    [Senate Hearing 109-177]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 109-177

                                                            Senate Hearings

                                     Before the Committee on Appropriations

    _______________________________________________________________________

                                             Departments of Transportation,

                                                   Treasury, the Judiciary,

                                             Housing and Urban Development,

                                                       and Related Agencies

                                                             Appropriations

                                                                Fiscal Year
                                                                       2006

             th CONGRESS, FIRST SESSION                                109

                                                                  H.R. 3058

    DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

    DEPARTMENT OF THE TREASURY

    DEPARTMENT OF TRANSPORTATION

    EXECUTIVE OFFICE OF THE PRESIDENT

    NONDEPARTMENTAL WITNESSES
      Departments of Transportation, Treasury, the Judiciary, Housing and
      Urban Development, and Related Agencies Appropriations, 2006 (H.R.
                                     3058)

                                                            S. Hrg. 109-177

      DEPARTMENTS OF TRANSPORTATION, TREASURY, THE JUDICIARY, HOUSING AND
    URBAN DEVELOPMENT, AND RELATED AGENCIES APPROPRIATIONS FOR FISCAL YEAR
                                      2006

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

                                    HEARINGS

                                    before a

                              SUBCOMMITTEE OF THE

                COMMITTEE ON APPROPRIATIONS UNITED STATES SENATE

                           ONE HUNDRED NINTH CONGRESS

                                 FIRST SESSION

                                       on

                                   H.R. 3058

      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, 2006, AND FOR OTHER PURPOSES

                                   __________

                  Department of Housing and Urban Development
                           Department of the Treasury
                          Department of Transportation
                       Executive Office of the President
                           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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    99-881                      WASHINGTON : 2005
    _____________________________________________________________________________
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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
                      Clayton Heil, Deputy Staff Director
                  Terence 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
                                  Paul Doerrer
                                  Lula Edwards
                                    Cheh Kim
                                  Josh Manley
                            Peter Rogoff (Minority)
                            Kate Hallahan (Minority)
                       Diana Gourlay Hamilton (Minority)
                           William Simpson (Minority)
                         Meaghan L. McCarthy (Minority)

                             Administrative Support

                                Matthew McCardle

                                C O N T E N T S

                                  ----------

                            Tuesday, March 15, 2005

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

                            Thursday, April 7, 2005

    Department of the Treasury: Internal Revenue Service.............    59

                            Thursday, April 14, 2005

    Department of Housing and Urban Development......................   145

                            Thursday, April 21, 2005

    Executive Office of the President: Office of Management and
      Budget.........................................................   199

                            Tuesday, April 26, 2005

    Department of the Treasury: Office of the Secretary..............   243

                             Thursday, May 12, 2005

    Department of Transportation: National Railroad Passenger
      Corporation....................................................   291

    Material Submitted by Agencies Not Appearing for Formal Hearings.   355
        United States Postal Service.................................   355
        Office of Personnel Management...............................   359
        United States Interagency Council on Homelessness............   363
        U.S. Office of Special Counsel...............................   369
        National Highway Traffic Safety Administration...............   372
        Federal Election Commission..................................   381
        Federal Deposit Insurance Corporation........................   384
        National Transportation Safety Board.........................   393
        Surface Transportation Board.................................   399
        Morris K. Udall Foundation...................................   403
        National Credit Union Administration.........................   405
        Neighborhood Reinvestment Corporation........................   410
        U.S. Consumer Product Safety Commission......................   417
        U.S. Office of Government Ethics.............................   422
        Federal Maritime Commission..................................   424
    Nondepartmental Witnesses........................................   543

      DEPARTMENTS OF TRANSPORTATION, TREASURY, THE JUDICIARY, HOUSING AND
    URBAN DEVELOPMENT, AND RELATED AGENCIES APPROPRIATIONS FOR FISCAL YEAR
                                      2006

                                  ----------

                            TUESDAY, MARCH 15, 2005

                                           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, Stevens,
    Domenici, Burns, Murray, Byrd, and Dorgan.

                          DEPARTMENT OF TRANSPORTATION

                            Office of the Secretary

    STATEMENT OF HON. NORMAN Y. MINETA, SECRETARY
    ACCOMPANIED BY:
            JEFFREY A. ROSEN, GENERAL COUNSEL
            PHYLLIS SCHEINBERG, ACTING ASSISTANT SECRETARY, BUDGET AND
                PROGRAMS, AND CHIEF FINANCIAL OFFICER

                opening statement of senator christopher s. bond

        Senator Bond. Good morning and welcome. The Subcommittee on
    Transportation, Treasury, the Judiciary, HUD, and Related
    Agencies, now commonly known as ``THUD,'' will come to order.
        This is the first hearing of the newly reconstituted
    appropriations subcommittee. It is quite a mouthful and, in
    many ways, it is just as diverse and complex as the VA/HUD
    Appropriations Subcommittee that I most recently chaired before
    the Appropriations Committee was restructured.
        But I acknowledge and welcome my new ranking member,
    Senator Murray. I think everyone knows of my high regard and
    close working relationship I had with Senator Mikulski, with
    whom I exchanged the gavel on VA/HUD Appropriations. Senator
    Mikulski is a close friend, and because of my high regard and
    friendship, we were able to forge an excellent bipartisan
    working relationship. Things change in life and time marches
    on. We take on new responsibilities and challenges. Certainly
    there is no lack of challenges in this restructured
    appropriations subcommittee. I look forward to developing a
    relationship and strong friendship with my new ranking member,
    Senator Murray.
        This is going to be a demanding subcommittee with diverse
    and divisive issues. I know we are both pragmatists. We are
    here to do a job and that job is to pass an appropriations
    bill. I know we will get that done.
        We welcome Transportation Secretary Norm Mineta, appearing
    before us today to testify on the administration's budget
    request for the Department of Transportation for fiscal year
    2006. We are old friends, and for the last several years, we
    have been working together with others from my perch as
    chairman of the Senate Subcommittee on Transportation and
    Infrastructure of EPW on reaching a consensus on highway
    spending. I am disappointed that reaching a consensus on
    highway spending has proved to be so elusive and that passage
    of the highway authorization bill has been delayed for 3 years
    primarily due to disagreements over funding levels.
        To be clear, I am an infrastructure Republican who supports
    funding for highways and transportation. Our Nation's network
    of roads keeps communities and families connected to one
    another and serves as the primary system for moving goods and
    products that are the lifeblood of our economy, and a good
    transportation system is necessary to reduce the fatalities we
    have in transportation in too many areas.
        I also take great pride in the national highway system that
    began with Highway 70 in St. Charles, Missouri in 1956. Our
    highway system soon will reach its 50th anniversary, which only
    underscores the need for more than a facelift as we move
    further into the 21st century. There are new demands created by
    a global marketplace that require we move our goods and
    products more quickly and more efficiently. For the United
    States to compete, we have to make the necessary investments in
    our highways, waterways, and airways.
        Beyond the necessary movement of goods, investing in
    transportation also benefits jobs and stimulates the economy.
    The Department of Transportation has estimated that every $1
    billion of new Federal investment creates more than 47,500
    jobs. Moreover, according to the Associated General
    Contractors, failure to enact a 6-year transportation bill
    could result in the loss of some 90,000 jobs.
        To that end, I am pleased to see that the budget request
    adjusts the total spending level for the 6-year transportation
    authorization bill to $284 billion. The willingness to increase
    the funding level for the reauthorization bill by $28 billion
    is a step in the right direction. Nevertheless, this
    accommodation on the part of the administration, in my view,
    still falls short of the investment that is needed to maintain
    and repair our Nation's crumbling infrastructure, much less to
    construct the new roads to reduce time spent in traffic and
    make needed safety improvements in rural and urban roadways.
        Secretary Mineta, as you know, I speak from the twin pulpit
    of both the primary Senate transportation authorizing and
    appropriations subcommittees in seeking your support and
    commitment to reach an accord with adequate funding for a 6-
    year highway bill. I expect this bill to complement our efforts
    and funding decisions on this subcommittee.
        Consequently, I am disappointed the administration is
    proposing some $59.5 billion in new budgetary resources for DOT
    which is a decrease of $2.1 billion or 4 percent from the
    enacted level of the current year. While I respect and support
    the efforts of the administration to reduce the deficit, I do
    not believe it appropriate to balance the Federal books on the
    back of critical transportation infrastructure programs.
        For example, the Airport Improvement Program is slated for
    one of the largest reductions in the entire fiscal year 2006
    budget, despite the proven track record that enhances airport
    safety, capacity, and security. After the program received high
    marks in the OMB PART process, I am at a loss to understand why
    this program remains in the sights of the budget gnomes.
        This is not to say that transportation spending should
    automatically be spared from the budget axe, but I do believe
    we must continue to increase the Nation's investment in
    transportation, especially highways and roads. To be blunt,
    this investment means a strong economy, safety, especially for
    the youth of our Nation, increased employment, decreased
    congestion, and enhanced security.
        In particular, the Department of Transportation's
    Conditions and Performance Report estimates that Federal
    investment in roads must increase by 17 percent per year simply
    to maintain our Nation's existing highway and bridge system.
    Improving the system would require some 65 percent more than
    currently invested. I think our own eyes and experiences speak
    directly to this issue. We live in one of the most affluent and
    economically prosperous areas of the country and every day we
    are confounded by unflagging traffic congestion, often during
    non-rush hour time, as well as unavoidable and significant
    potholes and other road damage, which is often covered with
    steel plates, if we are lucky. Our bridges are often down to
    one lane. Unfortunately, we have little in the way of options
    to avoid either the congestion or other road problems. It has
    gotten worse over the last few years and will likely continue
    to worsen without substantial investment.
        More troubling, some 43,000 people are killed on our roads
    and highways each year. In Missouri alone, traffic fatalities
    have increased from 1,098 in 2001 to 1,123 in 2004. We cannot
    eliminate all traffic fatalities, but we must make our highways
    and roads safer, and we can only do that through investment.
        Finally, I am very concerned about the reductions
    throughout DOT's fiscal year 2006 budget request. For example,
    regardless of my position, elimination of funding for Amtrak
    seems politically unlikely, not practical. However, assuming
    the adoption of real reforms, I do not see where the needed
    funds can come from without putting some other program or
    priority at risk.
        I am thankful that the administration has included $146
    million to support the Federal Railway Administration's rail
    safety activities, an increase of $8 million over the fiscal
    year 2005 level. While helpful, this increase seems to
    underestimate the real needs. In the last 9 weeks alone, there
    have been more railway accidents than at any time since FRA
    began tracking the data.

               PREPARED STATEMENT OF SENATOR CHRISTOPHER S. BOND

        I have much to learn about the funding needs of DOT, but I
    have a pretty good guess right now. I will have questions for
    today, for the record and in the future. Mr. Secretary, I look
    forward to your testimony today and to our future dialogues.
        It is now my pleasure to turn to my new ranking member,
    Senator Murray.
        [The statement follows:]

               Prepared Statement of Senator Christopher S. Bond

        The subcommittee will come to order. This is the first hearing of
    the newly reconstituted Senate Appropriations Subcommittee on
    Transportation, Treasury, the Judiciary, HUD, and Related Agencies. It
    is quite a mouthful and is, in many ways, just as diverse and complex a
    subcommittee as the VA-HUD Appropriations Subcommittee that I most
    recently chaired.
        First, I want to acknowledge and welcome my new Ranking Member,
    Senator Murray. I think everyone knows of my high regard for Senator
    Mikulski, with whom I exchanged the gavel at the VA-HUD Appropriations
    Subcommittee. I consider Senator Mikulski a close friend and because of
    my high regard and friendship we were able to forge an excellent,
    bipartisan working relationship. However, as with all things in life,
    time marches on and we take on new responsibilities and challenges. I
    look forward to the new responsibilities and challenges of this
    restructured appropriations subcommittee. I also look forward to
    developing a new relationship and hopefully a strong friendship with my
    new Ranking Member, Senator Murray. This will be a demanding
    subcommittee with many diverse and likely divisive issues. However, I
    know we are both pragmatists; we are here to do a job and that job is
    to pass an appropriations bill and I know we will get this job done.
        I welcome Transportation Secretary Norman Mineta for appearing
    before us today to testify on the administration's Budget Request for
    the Department of Transportation (DOT) for fiscal year 2006. We are old
    friends and, for the last several years, we have been working together
    with others from my perch as Chairman of the Senate Subcommittee on
    Transportation and Infrastructure of the EPW Committee on reaching a
    consensus on highway spending. I am disappointed that reaching a
    consensus on highway spending has proven to be so elusive and that
    passage of the highway authorization bill has been delayed for 3 years
    primarily due to disagreements over funding levels.
        To be clear, I am an infrastructure Republican who supports funding
    for our highways. Our Nation's network of roads keeps communities and
    families connected to one another and serves as the primary system for
    moving goods and products that are the lifeblood of our economy. I also
    take great pride that our national highway system was born in St.
    Charles, Missouri in 1956. Our highway system will soon reach its 50th
    anniversary, which only underscores the need for more than a facelift
    as we move further into the 21st century--there are new demands created
    by a global marketplace that requires that we move our goods and
    products quicker and more efficiently. For the United States to
    compete, we must make the necessary investments in our highways,
    waterways and airways.
        Beyond the necessary movement of goods, investing in transportation
    also benefits the creation of new jobs and stimulates the economy. DOT
    estimates that every $1 billion of new Federal investment creates more
    than 47,500 jobs. Moreover, according to the Associated General
    Contractors, failure to enact a 6-year transportation bill will result
    in the loss of some 90,000 jobs.
        To that end, I am pleased to see that the budget request adjusts
    the total spending level for the 6-year surface transportation
    authorization bill to $284 billion. The willingness to increase the
    funding level for the reauthorization bill by $28 billion is a step in
    the right direction. Nevertheless, this accommodation on the part of
    the administration falls far short of the investment that is needed to
    maintain and repair our Nation's crumbling infrastructure, much less
    construct new roads to reduce the time spent in traffic and make much
    needed safety improvements in rural and urban roadways.
        Secretary Mineta, I speak from the twin pulpit of both the primary
    Senate transportation authorizing and appropriations subcommittees in
    seeking your support and commitment to reach an accord with adequate
    funding for a 6-year highway bill. I expect this bill to complement our
    efforts and funding decisions on this subcommittee.
        Consequently, I am disappointed that the administration is
    proposing some $59.5 billion in new budgetary resources for DOT which
    is a decrease of $2.1 billion or 4 percent from the enacted level.
    While I respect and support the efforts of the administration to reduce
    the deficit, I do not believe that it is appropriate to balance the
    Federal books on the back of critical transportation infrastructure
    programs. For example, the Airport Improvement Program is slated for
    one of the largest reductions in the entire fiscal year 2006 budget
    request, despite a proven track record that enhances airport safety,
    capacity, and security. After the program received high marks in the
    OMB PART process, I am at a loss to understand why this program remains
    in the sights of the budget gnomes.
        This is not to say that transportation spending should
    automatically be spared from the budget axe, but I do believe that we
    must continue to increase the Nation's investment in transportation,
    especially highways and roads. To be blunt, this investment means a
    strong economy, safety for families, especially the youth of the
    Nation, increased employment, decreased congestion and enhanced
    security.
        In particular, the Department of Transportation's Conditions and
    Performance report estimates that Federal investment in roads must
    increase by 17 percent per year simply to maintain our Nation's
    existing highway and bridge system. Improving the system will require
    some 65 percent more than currently invested. I think our own eyes and
    experiences speak directly to this issue. We live in one of the most
    affluent and economically prosperous areas of the country and every day
    we are confounded by unflagging traffic congestion, often during non-
    rush hour time, as well unavoidable and significant potholes and other
    road damage which is often covered with steel plates if we are lucky.
    Our bridges also are often down to one lane. Unfortunately, we have
    little in the way of options to avoid either the congestion or our
    other road problems. It has gotten worse over the last few years and
    likely will continue to get worse without substantial investment.
        More troubling, more than 40,000 persons are killed on our roads
    and highways each year. In Missouri alone, traffic fatalities have
    increased from 1,098 in 2001 to 1,123 in 2004. While we cannot
    eliminate all traffic fatalities, we must make our highways and roads
    safer and we can only do that that through investment.
        Finally, I am very concerned about reductions throughout DOT's
    fiscal year 2006 budget request. For example, regardless of my
    position, elimination of funding for Amtrak seems politically unlikely,
    not practical. However, even assuming the adoption of real reforms, I
    do not see where the needed funds can come from without putting some
    other program or priority at risk. I am thankful that the
    administration has included $146 million to support the Federal Railway
    Administration's rail safety activities, an increase of $8 million over
    the fiscal year 2005 enacted level. While helpful, this increase seems
    to underestimate the real needs. In the last 9 weeks alone, there have
    been more railway accidents than at any time since FRA began tracking
    this data.
        I have much to learn about the funding needs of DOT. I will have
    questions for today, for the record and in the future. Mr. Secretary, I
    look forward to your testimony today and to our future dialogues. I now
    turn to my new Ranking Member, Senator Murray.

                       STATEMENT OF SENATOR PATTY MURRAY

        Senator Murray. Well, thank you very much, Mr. Chairman.
        Today signals a new day in the history of this
    subcommittee. We have broad, new responsibilities, including
    the funding needs for housing and for the judiciary. The
    subcommittee now has a complement of 19 members and only the
    Defense Subcommittee has more members than we do.
        I have to say that I am sorry to see my longtime friend and
    partner, Richard Shelby, move on to another subcommittee.
    Senator Shelby was a thoughtful and considerate chairman of
    this subcommittee and he consistently sought to produce a
    balanced, bipartisan bill that the maximum number of Senators
    could support. His leadership on this subcommittee will be
    missed.
        At the same time, I very much look forward to working with
    Senator Bond in tackling these new responsibilities. Chairman
    Bond has demonstrated a longstanding commitment to the Nation's
    transportation and housing needs. In addition to chairing the
    VA/HUD Subcommittee for several years, he has earlier served as
    the chairman of the Banking Subcommittee with authorizing
    jurisdiction over the housing programs and now serves as
    chairman of the Environment and Public Works Subcommittee with
    authorizing responsibility over our highway programs. Senator
    Bond's considerable expertise in both of these areas, as well
    as that of his staff, will be a great asset as we work together
    to assemble an appropriations bill that addresses all the
    disparate challenges that face us.
        With that goal in mind, I am sorry that the President's
    budget for fiscal year 2006 does not provide us with a better
    starting point. The Bush administration's budget for the
    Department of Transportation has a number of unjustified
    funding cuts, as well as some gaping holes.
        Over the course of the last year, air traffic has expanded
    beyond the levels we were experiencing prior to September 11,
    2001. All indications are that air traffic will continue to
    grow, but the administration has decided that now is the time
    to impose dramatic cuts in our investment at improving safety
    and expanding capacity at our airports.
        Despite the fact that the Federal Aviation Administration
    is well behind its own goals for replacing our outdated air
    traffic control system, the administration is again proposing
    funding cuts to the FAA's modernization effort. Between the
    cuts already imposed for the current year and the cuts proposed
    for next year, the administration is seeking to cut almost half
    a billion dollars out of this effort.
        Also in the area of aviation, the administration is
    proposing to cut in half funding for the Essential Air program,
    endangering the continuation of commercial air service to
    dozens of rural communities across the Nation.
        Clearly the largest gaping hole in the President's budget
    is the request to zero out the annual subsidy to Amtrak. While
    documents accompanying the President's budget speak of the
    merits of pushing Amtrak into bankruptcy, Secretary Mineta has
    stated in recent weeks that a bankrupt Amtrak is not the
    administration's goal.
        It appears that the administration wants to play a game of
    chicken with Congress, threatening to push the railroad into
    bankruptcy if we do not enact the President's proposed Amtrak
    reform bill. I think the administration's game of chicken with
    Congress is reckless and irresponsible. It will undermine the
    opportunity for a meaningful discussion of reforms. This debate
    should not take place with the threat of imminent bankruptcy
    hanging over the railroad, its 25 million passengers and its
    almost 20,000 employees.
        Personally, I would welcome congressional action on the
    Amtrak reform bill. I do not say that because I think we should
    acquiesce to the administration's threats. I say that because I
    believe a meaningful and thorough debate over Amtrak and its
    finances would bring a number of important facts to the
    surface, facts that many people are either unaware of or have
    sought to ignore.
        A thorough debate on Amtrak would require policy makers to
    admit that Amtrak's largest liability, both in the short and
    long term, is not the cost of subsidizing long-distance trains
    but rather the cost of maintaining and modernizing the
    Northeast Corridor. Just maintaining the corridor costs some
    $600 million a year. Parts of the corridor date from the early
    half of the last century. Secretary Mineta's own Inspector
    General has estimated the cost of deferred maintenance over the
    corridor exceeds at least $5.5 billion. With those huge costs
    looming, the administration now wants the States along the
    corridor to help pay them.
        A thorough debate over an Amtrak reform bill would bring to
    the surface the fact that Amtrak currently carries huge long-
    term debts. Back in 1997, the Amtrak Reform Act required Amtrak
    to seek to become the only self-sufficient passenger railroad
    in the world. Congress steadily cut Amtrak's operating subsidy.
    As a result, Amtrak took on more and more debt to keep afloat.
    Amtrak's total long-term debt now exceeds $3.8 billion. This
    burden is not going to go away no matter how you reform or
    reorganize the railroad.
        A thorough debate over an Amtrak reform bill would bring to
    the surface the fact that none of the reform plans being
    considered, including the administration's proposed reform
    bill, would save money in the near term. In fact, most of these
    reform plans require a substantial restructuring that would add
    to Amtrak's near-term costs, not reduce them. Indeed, when the
    Bush administration submitted its reform plan last year, it
    also submitted a budget that boosted the amount of spending for
    2006 and beyond to $1.4 billion annually. That is $200 million
    more than we currently invest in Amtrak.
        A thorough debate over an Amtrak reform bill would bring to
    the surface the fact that the administration shares some of the
    credit and the blame for the current conditions of Amtrak,
    conditions that include the highest passenger count in history
    with the fewest number of employees in years. But when you
    review the administration's recent rhetoric on Amtrak, you
    would think that Amtrak is some independent renegade operation
    running amok with Federal dollars. The fact is that this
    Transportation Secretary and his predecessors have continually
    served on Amtrak's Board of Directors and have been party to
    most, if not all, of the railroad's strategic decisions.
        While I would welcome congressional action on an Amtrak
    reform bill for the reasons I have stated, I have to point out
    that reform legislation is the responsibility of the Senate
    Commerce Committee, and I note that its chair is here today
    with us. It is not the responsibility of the Appropriations
    Committee.
        The job of this subcommittee is to set Amtrak's subsidy
    level for the coming year. To date, the only resources the
    President has proposed for the coming year are $360 million to
    allow for the continuation of local commuter rail services only
    in the event that Amtrak ceases operations. And that is a very
    dangerous game.
        The budget resolutions currently being debated in the House
    and the Senate set the overall levels for domestic
    discretionary spending at the level included in President
    Bush's budget. That proposal includes his anticipated zero for
    Amtrak's traditional subsidy and $360 million for continuation
    of commuter services. If this budget is adopted and that
    overall ceiling on discretionary spending becomes binding on
    the Appropriations Committee for the coming fiscal year, I do
    not know where this committee is going to come up with an extra
    billion dollars to keep Amtrak operating next year.
        Let me say that while I have been critical of several
    proposals in the President's budget for transportation, there
    are some positive things to be found in this budget as well.
        The administration is finally requesting funds to reverse
    the continuing attrition of our air traffic controller
    workforce. One of my questions this morning will focus on why
    the FAA is recognizing the need to replace its dwindling number
    of controllers but not its dwindling number of air safety
    inspectors.

                   PREPARED STATEMENT OF SENATOR PATTY MURRAY

        Finally, I want to applaud the proposal in the
    administration's budget to boost funding for the FAA's Joint
    Planning and Development Office, which is charged with charting
    the course for the next generation of our aviation system. The
    JPDO, as it is known, is a critical initiative that will
    determine the extent to which America remains in a leadership
    role in aviation. One area where the administration and I agree
    is that this leadership position must never be ceded to others.
        Thank you, Mr. Chairman.
        [The statement follows:]

                   Prepared Statement of Senator Patty Murray

        Thank you, Mr. Chairman. Today signals a new day in the history of
    this subcommittee. We have broad new responsibilities including the
    funding needs for housing and the Judiciary. The subcommittee now has a
    complement of 19 members. Only the Defense Subcommittee has as many
    members.
        I have to say that I am sorry to see my long-time friend and
    partner Richard Shelby move on to another subcommittee. Senator Shelby
    was a thoughtful and considerate chairman of this subcommittee. He
    consistently sought to produce a balanced, bipartisan bill that the
    maximum number of Senators could support. His leadership on this
    subcommittee will be missed.
        At the same time, I very much look forward to working with Senator
    Bond in tackling these new responsibilities. Chairman Bond has
    demonstrated a long-standing commitment to the Nation's transportation
    and housing needs.
        In addition to chairing the VA-HUD Subcommittee for several years,
    Senator Bond earlier served as the Chairman of the Banking Subcommittee
    with authorizing jurisdiction over our housing programs.
        He now serves as the Chairman of the Environment and Public Works
    Subcommittee with authorizing responsibility over our highway programs.
        His considerable expertise in both these areas, as well as that of
    his staff, will be a great asset as we work together to assemble an
    appropriations bill that addresses all these disparate challenges.
        With that goal in mind, I am sorry that the President's budget for
    fiscal year 2006 does not provide us with a better starting point.
        The Bush Administration's budget for the Department of
    Transportation has a number of unjustified funding cuts as well as some
    gaping holes.

                                      FAA

        Over the course of the last year, air traffic has expanded beyond
    the levels we were experiencing prior to September 11, 2001. All
    indications are that air traffic will continue to grow.
        Yet, the Bush Administration has decided that now is the time to
    impose dramatic cuts in our investment at improving safety and
    expanding capacity at our airports.
        Despite the fact that the Federal Aviation Administration is well
    behind its own goals for replacing our outdated air traffic control
    system, the administration is again proposing funding cuts to the FAA's
    modernization effort.
        Between the cuts already imposed for the current year and the cuts
    proposed for next year, the administration is seeking to cut almost
    half a billion dollars out of this effort.
        Also in the area of aviation, the administration is proposing to
    cut in half funding for the essential air service program--endangering
    the continuation of commercial air service to dozens of rural
    communities across the Nation.

                                     AMTRAK

        Clearly, the largest gaping hole in the President's budget is the
    request to zero-out the annual subsidy to Amtrak. While documents
    accompanying the President's budget speak of the merits of pushing
    Amtrak into bankruptcy, Secretary Mineta has stated in recent weeks
    that a bankrupt Amtrak is not the administration's goal.
        It appears that the administration wants to play a game of chicken
    with Congress, threatening to push the railroad into bankruptcy if we
    do not enact the President's proposed Amtrak reform bill.
        I think that the administration's game of chicken with Congress is
    reckless and irresponsible. It will undermine the opportunity for a
    meaningful discussion of reforms.
        This debate should not take place with the threat of imminent
    bankruptcy hanging over the railroad, its 25 million passengers and its
    almost 20,000 employees.
        Personally, I would welcome Congressional action on an Amtrak
    reform bill. I don't say that because I think we should acquiesce to
    the administration's threats.
        I say that because I believe that a meaningful and thorough debate
    over Amtrak and its finances would bring a number of important facts to
    the surface--facts that many people are either unaware of or have
    sought to ignore.
        A thorough debate on Amtrak would require policy makers to admit
    that Amtrak's largest liability, both in the short- and long-term, is
    not the cost of subsidizing long-distance trains but rather the cost of
    maintaining and modernizing the Northeast Corridor.
        Just maintaining the Corridor costs some $600 million per year.
    Parts of the corridor date from the early half of the last century.
        Secretary Mineta's own Inspector General has estimated the cost of
    deferred maintenance over the Corridor exceeds at least $5.5 billion.
    With those huge costs looming, the administration now wants the States
    along to Corridor to help pay them.
        A thorough debate over an Amtrak reform bill would bring to the
    surface the fact that Amtrak currently carries huge long-term debts.
        Back in 1997, the Amtrak Reform Act required Amtrak to seek to
    become the only self-sufficient passenger railroad in the world.
        Congress steadily cut Amtrak's operating subsidy. As a result,
    Amtrak took on more and more debt to keep afloat. Amtrak's total long-
    term debt now exceeds $3.8 billion. This burden is not going to go away
    no matter how you reform or reorganize the railroad.
        A thorough debate over an Amtrak reform bill would bring to the
    surface the fact that none of the reform plans being considered--
    including the administration's proposed reform bill--would save money
    in the near-term.
        In fact, most of these reform plans require a substantial
    restructuring that would add to Amtrak's near-term costs, not reduce
    them.
        Indeed, when the Bush Administration submitted its reform plan last
    year, it also submitted a budget that boosted the amount of spending
    for 2006 and beyond to $1.4 billion annually--that is $200 million more
    than we currently invest in Amtrak.
        A thorough debate over an Amtrak reform bill would bring to the
    surface the fact that the administration shares some of the credit and
    the blame for the current conditions at Amtrak--conditions that include
    the highest passenger count in history with the fewest number of
    employees in years.
        But when you review the administration's recent rhetoric on Amtrak,
    you would think that Amtrak is some independent renegade operation
    running amok with Federal dollars.
        The fact is that this Transportation Secretary and his predecessors
    have continually served on Amtrak's Board of Directors and have been
    party to most--if not all--of the railroad's strategic decisions.
        While I would welcome Congressional action on an Amtrak reform bill
    for the reasons that I have stated, I have to point out that reform
    legislation is the responsibility of the Senate Commerce Committee--not
    the Appropriations Committee.
        The job of this subcommittee is to set Amtrak's subsidy level for
    the coming year. To date, the only resources the President has proposed
    for the coming year are $360 million to allow for the continuation of
    local commuter-rail services only in the event that Amtrak ceases
    operations. And that is a very dangerous game.
        The Budget Resolutions currently being debated on the House and
    Senate Floors set the overall levels for domestic discretionary
    spending at the level included in President Bush's budget.
        That proposal includes his anticipated zero for Amtrak's
    traditional subsidy and $360 million for continuation of commuter
    services.
        If this budget is adopted and that overall ceiling on discretionary
    spending becomes binding on the Appropriations Committee for the coming
    fiscal year, I don't know where this committee is going to come up with
    an extra billion dollars to keep Amtrak operating next year.
        Let me say that while I have been critical of several proposals in
    the President's budget for transportation, there are some positive
    things to be found in this budget as well.

                         AIR TRAFFIC CONTROL WORKFORCE

        The administration is finally requesting funds to reverse the
    continuing attrition of our air traffic control workforce.
        One of my questions this morning will focus on why the FAA is
    recognizing the need to replace its dwindling number of controllers but
    not its dwindling number of air safety inspectors.

                    FAA JOINT PLANNING & DEVELOPMENT OFFICE

        Finally, I want to applaud the proposal in administration's budget
    to boost funding for the FAA's Joint Planning and Development Office,
    which is charged with charting the course for the next generation of
    our aviation system. The ``J.P.D.O.'', as it is known, is a critical
    initiative that will determine the extent to which America remains in a
    leadership role in aviation.
        One area where the administration and I agree is that this
    leadership position must never be ceded to others.
        Thank you, Mr. Chairman.

        Senator Bond. Thank you very much.
        Senator Stevens. I think we have to move sometime to have a
    limit on opening statements. Some of us have other committees
    to go to, and opening statements, when they go on and on, just
    delay us all.
        Senator Bond. Thank you, Chairman Stevens. I have a lot to
    say about this as my first hearing on this, and we will keep
    our questions limited to 5 minutes each and ask that others
    make limited opening statements. But now, following practice, I
    will turn to the chairman of the full committee, Chairman
    Cochran.

                       STATEMENT OF SENATOR THAD COCHRAN

        Senator Cochran. Mr. Chairman, let me congratulate you for
    your thoughtful and well-chosen remarks opening the hearing
    today, setting in context the challenges that we have before us
    with a limited amount of money available to this committee, to
    continue to support a massive transportation system for our
    country.
        I cannot think any other person I would rather see running
    the Department, though, than Norm Mineta. I know he has the
    experience and the talent, the know-how, the background. I can
    remember when he and I were serving in 1973 as brand new
    members of the House of Representatives and we were assigned to
    the Public Works and Transportation Committee. Through work on
    the Surface Transportation Subcommittee and then the Aviation
    Subcommittee, it afforded a training ground for him that I know
    has served him well. He has turned in a distinguished record of
    service as our Secretary of Transportation, and I congratulate
    you, Mr. Secretary, for your good work and wish you well as you
    carry out the mandate of the Congress with the funding that we
    will provide for you and our transportation system.
        Thank you, Mr. Chairman.
        Senator Bond. Thank you very much, Senator Cochran.
        Now, I turn to the ranking member of the full committee,
    Senator Byrd.

                      STATEMENT OF SENATOR ROBERT C. BYRD

        Senator Byrd. Mr. Chairman, I thank you, and I was very
    encouraged, by the opening statements. It seemed to me that
    ``action'' and ``forward'' and ``excelsior'' are the words that
    best typify the way you see your charge in the days ahead. I
    congratulate you for assuming the chairmanship of this very
    important subcommittee. Between your responsibilities as
    chairman of the subcommittee, as well as the chairman of the
    Surface Transportation Subcommittee on the Environment and
    Public Works Committee, you, Mr. Chairman, will chart the
    future course of transportation in America.
        I believe that you will recall the words of Isaiah who
    said: ``Prepare ye the way of the Lord. Make straight in the
    desert a highway for our God. Every valley shall be exalted and
    every mountain and hill shall be laid low. The crooked shall be
    made straight and the rough places plain. The glory of the Lord
    shall be revealed and all flesh shall see it together.''
        I think you are going to make the rough places plain and
    the crooked straight. I want you to know that I admire your
    stick-to-it-iveness, your ability and the force of your
    seniority as chairman of this subcommittee is going to be felt.
    It is about time.
        I also welcome Secretary Mineta to the committee this
    morning. I have to admit that I am happier to see him than to
    see his budget.
        I am particularly concerned with the impact of the
    transportation budget on the rural communities and small towns
    of West Virginia and all of America. Mr. Secretary, rural
    America is hurting. Not everyone is caught up in the rosy
    scenarios of the White House. There are several States,
    communities, and towns that are continuing to see persistently
    high unemployment and a dwindling tax base. These places are
    stretching their public dollars to the breaking point. When I
    look at this year's budget request for the Department of
    Transportation, I believe the administration has turned the
    back of its hand to these communities.
        By proposing to eliminate all direct subsidies to Amtrak
    and put the railroad into bankruptcy, the administration
    threatens to further isolate hundreds of communities that
    depend on Amtrak to link them with the rest of the Nation's
    transportation system. For that reason, I plan to introduce an
    amendment to the budget resolution that would increase the
    funding for transportation by $1.04 billion in fiscal year
    2006. When combined with the $360 million that the President
    has requested for the continuation of commuter services in the
    event of Amtrak's termination, my amendment would bring total
    rail passenger funding up to $1.4 billion in 2006.
        When President Bush submitted his budget request for fiscal
    year 2005, the President recognized that Amtrak funding should
    grow to $1.4 billion in 2006 and beyond. My proposal would help
    the President to reach his goal.
        This administration's proposal for a reformed Amtrak seeks
    to require the States to pay all of their trains' operating
    losses for the first time. As such, the administration wants
    the States to take on these costs at the same time they are
    dealing with the skyrocketing costs of Medicaid, education,
    homeland security, and so much more.
        It is no wonder that we have not seen too many Governors
    step forward in support of the administration's Amtrak
    proposal. While the President's budget proposes to zero out all
    direct subsidies for Amtrak, the administration does request
    $360 million to maintain commuter rail service in the largest
    cities in America. There again, you see greater focus on urban
    centers and benign neglect for the needs of small communities
    and towns.
        In the area of aviation, the President's budget completely
    eliminates all funding for the small community air service
    program which has provided grants to several small airports,
    including airports in West Virginia, to recruit or retain their
    commercial air service. After zeroing out these small community
    initiatives, the administration also proposes to cut in half
    funding for the Essential Air Service. That program was an
    elemental part of the negotiated compromise that accompanied
    the deregulation of the airlines in 1978. As part of that
    compromise, the Federal Government agreed to provide full
    subsidy to ensure that certain communities would not lose all
    of their air service when the airlines streamlined their
    operations and changed their route structure. Now the
    administration wants to walk away from that deal. It does not
    want to play. It does not want to pay. But communities like
    Bluefield, West Virginia, and Beckley, West Virginia, do not
    have the kind of excess resources that would allow them to pay
    as soon as October 1 what is rightly the Federal Government's
    share.
        Now, Mr. Chairman, I believe that this transportation
    budget is particularly punitive to our small communities and
    towns and those States that have continued to struggle
    economically. These places are ill-suited to put up matching
    funds for what have long been core responsibilities of the
    Department of Transportation. I hope that we will take a
    critical eye to these proposals as we move forward on the
    budget and appropriations for the coming fiscal year.
        I thank you, Mr. Chairman. I thank our ranking member, and
    thank you, Mr. Secretary.
        Senator Bond. Thank you much, Senator Byrd.
        Senator Stevens.
        Senator Stevens. I shall wait for my time allocated for
    questions.
        Senator Bond. Senator Dorgan.

                      STATEMENT OF SENATOR BYRON L. DORGAN

        Senator Dorgan. Mr. Chairman, I believe that Senator Byrd's
    statement really covers much of what I would say, especially
    about Amtrak. I am very concerned about Amtrak funding and hope
    that there can be a bipartisan agreement here in the Congress
    to deal with the funding for Amtrak.
        Essential Air Service is a very significant and serious
    issue.
        There are many issues in the President's budget that I
    believe are particularly punitive to rural areas of the
    country.
        So I will not take my entire time. I will be around to ask
    some questions, but let me associate myself with Senator Byrd's
    remarks with respect to the impact of the budget on rural
    areas.
        Senator Bond. Thank you very much, Senator Dorgan.
        Senator Domenici.
        Senator Domenici. I will defer. I will be next.
        Senator Bond. All right. We will go to Senator Burns.

                       STATEMENT OF SENATOR CONRAD BURNS

        Senator Burns. Thank you very much, Mr. Chairman. I just
    want to make a couple points and I want to thank the Secretary
    for coming today and dealing in an area that touches almost
    every American, and that is transportation.
        There are three areas that I am principally interested in:
    the airport improvement program, the Essential Air Service, and
    Amtrak.
        Essential Air Service, Mr. Secretary, you might want to
    sort of file this not 13. You might get halfway there, though.
    I think it is time we reassess our Essential Air Service, where
    those monies are going, and maybe we can save some. I know some
    areas that take advantage of a program and it is time to
    reassess or maybe have an oversight hearing on how we choose
    and how we fund EAS.
        In another area, Amtrak--I think we should be thinking more
    about light rail. We cannot in our highway system outbuild
    America's love for the automobile. 395 down here from the
    beltway into Washington from 6 o'clock in the morning until
    about 9:00 is the world's largest parking lot. So we are going
    to have to find other ways to move people because we are a
    mobile society in those areas.
        So we find ourselves with some big challenges ahead, and I
    cannot think of anybody any better to do it than you. I have a
    great deal of confidence and I think, as time moves along, we
    will overcome all these areas in which I have a great interest
    and which are very, very important to rural America. I thank
    you for coming this morning.
        Mr. Chairman, congratulations in your new chairmanship. We
    are under good leadership here. So thank you very much.
        Senator Bond. Thank you very much, Senator Burns.
        Senator Domenici.
        Senator Domenici. Are these opening statements?
        Senator Bond. Opening statements.
        Senator Domenici. I have none.
        I was going to ask him, not to answer, but I was going to
    ask--let us see how the chairman responds--are you considering
    a change in the CAFE standards? Please do not answer.
        Senator Bond. I would answer that, but I will not take the
    time.
        Senator Bennett.

                     STATEMENT OF SENATOR ROBERT F. BENNETT

        Senator Bennett. Thank you, Mr. Chairman, and
    congratulations to you on your assuming this chairmanship.
        The only opening comment I would make to Secretary Mineta
    is one of gratitude for him and his staff and the cooperative
    way in which they worked with us in Utah on our various
    challenges. We have had a lot of conversation about ADA
    problems with commuter rail, and I understand that we are about
    99 percent of the way towards getting this resolved. The other
    1 percent might fall into place if the Secretary's counsel,
    Jeffrey Rosen, should come to Utah and see for himself where we
    are. On behalf of the citizens of Utah, I extend a very warm
    invitation and a very rapid invitation. As quickly as you can
    get him out there to get that resolved, Mr. Secretary, we would
    appreciate it.
        With that, Mr. Chairman, I will save anything else for the
    question period.
        Senator Bond. Thank you very much, Senator Bennett.
        And now, Secretary Mineta, despite everything, we are ready
    to have your opening statement. Please proceed. We will make
    your full statement part of the record.

                         STATEMENT OF NORMAN Y. MINETA

        Secretary Mineta. Thank you very much, Mr. Chairman.
    Congratulations on becoming the new chair of this subcommittee,
    and I look forward to working with you.
        Let me introduce with me, Jeff Rosen to my left, the
    General Counsel in our Department, and to my right, the Acting
    Assistant Secretary for Budget and Programs and Chief Financial
    Officer, Phyllis Scheinberg.
        Mr. Chairman and members of the subcommittee, thank you
    very much for this opportunity to appear before you today to
    discuss the President's fiscal year 2006 budget request for the
    Department of Transportation.
        In the context of an overall Federal budget that
    emphasizes, No. 1, spending restraint, and No. 2, directs
    resources to national priorities, items that President Bush
    spoke to in his State of the Union message. President Bush is
    requesting $59.5 billion for the Department of Transportation
    in fiscal year 2006, slightly more than his 2005 request.

                        SURFACE TRANSPORTATION PROGRAMS

        The largest portion of the President's request supports
    surface transportation programs, including $35.4 billion in
    fiscal year 2006 for the Federal Highway Administration. As all
    of you know, the President has proposed a record-setting
    surface investment of $284 billion over the 6-year period life
    of the bill, an increase of 35 percent over the Transportation
    Equity Act for the 21st Century (TEA21). Under the Safe,
    Accountable, Flexible, and Efficient Transportation Equity Act
    (SAFETEA), increased funding will go to the States, along with
    greatly expanded flexibility to encourage private investment
    and achieve more efficient use of our highways. The
    administration is strongly committed to achieving enactment of
    these and other policy initiatives in SAFETEA and to do so
    before the current extension, which is the seventh one we are
    working on and which expires on May 31.
        The administration is also proposing record support for
    transit programs in fiscal year 2006. Recommended funding
    increases by $134 million to $7.8 billion for transit projects
    that bring people to jobs and development to communities.
        Funding for highway safety, through the National Highway
    Traffic Safety Administration and the Federal Motor Carrier
    Safety Administration, increases by $45 million in fiscal year
    2006 and continues on an upward path throughout the life of the
    SAFETEA reauthorization. The Bush administration's
    unprecedented focus on safety is paying off. Even with more
    people driving more miles, we achieved the lowest highway
    fatality rate on record. SAFETEA must build on those successes.

                            INTERCITY PASSENGER RAIL

        Turning to rail, perhaps the most widely discussed aspect
    of the President's transportation budget is the decision to
    request no further subsidies for Amtrak until and unless there
    is real and meaningful reform that puts passenger rail on the
    solid foundation to grow and deliver safe and reliable quality
    service that matches local needs.
        After 34 years of Amtrak operating losses and $28 billion
    in taxpayer subsidies, it is clear that the current model of
    passenger rail service is flawed and unsustainable. Amtrak is
    on financial life support. In the last 4 years alone, annual
    Federal subsidies have more than doubled from $520 million in
    2001 to $1.2 billion in fiscal year 2005. Yet, infrastructure
    is deteriorating and service declining as Amtrak continues to
    delay desperately needed maintenance of the infrastructure that
    it already owns, and starves investments in new and innovative
    services that would attract new riders and boost revenues.
        Let me be very clear. The Bush administration remains
    committed to intercity passenger rail service and is prepared
    to commit additional financial resources if the Congress will
    join with us to create a sustainable model. I am hopeful that
    now that the debate has been opened, real reform will be on the
    congressional agenda this year.

                           FEDERAL AVIATION PROGRAMS

        Finally, for aviation, the Bush administration plans major
    investment to keep up with growing demand as passengers return
    to the skies in record numbers and as air cargo continues to
    take off, as has already been indicated by the panel.
        The President's 2006 budget requests $14 billion for the
    Federal Aviation Administration, providing major support for
    building new infrastructure and deploying technology that
    enhances the capacity and the safety of today's aviation
    system. The budget triples funding for the Joint Planning and
    Development Office where we are designing the Next Generation
    air transportation system in readiness for the dramatic changes
    ahead in the way we fly.
        Within the total FAA budget, we request funding for the
    hiring of 1,249 air traffic controllers in fiscal year 2006.
    Specifically, the operations budget includes a nearly $25
    million increase to fund 595 new air traffic controllers, in
    addition to replacing the 654 that are expected to leave the
    system through retirement. These additional controllers
    represent the first step in the FAA's plan that was announced
    in December to begin training the staff needed to replace
    future retirees and to meet the growing demand for air service.
    This is an initiative to streamline and modernize controller
    training to speed these new experts to their posts and to save
    money as well.

                               PREPARED STATEMENT

        Mr. Chairman, thank you for this opportunity to share some
    of the key elements of the President's budget request for the
    Department of Transportation for fiscal year 2006. You will
    find additional details within my written statement that was
    submitted earlier, as well as our Budget in Brief. Mr.
    Chairman, I will now be happy to respond to questions of the
    subcommittee.
        [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 2006 budget request for the Department of Transportation.
    The President's request, which totals $59.5 billion in budgetary
    resources, includes major investments in our Nation's highways and
    roadways, airports and airways, railroads, transit systems, and other
    transportation programs that move the American economy. This budget
    makes a strong commitment to the infrastructure, technology, and
    research that will ensure that our Nation's transportation network
    remains a potent and capable partner as our economy continues to grow.
        I am proud of the considerable progress that the Department of
    Transportation has made over the past 4 years in advancing the safety,
    reliability, and efficiency of our transportation system. Through the
    Bush Administration's unprecedented focus on safety, for example, we
    have achieved the lowest vehicle fatality rate ever recorded and the
    highest safety belt usage rate ever recorded. During the same time, we
    have helped bring about the safest 3-year period in aviation history.
        Enactment of a 6-year reauthorization of surface transportation
    programs is a top priority. The administration's reauthorization
    proposal, the Safe, Accountable, Flexible, and Efficient Transportation
    Equity Act, or SAFETEA, provides a blueprint for investment that
    relieves gridlock and ensures future mobility and safety on the
    Nation's roads and transit systems. The 2006 budget includes a record
    investment of $284 billion in Federal resources over the 6-year life of
    the bill--almost $35 billion more than funding under TEA21, the
    previous surface transportation authorization. Continued delays in
    enactment of the reauthorization impede proper planning by States and
    communities and deprive them of the ability to use new flexibilities
    that the Bush Administration is proposing to encourage private
    investment and achieve more efficient use of the Nation's highways.
        The budget request also reflects the imperative for reform of
    America's intercity passenger rail system, which Amtrak has been
    operating at a loss for 33 years. Amtrak has received more than $29
    billion in taxpayer subsidies, including more than $1 billion in each
    of the last 2 years, despite the requirement of the 1997 Amtrak Reform
    Act that after 2002, ``Amtrak shall operate without Federal operating
    grant funds appropriated for its benefit.'' In 2003, the administration
    sent to the Congress the President's Passenger Rail Investment Reform
    Act. This proposal would align passenger rail programs with other
    transportation modes, under which States work in partnership with the
    Federal Government in owning, operating, and maintaining transportation
    facilities and services.
        Deteriorating infrastructure and declining service further the case
    that, without congressional action on the administration's reform
    proposals, continued taxpayer subsidies cannot be justified.
    Consequently, no funding is included in the 2006 budget for Amtrak.
    Rather, $360 million is budgeted to allow the Surface Transportation
    Board to support existing commuter rail service along the Northeast
    Corridor and elsewhere should Amtrak cease commuter rail operations in
    the absence of Federal subsidies. The President's budget is a call to
    action: The time for reform is now. If the administration's management
    and financial reforms are enacted, the administration is prepared to
    commit additional resources for Amtrak--but if, and only if, reforms
    are underway. We want to work with the Congress and with Amtrak to make
    meaningful reforms that will enable intercity passenger rail to achieve
    success and Amtrak to achieve financial independence. I am optimistic
    that these reforms can be accomplished this year.
        The President's fiscal year 2006 budget includes nearly $14 billion
    for the Federal Aviation Administration to continue our investments
    both in building new infrastructure and in deploying technology that
    enhances the capacity and safety of the Nation's aviation system. The
    President's request for the FAA includes funding for the hiring of
    1,249 air traffic controllers in fiscal year 2006. Specially, the
    operations budget includes nearly $25 million to fund 595 new air
    traffic controllers in addition to replacing the 659 that are expected
    to leave the system through attrition. This net increase above the
    current replacement levels is a first step in the FAA's plan announced
    last December to begin training the staff needed to replace future
    retirees and meet growing demand for air service.
        Under the President's plan, the airport improvement program would
    receive $3 billion. These resources are sufficient to fund construction
    of all planned new runways, which are the single-most effective way to
    add capacity. This funding level is robust by historical standards. As
    recently as 2000, the Airport Grant program was funded at $1.9 billion.
    In addition to funds in the airport improvement program, airports can
    meet infrastructure needs through revenues generated from passenger
    facility charges. Many airports do not take full advantage of this
    legal authority to charge user fees which FAA estimates could produce
    an additional $350 million annually for airport development needs. The
    President's plan also triples funding to $18 million for the Joint
    Planning and Development Office. The work of this office supports the
    development of plans for transforming the future of the National air
    space to address growing capacity needs.
        Our maritime network also finds itself in greater demand, both at
    home and abroad. The President proposes to increase funding for the
    Maritime Security program by $58 million to $156 million. This increase
    will fully fund an expanded fleet of 60 ships to provide sealift
    capacity to carry equipment and supplies to those charged with
    defending our freedom and expanding liberty.
        We are grateful to the Congress for enacting the Department's
    reorganization proposal, and in accordance with that legislation, we
    have created two new administrations in place of the Research and
    Special Programs Administration (RSPA). The new Research and Innovative
    Technology Administration (RITA) promises to bring new energy and focus
    to the Department's research efforts and expedite implementation of
    cross-cutting, innovative transportation technologies. The new Pipeline
    and Hazardous Materials Safety Administration (PHMSA), has
    responsibility for the safe and secure transport of hazardous materials
    throughout the transportation network. The 2006 budget provides $130.8
    million for PHMSA's first full year of operations and $39.1 million for
    RITA. In addition, RITA is expected to receive over $300 million for
    transportation research conducted on behalf of other agencies on a
    reimbursable basis.
        Finally, I want to highlight the fiscal year 2006 President's
    budget request for the new Department of Transportation headquarters
    building project. We are pleased that the Congress has provided $110
    million in funding over the last 2 years. Today, construction is well
    under way and we are requesting your support of $100 million to
    continue the next phase of this project. Under the terms of our lease,
    the Department has only until June 2007 to vacate our current building
    without incurring substantial penalties. For that reason, fiscal year
    2006 funding is critical to ensure a timely and smooth transition for
    the Department's more than 5,600 headquarters employees.
        The fiscal year 2006 budget request recognizes that the
    transportation sector is the workhorse that drives the American
    economy, providing mobility and accessibility for passengers and
    freight, supplying millions of jobs, and creating growth-generating
    revenue. The President's budget reflects a fiscally responsible plan
    for the Department of Transportation to help America better meet its
    21st Century transportation needs. The Federal transportation budget
    must adequately fund our workforce and our programs despite the
    continuing funding challenges of national and homeland security needs.
    President Bush and I are committed to working with the Congress, and
    with our public- and private-sector partners to ensure that our
    transportation network can keep America moving confidently into the
    future.
        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 2006 President's budget
    request and I look forward to responding to any questions you may have.

                     SURFACE TRANSPORTATION REAUTHORIZATION

        Senator Bond. Thank you very much, Mr. Secretary. I
    appreciate your strong statements about the importance of the
    many transportation issues facing us in this committee and in
    other committees as well. I appreciate knowing about the
    national priorities the President has set. I would have to say
    that Congress has a different view of the importance of the
    priorities than OMB seems to have.
        I would encourage you, as the ranking member suggested, to
    submit a proposal for the restructuring of Amtrak that would be
    considered by the appropriate authorizing committee, the
    Commerce Committee, rather than achieving a death sentence by a
    cleaver in the appropriations process.
        Turning now to highways, I note with interest that the
    revised reauthorization financing plan assumes $5.6 billion
    through 2009 in new highway trust fund revenues from reforming
    the structure of certain fuel tax refunds. When the Senate
    Finance Committee made this same proposal in 2004, it was
    criticized as a general fund transfer, violating one of the
    administration's three principles.
        To set the record straight, does this proposal meet with
    the funding principles, or has the administration recognized
    that transfers such as this are appropriate?
        Secretary Mineta. First of all, we did not change the
    principles that were laid out and I do not believe that we are
    violating them. But this was before we had the benefit of
    substantial discussion about the issue with the leadership and
    members of the respective committees.
        While the goal is the same, in the House Statement of
    Administration Policy (SAP), we decided that it would be more
    beneficial for Congress if we provided as much clarity as
    possible. The SAP clearly states that the President will
    support up to the $283.9 billion. That is why we are so anxious
    to see the legislation being considered by the House and Senate
    brought to completion in conference.
        But we do hold to the $283.9 billion, which is a $28
    billion increase from where we were last year. Some of that
    funding, as you know, comes from the ethanol provision, as well
    as the enforcement of the collection of the sales tax as it
    relates to the gasoline and fuel taxes.

                        REVENUE ALIGNED BUDGET AUTHORITY

        Senator Bond. Thank you very much, Mr. Secretary.
        In the administration's original SAFETEA proposal, there
    was a modification of the revenue-aligned budget authority, or
    RABA, which claimed to moderate the wide swings in spending
    that resulted from the RABA mechanism. But the administration's
    2006 budget proposes to eliminate RABA, which some may recall
    was adopted as a result of what is known, I think, as the
    Chafee-Bond legislative proposal of 1998. Why has the
    Department chosen to eliminate that provision?
        Secretary Mineta. In TEA21 there was linkage between
    Highway Trust Fund revenues and expenditures. To the extent
    that that linkage does not exist, there is no need for the RABA
    provision.
        RABA was effectively eliminated a year or 2 ago. RABA took
    care of the ups as well as the downs. About 2 years ago we had
    a real serious downturn in trust fund receipts and RABA was not
    applied at that time. This year, since there is no linkage
    between trust fund revenues and expenditures, there is really
    no need for the RABA adjustment.
        Senator Bond. Well, despite my personal interest in and
    pride in the RABA authorization, I welcome your comments that
    Federal Highway Trust Fund funding is no longer constrained by
    Highway Trust Fund receipts. We will take that under
    consideration in our actions.
        Secretary Mineta. The reason being, Mr. Chairman, is that
    we are drawing deeper into the trust fund balances in order to
    make sure we have the adequate funds to keep the program----

                          AIRPORT IMPROVEMENT PROGRAM

        Senator Bond. Changing to the other area that is of high
    priority, the FAA improvement program reductions. Enplanements
    have rebounded after 9/11, which has renewed interest in the
    need to add capacity to the national airspace system.
    Considering that adding runways is one of the most, if not
    most, effective ways to add capacity, how do you justify a $500
    million reduction in the AIP?
        Secretary Mineta. Well, we believe that $3 billion for the
    Airport Improvement Program (AIP) is sufficient to take care of
    the applications that we have pending before the Department for
    capacity building, that is runways, taxiways, and tarmacs.
        In addition, the airports themselves have available to them
    passenger facility charges (PFC's), and to that extent, many
    airports still have not triggered their own ability to finance
    some of those improvements through the use of PFC's. We believe
    that about $350 million to $400 million is still available to
    airports if they were to exercise the use of PFC's.
        Senator Bond. Thank you, Mr. Secretary.
        Senator Murray.

                        INTERCITY PASSENGER RAIL SERVICE

        Senator Murray. Thank you, Mr. Chairman.
        Mr. Secretary, during your recent appearances on Amtrak,
    you often point to the success of the Cascadia Corridor trains
    that are in the Pacific Northwest. I am also very proud of what
    we have accomplished in my State with the Cascadia trains.
        But your public statements have implied that the State of
    Washington pays all of the operating costs of that train, and
    that is just not true. Amtrak still pays the full operating
    costs of one of the three daily Seattle-Portland trains and a
    considerable amount of overhead costs for all the Cascadia
    trains.
        Your Amtrak reform proposal assumes that Washington and
    Oregon would take on 100 percent of the operating costs of
    these trains, and the only help they would get from the Federal
    Government is matching grants for capital expenses. Are you
    aware that Washington State would have to significantly
    increase its investment just to maintain the status quo if your
    reform bill was enacted?
        Secretary Mineta. We know that there is going to be an
    added burden on the States through the reform legislation. But
    we also recognize that there are some 24 or 25 States that do
    provide passenger rail services. In fact, just yesterday I met
    with a group that is called States for Passenger Rail, and
    there are some 24-25 member States in that organization. The
    vice chair of that program, in fact, is the director of the
    rail program in Washington State, Ken Uznanski. They are
    generally supportive of the Amtrak reform proposal that we have
    before Congress. The group is chaired by the Secretary of
    Transportation of the State of Wisconsin. We had a very good
    discussion about why there is need for Amtrak reform. They feel
    the uncertainty of the present program is something that the
    States cannot afford to have continue because they go through
    the roller coaster of whether or not there is going to be
    Amtrak funding.
        Senator Murray. That is true, but the States would have to
    take up considerable costs----
        Secretary Mineta. We recognize that there would be----
        Senator Murray [continuing]. Including Washington State
    that you----
        Secretary Mineta [continuing]. Including Washington State.
    But Missouri, for instance, is part of the Midwest Regional
    Rail Initiative, which consists of the States of Michigan,
    Wisconsin, Minnesota, Illinois, Missouri, Nebraska, Iowa,
    Indiana, and Ohio.
        Senator Murray. Right.
        Secretary Mineta. We know that there are States that are
    interested in rail. This way they would be able to get 50
    percent capital grants that they are not getting right now.
        Senator Murray. Well, you know that last year the director
    of the rail division of the Oregon Department of Transportation
    testified on your reform bill, and she was not very
    enthusiastic. She said in her testimony that ``the Pacific
    Northwest is touted because Oregon, Washington, and British
    Columbia appear to exist as an operating entity, and in fact,
    there is no formal compact. We exist only because Amtrak
    exists.'' It was Amtrak that put the years of effort into
    bringing those three entities together to start a viable cost-
    sharing arrangement. Under your reform proposal, States will be
    required to pay for all of the operating losses of their
    trains, not just a portion as is now done in the Pacific
    Northwest.
        So tell me, even if you could get the States of the Nation
    to take on this new obligation, what entity is going to gather
    all these States together to negotiate those arrangements?
        Secretary Mineta. We are in the process of trying to find
    what is the best way to come to some agreement.
        Senator Murray. So we do not know that. We do not have an
    entity today.
        So the second question I would have is, how soon would the
    States be required to put up the funding to cover those
    operating losses?
        Secretary Mineta. Under our reform legislation, we have a
    transition period of 6 years.
        Senator Murray. Have you ever considered advocating
    flexibility for the use of Federal highway funds so the States
    can use a portion of those dollars to fund the operating losses
    on Amtrak?
        Secretary Mineta. Not to that extent. We have modeled our
    reform legislation after the way that the Federal Government
    relates to States and localities on highway programs, transit
    and aviation. We provide the capital grant funding to local and
    State governments. The States for Passenger Rail said that they
    would like to see this program modeled after the highway
    approach.
        Senator Murray. Let me ask one last question. I sent you
    some questions recently, and in your answers to them on Amtrak
    bankruptcy, you said that ``if Amtrak were to seek bankruptcy
    protection, Amtrak would do well to emulate the airlines and
    file at a time when it has substantial cash balances.'' You
    estimated that if we wait until the end of this year, Amtrak
    would only have a cash balance of $75 million, which would only
    allow the company to operate for a few weeks.
        Since you are a member of the Amtrak Board of Directors,
    you have got to be intimately familiar with its finances. Is it
    possible that the Amtrak Board of Directors is going to declare
    bankruptcy sometime in this fiscal year even while Congress
    continues to work on our budget in the reform bill?
        Secretary Mineta. I do not believe so, but let me ask Jeff
    Rosen, our General Counsel, who is my representative on the
    board of Amtrak. They will be meeting this week and I will be
    meeting with them as well.
        Mr. Rosen. Senator, I think the answer to your question is
    that the Amtrak board is engaged in a strategic planning
    process, attempting to look at places where costs can be
    reduced, where revenues might be enhanced, and where there
    would be some opportunities to improve the operation and
    financial performance of the company.
        Senator Murray. Do you foresee them declaring bankruptcy
    sometime this fiscal year?
        Mr. Rosen. That is not the object or intention. Obviously,
    everybody has to adapt as they go, but that is not the current
    plan.
        Senator Murray. Well, Mr. Chairman, I hope at some point we
    can have a hearing on Amtrak so we can hear about the financial
    situation from the Amtrak Board of Directors.
        Senator Bond. I think one may be needed in the Commerce
    Committee as well.
        Senator Stevens.

                    TRANSPORTATION INFRASTRUCTURE IN ALASKA

        Senator Stevens. Mr. Secretary, I find it strange we meet
    today on the day we are probably going to consider the question
    of whether or not we will open up the North Slope of Alaska for
    oil. I note that the price of aviation fuel has gone up three
    times since 1999 and that the problem really with the airline
    industry is that it is just being put out of business because
    of high energy prices. A $1 increase in the price of fuel, I am
    told, for aviation costs 5,300 airline jobs. It is interesting
    that some people here criticize the administration for its
    budget when they refuse to recognize the need for purchasing as
    much oil as we can at home. The export of dollars to OPEC is
    just a hemorrhage.
        Today they meet in Iran. OPEC meets in Iran today. The
    estimates of some experts say by the end of the year it will be
    $80 a barrel. Today it is $54.95 a barrel.
        Now, I think it is high time some people start thinking
    about what causes the problems of transportation, particularly
    aviation. I would hope that you and the administration would
    start moving in on the question of the cost to the system by
    forever having these increased costs of buying so much oil
    abroad. It will be 60 percent by the end of the year they tell
    me. We will be buying 60 percent of our oil abroad, primarily
    from unstable countries that are today meeting in Iran. I
    cannot think of anything that is more difficult for the
    transportation industry than to face the costs of fuel.
        I have a question, though, and that relates to my problem
    about where I live. We have, as you know, a State that has half
    the coastline of the United States. Because of the withdrawals
    that were made by President Carter in 1980, we cannot build
    highways, north or south or east or west. That was the total
    plan at the time, was to prevent Alaska from being able to have
    ground transportation. We have only air transportation and that
    by sea. We have been able to build air terminals, thanks to a
    long process, but we now have some 230 small airports, most of
    them maintained by the State, but some of them by the Federal
    Government. Our reliance on water transportation increases now
    as freight gets heavier going into the rural communities. I
    find we just do not have docks. We do not have the capability
    to bring this equipment ashore in these small villages and
    small towns.
        I have been trying to find a way to develop small dock
    projects, and I want to urge your assistance to see if we
    cannot find some way to do this. We created the Denali
    Commission, formed after the Appalachian Commission that
    Senator Byrd started. We think that if we had some way to take
    funds and allow the Denali Commission to start building docks,
    we could cut the cost of delivery of freight to those small
    villages in half.
        So I am not asking a question. I am just making a plea that
    you assign some of your people to start working with us. How
    can we get docks for the small villages along the rivers and
    along the sea that have never had docks? They have had to load
    their stuff in small boats, 30-foot boats. That is just not
    possible to get it in. The airports are small airports. They
    are flying 19-passenger planes in those areas and they cannot
    carry freight. The only freight they get is really by water,
    and it is very limited as to what we can do to help them
    modernize until we can freight ashore.
        So, my friend, I just plead with you that you help me find
    some way to meet the transportation needs of rural Alaska.
        Thank you, Mr. Chairman.
        Secretary Mineta. Mr. Chairman, we have AIR21 and now
    Vision 100 related to aviation. We have had TEA21 related to
    surface transportation. Right now we are putting together a
    program called SEA21 for maritime transportation. This is a way
    of dealing with short sea shipping, using smaller ports and
    looking at the inland waterway system of the United States to
    see what we can do to enhance the movement of people and goods
    through the water system that we have. It is used extensively
    in Europe. You can travel all the way from Rotterdam to the
    Black Sea on barges or even on passenger-type vessels. Again,
    we feel that the potential is here. So we are now looking at
    SEA21. I am quite sure that that would fit in very well with
    what you were envisioning.
        Senator Stevens. Good. We look forward to working with you.
    Your friend and mine, the Congressman from Alaska, was a
    riverboat captain. We used to have riverboats but we do not
    have them any longer because they are not constructed any
    longer. We may have to look to the basic concept of acquiring
    new types of boats that can be used in the rivers of Alaska, if
    you want to go that way. But I thank you for your response.
        Senator Bond. Thank you very much, Senator Stevens.
        Mr. Secretary, we appreciate your comments about the
    importance of inland waterways transportation, and we will need
    your help on a little bill called WRDA.
        Senator Byrd.

                        INTERCITY PASSENGER RAIL SERVICE

        Senator Byrd. Thank you, Mr. Chairman. Senator Stevens, as
    Alaska's Senator of the 20th Century, we will get it done, and
    we will do what we can to help get those little ports.
        Regarding one of your so-called reform proposals, how did
    you arrive at your plan to have the States, Mr. Secretary,
    rather than the Federal Government absorb all of the operating
    costs on Amtrak? Why do you think that the States collectively
    are in a better position to fund the operating losses for
    Amtrak than the Federal Government?
        I notice in The Washington Post of March 15, these words,
    which I excerpt from the article. ``As Northern Virginia
    drivers spend more time in their cars on bottlenecked highways,
    money to expand the State's road and transit network is
    disappearing fast, transportation experts said yesterday. The
    shortage is so serious that by 2014, Virginia will have trouble
    matching Federal transportation grants, jeopardizing funding
    for construction and maintenance, a top State official told a
    gathering of the region's transportation leaders. And by 2018,
    so much of the State's transportation fund will have been
    shifted to maintenance and general spending that money to build
    new roads will be nonexistent.'' So this is the condition that
    the State and local subdivisions and communities are being
    placed in.
        So, let me say again, Mr. Secretary, how did you arrive at
    your plan to have the States, rather than the Federal
    Government, absorb all of the operating costs on Amtrak trains?
        Secretary Mineta. The basis of the reform measure was how
    we currently approach highway programs, transit, and aviation.
    In every one of those cases, the operating costs of those
    systems are borne by States and localities. The Federal
    Government does participate in funding the capital
    infrastructure costs. We felt that Amtrak should not be treated
    any differently than other modes of transportation. That was
    the basis for our using the States as the way of structuring
    the reform on Amtrak.
        Yesterday I met with the group States for Passenger Rail.
    One of the people participating in that meeting was a woman by
    the name of Karen Ray who is the director of rail for the
    Commonwealth of Virginia. They already have Virginia Railway
    Express (VRE) that goes from Fredericksburg to the District of
    Columbia, but they are also planning on rail from Richmond to
    the tidal area of Roanoke and Hampton Roads. They are also
    thinking of passenger rail service from Bristol, Virginia all
    the way to Washington, DC. They already have an agreement
    between Virginia and North Carolina, and that will be part of a
    system that will eventually go through South Carolina and on to
    Georgia. The States recognize the need for rail as an
    alternative form, and I think that we are not out of step in
    terms of the initiative that the States are already taking on
    their own.
        Senator Byrd. Mr. Secretary, I say most respectfully that
    you would make a fine U.S. Senator if we are able to continue
    to filibuster, if they do not stop us.
        But you still have not answered my question. I listened
    very closely. Why do you think, given the States' financial
    situation, that they are in a position to start absorbing the
    cost of Amtrak service?
        Secretary Mineta. Again, I would say that the States are
    taking the initiative to promote their own rail services. Right
    now they are paying for it fully on their own. This way we
    would participate 50-50 with them on their capital costs. They
    are already absorbing the operating costs right now. I would
    assume that that would continue in the future and that we would
    participate with them on the capital physical infrastructure
    costs.
        Senator Byrd. Thank you, Mr. Chairman. My time is up.
        Senator Bond. Thank you, Senator Byrd.
        Senator Domenici.

                                 HIGHWAY SAFETY

        Senator Domenici. Mr. Secretary, first, I am hopeful that I
    will be here when the meeting ends because I have a matter
    pertaining to how your office is handling certain Federal
    events in my State, and I would rather state those to you
    privately. If I miss you this morning at the end of the meeting
    because I have left, I would appreciate it if you would note
    that I need a call from you about something rather urgent.
        Secretary Mineta. Great.
        Senator Domenici. Mr. Secretary, you mentioned that deaths
    were down on the highways. Could you state for the record how
    many deaths there are, even though they are down? How many
    people die on the highways?
        Secretary Mineta. The total is about 42,600, and this is
    down from over 43,000 the year before. We have not only had a
    drop in the total number of deaths, but we also have had a drop
    in the fatal accident rate even given the increase in vehicle
    miles traveled.
        Senator Domenici. Well, I did not come here prepared to
    talk about that, but it is amazing. In other situations that
    occur in the United States, McDonald's and their hamburgers,
    whatever, when we talk about obesity and death, we get all
    worked up over 300 or 400 deaths, and we have 42,000 on the
    highways. Yet, what kind of advertisements do you see by the
    automobile manufacturers? Have you seen very many yet that do
    not emphasize how fast the cars can take off, how fast they can
    go? It is amazing to me, with this kind of thing happening on
    our highways, why we are promoting speed as a reason for buying
    cars. That is just my view. It is nobody else's.

                    INTERCITY PASSENGER RAIL SERVICE REFORM

        You also mentioned that Amtrak is not eliminated, rather it
    is held in abeyance pending reforms. You know, I have been
    hearing that for so long. Would you tick off three or four
    reforms that you think ought to be made? I do not want you to
    use a lot of time, but what are the reforms?
        Secretary Mineta. That we are proposing under our bill?
        Senator Domenici. No. You are saying Amtrak must make
    reforms to continue the operating subsidy. What kind of
    reforms?
        Secretary Mineta. I think there are a number of cost
    savings that they can----
        Senator Domenici. What are they?
        Secretary Mineta. For instance, dining car services.
        Senator Domenici. Okay, that is one.
        Secretary Mineta. That costs something like $84 million a
    year. I think again this is an area in which they ought to be
    taking some action.
        Senator Domenici. Well that is not very much.
        Secretary Mineta. It is like anything else. Everything does
    add up to a bottom line.
        Senator Domenici. Mr. Secretary, are the railroads,
    including Amtrak, still immune from workmen's compensation laws
    and they apply their own liability under straight tort
    liability for injuries?
        Secretary Mineta. I think that is under a different kind of
    law. There are special laws that apply to----
        Senator Domenici. I cannot help but believe that that would
    be a rather expensive liability situation. I would assume that
    might be one of the reforms being contemplated. Is that
    correct? Could you answer it, sir?
        Mr. Rosen. Senator, that is not a piece of the reform
    legislation that the administration sent up in 2003, but you
    are correct that it is an expensive piece of the puzzle for
    railroads.
        Senator Domenici. Why is it not a suggested reform? Are we
    scared of somebody?
        Mr. Rosen. Not that I know of, but I think that may be a
    useful suggestion for us to look at.
        Senator Domenici. I think it is because you are scared of
    somebody. You are scared of the unions. That is why.
        I noticed the other day there was an accident on a
    railroad. The story said that the cars tipped mildly, did not
    even turn or anything. Three days later, 12 railroad employees
    filed suits for injuries not under workmen's comp, but under
    straight tort liability. Who knows how much those cases were
    settled for. You know about that, Mr. Chairman. That is not
    workmen's comp. Just as if somebody was negligent, you recover
    under straight liability like anybody else in an automobile
    accident. That is a pretty costly item.
        Well, I did not really come to talk about that. I came here
    to talk about two things.

                            INDIAN RESERVATION ROADS

        Mr. Secretary, I have been part, for the last 10 years, of
    seeing to it that the Indian people of the United States get
    some roadway money. We passed three sets of legislation with
    each highway bill, setting aside a small portion of highway
    taxes for Indian roads. I know you cannot right here, but could
    you, for the record, tell us how that program is going, how
    much money has been put out each year by the Department,
    through the BIA or otherwise, under that piece of the law which
    sets aside a portion of the highway funds for Indian roads?
        Secretary Mineta. We will respond for the record.
        [The information follows:]

        On July 19, 2004, after approximately 5 years of negotiated
    rulemaking between representatives of Indian tribes and the Federal
    Government, the Indian Reservation Roads (IRR) Program Final Rule (25
    CFR Part 170) was published. This rule established policies and
    procedures governing the IRR Program. It expanded transportation
    activities available to the tribes and provided guidance for planning,
    designing, constructing, and maintaining transportation facilities. It
    also established an IRR Coordinating Committee of 12 tribal
    representatives to provide input and recommendations to the Bureau of
    Indian Affairs (BIA) and the Federal Highway Administration (FHWA) on
    the IRR program.
        In addition, the Final Rule established a funding distribution
    methodology for IRR Program funds. As a result part of the negotiated
    rulemaking, the entire IRR inventory of 63,000 miles contribute towards
    the amount of IRR Program funds the tribes receive. The limitation on
    the growth of the inventory has been eliminated.
        IRR Program Funds are distributed by tribal allocation. The formula
    methodology used to determine each tribe's allocation is composed of
    three factors. The largest contributing factor is a tribe's ``cost to
    construct,'' which contributes 50 percent. A tribe's ``vehicle miles
    traveled'' (VMT) contributes 30 percent, while its ``population''
    contributes the remaining 20 percent. Each tribe's allocation is then
    calculated by its percentage of these factors as compared to the
    nationwide total. However, the actual distribution of the funds has
    been affected by the different continuing resolutions and extensions to
    the Transportation Equity Act for the 21st Century (TEA21).
        The following funding amount has been made available for the Indian
    Reservation Roads Program during the past four highway authorizations:
      --Surface Transportation Assistance Act of 1982 (STAA): $418 million;
      --Surface Transportation and Uniform Relocation Assistance Act of
            1987 (STURAA): $400 million;
      --Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA):
            $1.069 billion; and
      --TEA21: $1.47 billion.
        The current annual funding level is $275 million for the IRR
    program. After application of statutory and regulatory takedowns, the
    available funds are re-allocated from FHWA to the BIA, which is the
    only agency that receives these funds. The BIA then distributes the
    funds either directly to the tribes through self-governance agreements/
    compacts or to the BIA Regional Offices. If the funds are distributed
    to the BIA Regional Offices, they in turn provide the funds to the
    tribes through Indian Self Determination Education Assistance Act
    (Public Law 93-638) contracts, Buy Indian contracts, or perform the
    work themselves on behalf of a tribe. It should be noted that the
    Indian Reservation Roads Bridge Program (IRRBP), established under
    TEA21, has dedicated $13 million of each year's IRR Program funds to
    the rehabilitation or replacement of deficient bridges within the IRR
    System. There are over 4,640 bridges on the IRR System. Approximately
    1,050 of these are deficient. To date, these funds have been utilized
    for work on over 125 IRR bridges.
        Finally, as a result of TEA21, FHWA developed by rule requirements
    and guidelines for three new management systems to assist BIA and
    tribal governments in identifying and prioritizing quality and
    quantifiable projects. In addition, FHWA, BIA, and tribal governments
    are working together both to develop an integrated transportation
    planning process to help the tribes work with the State and
    metropolitan planning organizations, and to improve their ability to
    facilitate long range advance funding for projects. There has also been
    considerable success with the tribes to develop safety audits and
    initiatives in cooperation with State and local governments.

        Senator Domenici. Will you also give us an overview,
    through your experts, on where we are, how much are we
    accomplishing, how much do we have still to get done? That
    would be an interesting thing for us. That is a big number now.
    We have got it up to almost $300 million a year. It will be
    more in the next bill.
        [The information follows:]

        One of the greatest single recent accomplishments of this program
    was the publication of the Indian Reservation Roads (IRR) Program final
    rule (25 CFR Part 170). This accomplishment involved 5 years of
    negotiated rulemaking between representatives of Indian tribes and the
    Federal Government and expands transportation activities available to
    the tribes by providing guidance for planning, designing, constructing,
    and maintaining transportation facilities.
        Over the 7 year period of fiscal year 1998 through fiscal year
    2004, approximately $1.745 billion has been made available for the IRR
    Program. These funds have been spent on improving thousands of miles of
    IRR facilities across the country as well as rehabilitating or
    replacing 125 IRR bridges. However, the backlog of needs for the IRR
    Program remains high at $15.7 billion as a majority of the IRR road
    mileage remains in fair to poor condition and more than 1,000 bridges
    are still deemed deficient.
        Another accomplishment of the program is that it has enabled the
    tribes to administer their own projects. Today tribes, through either
    self-governance compacts or Indian Self Determination Education
    Assistance Act (Public Law 93-638) self-determination contracts with
    the Bureau of Indian Affairs (BIA), administer approximately 50 percent
    of the funding made available under this program. This has provided
    local employment for tribal forces and an opportunity for significant
    local resources to be used.

                         CORRIDORS AND BORDERS PROGRAM

        Senator Domenici. My last question has to do with money
    that goes to the so-called border. We have the Borders and
    Corridors program. It was instituted, as you know, to alleviate
    problems along the borders that need upgrades on existing
    highway structures where we have a lot of traffic between
    Mexico and America and Canada and America. Would you provide
    the committee with an update on the Borders and Corridors
    program, which is important to many States, including mine?
    Would you also tell us if it has had any positive effects, and
    then where do you think the program is going? By that, I mean
    what are the problems out there that you think might be
    addressed.
        Senator Bond. Thank you very much, Senator Domenici. We
    will ask those questions for the record.
        Secretary Mineta. We will respond to that.
        [The information follows:]

        The Federal Highway Administration (FHWA) prepared a report on the
    first 5 years (fiscal year 1999-fiscal year 2003) of the program under
    TEA21. This report, The National Corridor Planning and Development and
    Coordinated Border Infrastructure Program (NCPD/CBI): History,
    Evaluation and Results, found that during the first few years of the
    program, the demand for grants under the program have outpaced the
    available funds. Through the years, most of the funds appropriated for
    the program have become designated by the Congress, and most of those
    funds have been designated for corridor projects. Five States, West
    Virginia, Texas, Kentucky, California, and Washington accounted for
    over 40 percent of the awards in the first 5 years of the program.
        Many projects are longer term, so their benefits have not been
    assessed during the short life of this program. Also, many projects are
    more costly than reflected in the grant allocation, and require
    contributions from other sources. However, anecdotal evidence from some
    recent success stories in Texas, New York, California, and Washington
    State indicates that the program has some very positive effects such as
    alleviating congestion, improving highway/railroad crossing safety, and
    expediting project implementation. These success stories are
    highlighted in the report, and a brief narrative of each follows:
    World Trade Bridge, Laredo,Texas
        Mexico-U.S. trade increased in the 1980's and with it the traffic
    on the downtown Laredo Juarez-Lincoln Bridge. By the end of this
    decade, the State of Texas, the City of Laredo, the Mexican government,
    the City of Nuevo Laredo and others were discussing how to address this
    situation. In 1991, detailed coordination began for a new bridge
    outside the central business district that would carry commercial
    traffic. By 1993, projects were placed on the Texas multi-year
    transportation improvement program and in 1995 a comprehensive funding
    agreement had been reached. The total cost of the new bridge and
    related improvements was about $100 million. The NCPD/CBI contributed
    about $6 million of this total through one of the fiscal year 1999
    awards.
        The new bridge opened on April 15, 2000. Downtown back ups
    disappeared and truck traffic was successfully diverted to the new
    bridge. Substantial job growth occurred in fiscal year 2001 and seems
    clearly related to the business opportunities created by the new
    bridge.
    Commercial Vehicle Processing Center, Buffalo, New York
        For a number of years, the Buffalo and Fort Erie Public Bridge
    Authority had been seeking to improve the operation of the border
    crossing at the Peace Bridge. In the late 1990's, a user group
    consisting of trucking associations, commercial carriers, brokers and
    the U.S. Customs Service developed ideas to meet this objective. One
    method that seemed promising was to develop procedures and train
    personnel to operate a Commercial Vehicle Processing Center (CVPC) on
    the Canadian side of the border. The CVPC would assist truck drivers
    with incomplete paperwork prior to the vehicles entering the inspection
    queue. Fewer vehicles failing the primary inspection would mean less
    congestion on the bridge. In fiscal year 1999, the FHWA awarded about
    $1 million in NCPD/CBI funds for developing procedures and training
    personnel for the CVPC. The Authority immediately began implementing
    this project and the CVPC opened in late fiscal year 1999. Within the
    first year, the number of vehicles failing the primary inspection fell
    from 36 percent to 15 percent. Border agencies and the U.S. Customs
    Service have recognized the CVPC as a success.
    Freight Action Strategies Corridor (FAST), Seattle Metropolitan Area,
            Washington State
        Beginning in 1994, local, State, port authority, private sector and
    Federal officials began developing plans to improve highway/railroad
    crossings and port access highways in the vicinity of the ports of
    Everett, Seattle and Tacoma, Washington. In 1997, a phased
    implementation plan was developed and in fiscal year 1999, the FAST
    corridor received the first of a number of awards from the NCPD/CBI
    program. From fiscal year 1999 through fiscal year 2003, FAST was
    awarded $32,000,000 in NCPD/CBI funds, including funds selected by the
    U.S. Department of Transportation (DOT) and funds designated by the
    Congress. The FAST project also received funds outside the NCPD/CBI
    Program, in Section 1602 of TEA21, in Section 378 of the fiscal year
    2001 DOT Appropriations Act, and in Section 330 of Division I of the
    Consolidated Appropriations Act of 2003. The first complete grade
    separation project was completed in fiscal year 2001 and by January
    2003, ten such projects were complete or nearly so. As projects have
    been completed, traffic back-ups disappeared, safety improved and
    railroad efficiency increased. Because a high percentage of jobs in the
    Seattle metropolitan area (as many as 1 in 3) are tied to international
    trade, systematic improvement of port access is seen as vital to the
    economic well being of the area.
    Alameda Corridor East (ACE), San Gabriel Valley, California
        Similar to the FAST program, local, regional, State and private
    sector parties have been working together since the late 1990's to
    improve highway/railroad grade crossings (including many grade
    separation projects) in an East-West corridor with high railroad
    traffic serving the Port of Los Angeles/Long Beach. The ACE corridor
    received funds from Section 1602 of TEA21 and corridor officials credit
    this with jumpstarting the ACE program. The same officials state that,
    in the first phase of the program, $3 have been leveraged for every
    Federal $1. The ACE corridor first received a NCPD/CBI award in fiscal
    year 2000 and subsequently received awards in fiscal year 2001, fiscal
    year 2002 and fiscal year 2003. These awards totaled $9,019,000. The
    first projects have resulted in less congestion, improved safety, and
    reduced emissions. This latter result is quite important because of the
    well-known air quality problems in the Los Angeles region. Without
    these improvements, increasing rail corridor traffic would worsen the
    congestion, safety and air quality problems as well as restrict
    economic development.
        The administration has proposed to reauthorize the Corridors and
    Borders program. Under the administration's proposal, the corridor
    program would become a Multi-State Corridor Planning Program. The
    purpose of this program is to support and encourage transportation
    planning from a broader perspective, transcending traditional State and
    modal boundaries, to meet evolving freight and passenger transportation
    needs of the 21st Century. Similarly, the border program would become a
    Border Planning, Operations, and Technology Program. The purpose of
    this program is to focus on improvement to bi-national transportation
    planning, operations, efficiency, information exchange, safety, and
    security for the United States borders with Canada and Mexico.

        Senator Bond. Senator Bennett.

                        INTERCITY PASSENGER RAIL SERVICE

        Senator Bennett. Thank you, Mr. Chairman.
        Mr. Rosen, I had not realized you were here when I extended
    the invitation through the Secretary to you. I apologize. I
    extend it to you personally. We would be happy to entertain you
    in Utah in grand Olympic style.
        This is a segue, I think, into this discussion about Amtrak
    because what we are talking about here in Utah is commuter rail
    and commuter rail from Salt Lake City north. It has nothing
    whatever to do with Amtrak. It has to do with the contribution
    of the State and the Federal Transit Administration.
        I think we get hung up on Amtrak as some kind of holy grail
    that is the only solution to intercity rail traffic. I will be
    the first to say that we need intercity rail traffic along the
    western front of the Wasatch Mountains in Salt Lake County
    north of Davis County and into Weber County, but I frankly do
    not want Amtrak to have anything to do with it. I want it to be
    run by the Utah authorities that understand the needs and
    understand the situation.
        If it would be of any help in resolving the Amtrak
    budgetary problem, I am happy to offer up Amtrak service in the
    State of Utah for immediate cancellation. This is not the
    Northeast Corridor. This is not an area between Washington and
    Boston where the trains carry as many people as the airplanes
    do. We have Amtrak service into Salt Lake City that arrives--I
    know this because I have met an Amtrak train where a family
    friend was coming in by train--at 2:30 in the morning. I think
    it arrives 3 whole days every week. On the occasion where the
    family friend got off the train, there were probably four or
    five other people that got off with her. To be spending the
    kind of subsidy that we are spending to maintain that sort of
    service, which is totally unsatisfactory, completely disruptive
    of the very few people who use it, when the money should be
    going into places where there is a legitimate need for
    intercity rail traffic is silly.
        So if you want an elected official who is willing to
    sacrifice his Amtrak service for the greater good of the Nation
    and help hold down the deficit on Amtrak, I offer my State. I
    have not consulted with the mayor and I have not consulted with
    the Governor, and I do not know how much political trouble it
    is going to get me in. But knowing the number of passengers
    that disembark from Amtrak on those 3 days a week when it shows
    up, I do not think I am in much political trouble. We could
    handle that amount of passengers numerically with a single
    flight of a single 767 once a week, and all of the
    transportation problems would be taken care of. Now, I realize
    that is an oversimplification.
        I am a strong supporter of Amtrak. As the Secretary knows,
    I was in the Department of Transportation and I was the
    lobbyist for the Department of Transportation that convinced
    the Congress to create Amtrak. I have got a nice certificate
    signed by John Volpe with a big award, the Secretary's award
    for outstanding achievement, for what I did to help create
    Amtrak. And I believe in Amtrak.
        But I think the primary function here is that if you are
    going to have mass transit, you have to have a mass that needs
    to be transited. And for a very large percentage of the Amtrak
    route system, you do not have the mass that needs to be
    transited. The money should go getting people from Washington
    to Baltimore, getting Senator Biden back home to Delaware and
    Senator Specter back home to Pennsylvania. And in the areas in
    the Cascades where there is a mass to be transited, let us
    transit them by rail, and let us put the Federal money in to
    make sure that system works. But let us not, for romantic
    purposes, continue to talk about a nationwide rail network that
    some day we are going to need and pour money into it. We have
    been doing it for over 30 years. I left the Department of
    Transportation in 1970, and here we are in 2005.
        The promise I solemnly made to the Congress, as I lobbied
    that bill through, that Amtrak would require Federal subsidies
    for only 3 years, has long since been broken by every
    administration from the Nixon administration, in which this
    thing was created, on down. And it is time to get serious about
    saying let us put the money where the passengers are and let
    the romance go into the novels that people can read on the
    airplanes as they are flying over the long distances.
        Thank you, Mr. Secretary.
        Senator Bond. Thank you, Senator Bennett. Confession is
    good for the soul.
        We appreciate that purging of past sins.
        Senator Dorgan.
        Senator Dorgan. Well, Mr. Chairman, I am pleased I was here
    for that confession.
        But let me be quick to say I would not offer up my State
    with respect to its Amtrak service, and let me tell you why. I
    do not know the specifics, and I am not critical of Senator
    Bennett's position or statement with respect to Utah.
        We have the Empire Builder that comes through North Dakota
    on the northern route. It connects Chicago to Seattle. We have
    80,000 to 90,000 people get on and off in North Dakota. It is
    an important adjunct to our transportation system. It is very
    important. I happen to believe that it is worthy for us to
    subsidize Amtrak service. I just flat out believe that
    subsidizing rail passenger service is something that is all
    right with me. In terms of the set of priorities of
    investments, I think that is a good thing to do.
        Now, I do not see Amtrak as part of mass transit. That is
    perhaps where Senator Bennett and I disagree. Senator Bennett
    several times talked about mass transit. I do support mass
    transit. I come from a rural area. We do not have mass transit,
    but I support mass transit because our major cities need mass
    transit and the investment and the funds to advance mass
    transit. But Amtrak is not in my judgment mass transit.
        I really feel strongly that we need to maintain a national
    rail passenger system. If we do what the administration
    suggests we do, we will have Amtrak service from Boston to
    Florida and the income stream from the masses who would use
    that service will perhaps justify, I am guessing, that service
    and perhaps even not require subsidy.
        We subsidize every single form of transportation. Every
    form of transportation has some embedded Federal subsidy. So I
    am perfectly comfortable believing that a national rail
    passenger system is something we should subsidize.
        Now, Senator Bennett does make a point. There may be some
    circumstances where you ought not stop or you ought not serve
    if there is nobody there.
        But I am very disappointed, Secretary Mineta, once again
    that the administration believes that Amtrak as a national
    system is somehow unworthy. I really think that is the wrong
    approach and hope that those of us in Congress who will likely
    have an opportunity to vote on that in the coming days will be
    able to overturn that recommendation.
        I would like to ask a question.
        I do not mean at all to be critical of Senator Bennett.
    That was not my intention.
        Senator Bennett. Feel free.

                         ESSENTIAL AIR SERVICE PROGRAM

        Senator Dorgan. Let me ask about the Essential Air Service
    program because there is a proposed 50 percent cut in the
    funding for the Essential Air Service program. You may have
    already answered this question. Can you give me the rationale
    for that? Because that also plays into the point that Senator
    Byrd made, I think, that this is a budget that is very punitive
    to rural areas.
        Secretary Mineta. First of all, the total budget that we
    got, $59.5 billion, is shoehorned in as part of the overall
    Federal budget. The President outlined three priorities that he
    had in developing the budget: fiscal restraint, national
    defense, and homeland security. As OMB was putting the budget
    together following these three priorities, then everyone else
    either had a plus or a minus. Even with our $59.5 billion
    budget, we are still close to, I believe, a 2 percent increase
    from the previous year's request.
        So one of the programs we had to shoehorn in, as you have
    mentioned, is Essential Air Service. We have proposed
    categories of airports that would get Essential Air Service
    funds based on how close they are to a large, medium, or small
    hub airport, or a non-hub airport that has jet service.
        So we looked at how many airports fall into those
    categories and how much money we have, and then tried to figure
    out how to set the criteria for the program. In doing that, and
    given the amount of money we had for Essential Air Service, we
    are trying to maintain service to those airports, but under a
    different set of criteria.
        Senator Dorgan. Mr. Secretary, my time is about up----
        Senator Bond. Have one on me.
        Senator Dorgan. All right. Thank you. A generous new
    chairman.
        Senator Bond. Everybody else is taking one, so you might as
    well.

                          TRANSPORTATION CONNECTIVITY

        Senator Dorgan. And congratulations, by the way, to you.
        If we were to build the interstate highway today, I assume
    there would be some people that would say, well, how on earth
    can you justify building four lanes across North Dakota,
    connecting Fargo to Beach, North Dakota from the east to the
    west because out near Medora, North Dakota and Buffalo Gap and
    Alsen, there are not a lot of people out there and so not as
    much traffic. But, of course, as you know, connecting a four
    lane across North Dakota connects Minneapolis to Seattle,
    Chicago to Seattle. So the same is true with other forms of
    transportation. We can either decide this is a country or this
    is a series of very big cities, the income from which will
    support robust, aggressive transportation systems for people
    who live in big cities in the masses, and the heck with the
    rest of the country.
        That is why I raise these questions about Amtrak, about
    Essential Air Service and believe that these investments more
    tend towards saying: where can you make a profit here? Where
    are the dollars and cents with respect to profitability? And
    with respect to transportation, whether it is AIP or EAS or
    Amtrak, sometimes you can know the cost of everything and the
    value of nothing, as some say. So there is value here in some
    of these decisions to make sure that our transportation systems
    help everybody in the country, connect everybody in the
    country.
        Secretary Mineta. That was the purpose of the national
    defense highway program. One of the criteria was a four-lane
    highway. Originally the program was based on interconnectivity
    of the country, and the highway system was basically an east-
    west system. It was not until the Intermodal Surface
    Transportation Efficiency Act (ISTEA) in 1991 that we went
    north-south with the national highway system.
        Today we are not talking as much about connectivity as we
    are congestion relief and increasing capacity as far as
    highways are concerned. We are trying to do the same thing in
    other modes of transportation, whether it is transit or
    aviation or, as I mentioned earlier, maritime in terms of
    inland waterways and short-sea shipping. We want to relieve
    some of the traffic that is on the highway and move it to water
    or to air or to other modes of transportation. It is not a one-
    system-fits-all.
        Senator Dorgan. I would just finally observe there will
    never be congestion on the Gladstone intersection of I-94 in
    western North Dakota. But although congestion is not our issue,
    I understand congestion exists elsewhere. Access and capability
    is the issue in rural America, and access to reasonable
    transportation opportunity is just as critical for somebody
    that lives in a town of 900 people with no bus service and no
    other access as congestion is for somebody that lives in a city
    of 4 million people where they have parking lots.
        Secretary Mineta. Absolutely. You were there in 1991 when
    Congress enacted ISTEA and we changed the name of the Urban
    Mass Transit Administration to the Federal Transit
    Administration because there were rural needs that had to be
    met by transit as well. We recognize the needs of rural
    communities, whether it be in air or transit or highways, and
    we have various parameters to meet the needs of the total
    country, regardless of the mode of transportation.
        In the case of the Essential Air Service program, we had to
    build the criteria around the available funding in order to
    continue to serve those communities.
        Senator Dorgan. Mr. Chairman, thank you very much.

                       CONDITIONS AND PERFORMANCE REPORT

        Senator Bond. Thank you very much, Senator Dorgan.
        Mr. Secretary, I mentioned in my opening statement your
    Department's Conditions and Performance Report said that
    Federal investment must increase by 17 percent just to maintain
    the current system, and to improve the system would require 65
    percent more than currently invested. I would like to know what
    specific plans, both for the short term and long term, are
    being looked at by the Department to address the shortfall and
    ensure adequate funding to reduce congestion, meet our economic
    needs, and lessen the senseless loss of life, estimated to be
    one out of three traffic fatalities nationally--in my State it
    is higher--caused by inadequate highways for the traffic that
    they hold. This is a question of life and death in my State.
    How does the Department propose to meet it?
        Secretary Mineta. First, let me address the Conditions and
    Performance (C&P) Report. The needs that are talked about in
    the report are not just Federal needs. They also include the
    requirements and the responsibilities that State and local
    governments have to maintain their road structure. So, the C&P
    report does not identify only the U.S. Department of
    Transportation's financial requirements.
        Let me deal with the safety issue.

                      FUNDING FOR FEDERAL HIGHWAY PROGRAMS

        Senator Bond. Let me just point out one thing. I understand
    that the States provide--at least my State provides--a lot more
    money than the Federal Government does, but I understood your
    Conditions and Performance Report to estimate the Federal
    investment. Federal investment alone must increase by 17
    percent and improving the system would require 65 percent more.
        Secretary Mineta. I was a co-author of ISTEA and the one
    who helped put together the SAFETEA proposal that the
    administration submitted to Congress. I was not here for TEA21.
    SAFETEA is a 35 percent increase over TEA21. Even in this
    year's budget, the administration is requesting $28 billion
    more for SAFETEA than we did last year in the 2005 budget. So
    we recognize the need for an increase in highway funding. I
    believe we were trying to meet the needs that we see facing us
    today and into the future during the 6-year authorization
    period.
        The second point on safety. When I was briefing the
    President on SAFETEA in 2002, he looked at the 43,000 highway
    fatalities figure and he said that we have got to get that
    down. We have put together a multi-pronged program in the
    Department of Transportation and in SAFETEA to drive the number
    of fatalities and the fatality rate down.
        Apart from SAFETEA, we think we have already turned the
    corner, given the programs in the National Highway Traffic
    Safety Administration and in the Federal Motor Carrier Safety
    Administration. As I said earlier, our annual traffic
    fatalities are about 42,600, whereas in 2002 they exceeded
    43,000. So we have turned the corner.
        Senator Bond. Mr. Secretary, I know those figures but in my
    State we are killing people on two-lane highways that have
    traffic that everybody recognizes requires four lanes. We do
    not have it. So I would just ask you to consider that because
    we are not solving that problem.
        Secretary Mineta. Well, we are and in fact----
        Senator Bond. The Federal role is not doing it.
        Secretary Mineta. In fact, we have been asking Missouri to
    adopt the primary seat belt law. We know that primary seat belt
    laws have a very big impact on traffic deaths.

                        INTERCITY PASSENGER RAIL SERVICE

        Senator Bond. All right. I am just about out of time.
        Let me just ask you on Amtrak. We have talked about that.
    Senator Bennett confessed to his role in it. What is the
    administration going to provide in terms of reform for Amtrak?
    Are you going to include options for State or private passenger
    rail, competition with Amtrak? When do you expect to get a
    reform proposal up, and how is that going to impact the
    appropriations death sentence for Amtrak included in this
    budget?
        Secretary Mineta. Mr. Chairman, our original proposal was
    submitted in July of 2003. We had no committee action on the
    proposal in 2004 so far in 2005. It was decided by OMB and DOT
    that in order to get action by the Congress, we would request
    zero funding for Amtrak. I think that has gotten everyone's
    attention. In fact, that is how I think I got this black and
    blue mark.
        We will submit, probably within 1 week or 2, essentially
    the same legislation that we submitted in July of 2003, with
    some refinements in terms of what we ought to be doing.
        Senator Bond. Thank you very much, Mr. Secretary.
        Senator Murray.

                             FAA SAFETY INSPECTORS

        Senator Murray. Thank you, Mr. Chairman.
        Mr. Secretary, in 1996 the FAA significantly increased the
    number of aviation safety inspectors in light of that 90-day
    safety review that was conducted in the aftermath of the
    ValuJet crash in Florida. Unfortunately, the number of
    inspectors has been consistently below the standard of 3,297
    that was set in that review. In fact, Mr. Secretary, I believe
    that the National Civil Aviation Review Commission that you
    chaired called for even higher inspector levels.
        I understand that the FAA may lose as many as 250
    inspectors this year through attrition and that the agency has
    no intention to back-fill for these positions. That really
    concerns me. Why are you not filling the vacancies for these
    critical safety positions?
        Secretary Mineta. As I recall, we are increasing the number
    of safety inspectors by 197.
        Senator Murray. We are losing 250 this year for
    retirements.
        Secretary Mineta. I am not sure of the number that we are
    losing, but I know that given the foreign repair station issue
    and a number of other things that are coming up, we are
    increasing the number of aviation safety inspectors. I
    misspoke. It was not 197. It was 97.
        Senator Murray. Right, at a time when we are losing 250.
        Secretary Mineta. I will check on that.
        [The information follows:]

        During fiscal year 2005, staffing for FAA's Aviation Safety line of
    business (Regulation and Certification) will decrease from 6,429 to
    6,187 due primarily to attrition, a net loss of 302 staff, including
    256 safety inspectors and engineers. This decrease, which does not
    include air traffic controllers, is partially offset by a requested
    fiscal year 2006 budget increase of 97 safety inspectors and engineers
    to: (1) improve oversight of domestic and foreign repair stations; (2)
    oversee FAA's Air Traffic Organization (ATO); (3) establish a new
    safety oversight office in China; and (4) restore a small portion of
    the staff lost in fiscal year 2005. Safety will always come first, and
    the FAA will not reduce its oversight of the air carriers. Instead, the
    agency will reduce the number of staff who certify new products, and
    its aviation medicine and regulatory offices.

        Senator Murray. I think you would agree with me when the
    airlines are struggling financially and we are outsourcing an
    increasing portion of the maintenance work, replacing these
    inspectors should be at the top of the priority list. So if you
    could get back to me on when you are going to fill those
    vacancies.
        Secretary Mineta. Given the financial condition of the
    airlines, I told the FAA that I want to make sure that the
    inspection workforce is checking all of the maintenance
    records. I had a hearing, I think it was in 1988, on what we
    call pencil whipping, where inspectors were saying what they
    were doing, but that was not the case.
        Senator Murray. Okay. Well, I am very concerned about that
    so I would like to hear back from you.

                                RAILROAD SAFETY

        On another area--and, Mr. Chairman, you talked about some
    of the rail safety programs and concerns, and I hope that we
    can have a hearing on that at some point. But we do know that
    there were two very serious railroad crashes that resulted in
    several fatalities in January just a few months ago, one in
    South Carolina and one in California. Those crashes came right
    on the heels of an investigation by your Inspector General into
    whether your Federal Railroad Administration was exercising
    sufficient safety oversight of the railroads. I want to know
    from you what specific actions you are taking to step up
    enforcement.
        [The information follows:]

        The Federal Railroad Administration (FRA) enforces railroad safety
    laws and regulations vigorously. To accomplish this, FRA uses a variety
    of enforcement tools, including civil penalties, emergency orders,
    compliance orders, compliance agreements, individual liability, and
    criminal enforcement. FRA is accelerating development of a new National
    Inspection Plan that will help to deploy its inspection force of about
    415, supplemented by 160 State inspectors, to the highest value safety
    targets. FRA is also reviewing extensive safety data and focusing
    inspections to achieve the maximum safety benefits. FRA is targeting
    its current efforts toward the leading causes of train accidents: human
    factors and track. On human factors, FRA is considering regulatory
    action addressing the leading causes of accidents. On track, FRA is
    continuing aggressive, focused enforcement efforts and conducting
    research on technologies that will assist in detecting hidden track
    defects.

        Senator Murray. And I also want to press the fact that a
    number of press reports suggested that the FRA has been too
    close to the industry that it regulates, and the agency's
    Deputy Administrator resigned after the Inspector General found
    that she had not taken sufficient steps to avoid the appearance
    of inappropriate contact between her and the chief lobbyist for
    the Union Pacific Railroad. As a result, the agency has been
    without a confirmed Administrator or Deputy Administrator for
    several months, and I want to know when you are going to be
    appointing a new Federal Railroad administrator.
        Secretary Mineta. The resignation of the acting FRA
    administrator came in December, and in about mid-February I
    submitted a name for administrator of FRA. That person is going
    through the background investigation right now, and it will
    take roughly 60 to 70 days to complete the investigation. As
    soon as the background investigation is completed, then the
    White House is in a position to forward the name to the Senate.
        Senator Murray. I am very concerned about whether we can
    have a new attitude about safety and enforcement without
    somebody at the top.
        Secretary Mineta. In the meantime, we are not letting rail
    safety go unnoticed or not dealt with. Robert Jamison, the
    Deputy Administrator of FTA, is now the acting Administrator of
    the Federal Railroad Administration. I have asked him to look
    at rail safety as the No. 1 priority. Just within the last
    week, we have had something like nine accidents and I will not
    put up with it. I said to him that we want to deal promptly
    with this issue. So Robert is working on the rail safety
    program.
        And it goes back to the Graniteville, South Carolina
    accident. Robert Jamison was appointed as the acting
    administrator when his predecessor stepped down, and I think 7
    hours later the Graniteville accident occurred. So safety is
    his No. 1 issue.
        Senator Murray. I see that my time is up for this round,
    but there were nine fatalities in that accident. There were 11
    in California. I think this is a serious issue.
        Secretary Mineta. Absolutely, I agree with you.
        Senator Murray. Mr. Chairman, I hope we can have a hearing
    on that as well.
        Senator Bond. Senator Byrd.

                         ESSENTIAL AIR SERVICE PROGRAM

        Senator Byrd. Well, thank you again, Mr. Chairman.
        Mr. Secretary, you and I have been around transportation
    policy for a long time. I was chairman many years ago of this
    subcommittee.
        We have been around long enough to remember the discussions
    and the arguments that surrounded airline deregulation. I voted
    to deregulate the airlines. That is one of the votes I have
    always regretted, Mr. Chairman. We paid for it immediately, for
    that bad vote. In West Virginia, my then colleague, Senator
    Randolph, voted the other way. That was a long time ago.
        The establishment of the Essential Air Service was at the
    very heart of the compact that was made with the flying public
    when we agreed to deregulate the airlines. We said that the
    Federal Government would continue to pay to ensure the
    continuity of air service to communities, that the airlines
    might want to abandon. And you are now proposing to cut funding
    for the Essential Air Service in half and require that cut be
    made up through contributions from the communities themselves.
        Now, Mr. Secretary, President after President after
    President, Democratic and Republican, have proposed to cut this
    program. I have, time and again, supported successfully the
    restoration of monies that were cut by an administration.
        Why is this cost-sharing requirement not an example of the
    administration reneging on the commitment made by the Federal
    Government to these communities? Your answer please.
        Secretary Mineta. Senator Byrd, first of all, the EAS
    program has essentially remained the same without any
    legislative change since 1978, the year of deregulation.
        Secondly, as I was mentioning to Senator Dorgan, we are
    trying to maintain the number of communities that receive
    Essential Air Service, but by shoehorning those airports within
    the amount of money that we have available. We built the
    criteria for eligibility to be a part of the program based on a
    $50 million request.
        Senator Byrd. Following this program of shoehorning, are we
    not being short-sighted? We are cutting air service to small
    communities, to rural communities, and this is vital to the
    communities. They cannot be O'Hare. They cannot be Dulles. They
    cannot be the Washington Reagan National Airport, but they
    serve the needs of people in areas such as Beckley, for
    example, and Bluefield, West Virginia. I cannot understand why
    the administration believes that communities the size of these
    two cities that I mentioned will have the resources to
    subsidize this airport. I think it is short-sighted. But as I
    say, it has happened under President after President after
    President.
        Secretary Mineta. My philosophy is to protect the most
    isolated communities, given the amount of money we have
    available.
        Senator Byrd. That is the point, given the amount of money
    we have. Why does the administration not push for an increase,
    or certainly we are going to try here to restore these monies.
    It is a philosophy, Mr. Secretary, I respectfully disagree with
    and have all along. We will be at it again.
        I hope we will not use this term ``shoehorn'' to express
    our philosophy as to the way we are going to help people
    shoehorn it into the amount of money we have when, Mr.
    Secretary, your administration will oppose our efforts to
    restore this. We want something larger, a larger amount in
    which to shoehorn small communities like Beckley and Bluefield.
        Thank you, Mr. Chairman. My time is up.
        Senator Bond. Thank you, Senator Byrd.
        We have had very interesting discussions. I am going to ask
    three more questions only. I know you will be disappointed. I
    will submit the rest for the record. Then we will turn to our
    ranking member and Senator Byrd for as many questions as they
    wish to ask here.
        Senator Byrd. Mr. Chairman?
        Senator Bond. Yes, sir.
        Senator Byrd. Let me just thank you before you do that. I
    recognize the shortage of time. I am glad that we are going to
    submit questions to be answered for the record. I will join you
    in that. Thank you.

                          HOURS OF SERVICE RULEMAKING

        Senator Bond. Thank you very much, Senator Byrd. We
    appreciate your questions and your leadership.
        Mr. Secretary, in July 2004, a Federal court overturned the
    new hours of service rules for truckers because the FMCSA had
    not considered driver health. There were other concerns that
    the court raised. Congress has temporarily extended the new
    rule until 2005 to give FMCSA time to respond to the court's
    ruling. FMCSA reproposed the rule in 2005 after adding
    information. But the agency has also asked Congress to enact
    regulations in law during TEA21.
        I would like to know your views on whether these new rules
    have improved safety. And a very real concern has been raised
    by the trucking industry as to the economic impact of this
    rule. Have you considered, first and foremost, the health and
    safety of the drivers and the impact on the economy by these
    rules?
        Secretary Mineta. In 2001, the first person I had to head
    the Federal Motor Carrier Safety Administration was a gentleman
    by the name of Joe Clapp. He was the chairman and CEO of Yellow
    Freight, and fully understood and appreciated the impact of the
    hours of service (HOS) rule as it related to the safety and
    economics of the trucking industry.
        His successor as the Administrator of the Federal Motor
    Carrier Safety Administration, Annette Sandberg, has developed
    a really good rule. It is supported by the American Trucking
    Association. They feel, even where the HOS rule was overturned,
    that it is the right approach.
        But beyond that general response, let me ask our General
    Counsel on the specifics as to the timing of where we are going
    to go now.
        Senator Bond. If you could give us a brief answer, Mr.
    Rosen.
        Mr. Rosen. I will try to be brief. The proposed rule was
    intended to use available science and data to improve safety
    but with a reasonable balance of the costs. The administration
    believes that it did that, and so we have asked the Congress to
    extend that 1-year allowance of the rule to stay in effect, to
    instead ratify that the rule would remain in effect on a
    permanent basis, subject to whatever improvements the
    administration could do thereafter.
        The Federal Motor Carrier Safety Administration staff is
    looking at what other improvements or refinements could be
    achieved and, if need be, they will get themselves in a
    position to respond as the court had required. But our hope is
    that rather than have continued litigation and continued rounds
    of work on that, we could have the rule codified or ratified.

                            HIGHWAY CONGESTION RELIEF

        Senator Bond. Thank you, Mr. Rosen.
        Very briefly, Mr. Secretary, a year ago there was testimony
    that the FTA did not have an effective method to consider the
    congestion relief on highways that the new transit systems were
    intended to provide. FHWA and FTA were directed to work on a
    solution. Where is that solution? Have you come up with a new
    paradigm for that?
        Secretary Mineta. Mr. Chairman, can I get back to you for
    the record on that please?
        Senator Bond. We would be happy to do that.
        [The information follows:]

        FTA is working with FHWA to study the extent to which transit
    provides congestion relief. FTA has determined that that locally-
    developed travel models used in metropolitan areas seeking New Starts
    funds are incapable of producing reliable estimates of highway user
    benefits resulting from construction of the New Start. FTA expects to
    provide a report on the New Starts Rating and Evaluation Process--
    Congestion Relief--to the House and Senate Committees on Appropriations
    by June 1, 2005 as requested in House Report 108-671. By further
    Congressional direction, FTA provides monthly updates to Congress on
    the progress of the study.
        FTA has identified possible causes of the unreliability of highway
    user benefits. These include: an insufficient number of iterations of
    capacity constraint in the highway assignment model; inconsistency
    between the decision rules used to find highway paths and make
    assignments of traffic to those paths; and the lack of attention to the
    resulting congested highway travel times. Potential remedies would
    include several hundred iterations of capacity constraint, consistent
    decision rules for highway paths and assignment, and improved quality
    control of congested highway travel times. These remedies are currently
    being tested in several different metropolitan areas. FTA's intent is
    to understand the value of the remedies in time for the June 1, 2005
    report. The timing of implementation of the remedies will be dependent
    on the success of the tests and the degree of effort required by
    metropolitan areas to modify their travel models.

        Senator Bond. Finally, the FTA last week delivered a letter
    instituting new criteria for ratings on every project in the
    pipeline and current ratings related to cost effectiveness. The
    letter says that no full funding grant agreement will be
    approved for a New Starts project that does not have a cost
    effectiveness rating of medium. Of the six projects other than
    full funding grant agreements recommended for funding in the
    budget request, four would be directly impacted by this
    proposal. The policy, while it may be prudent, came only 6
    weeks after the projects had been rated for the year.
        I am concerned that this drastic change in policy appears
    to be arbitrary. How can you respond to that? And are there any
    other changes to the New Starts rating process on the horizon?
        Secretary Mineta. First of all, there are not any other
    changes in the process for the upcoming fiscal year. We are
    taking a look at all of the projects, and I am not in a
    position right now to say what we are going to do with them.
        Senator Bond. Is it not arbitrary, on the short time frame
    just after you fund it, to then say no New Starts? How is that
    going to work?
        Secretary Mineta. The reason I hesitated is that I did not
    know whether we had made the final decisions, but I have just
    been informed that we are going to grandfather some of them.
        Senator Bond. Thank you.
        Secretary Mineta. I knew we were talking about it, but I
    did not know whether we had actually come to that conclusion.
    So two projects will be grandfathered under the previous
    criteria.
        Senator Bond. There will be a lot of people happy with
    that. Thank you, Mr. Secretary.
        Senator Murray.

                                 AVIATION FEES

        Senator Murray. Thank you.
        Mr. Secretary, I just have a few questions left and I
    wanted to ask you, because I am sure you are aware in the
    Homeland Security budget, the administration is proposing to
    increase the security fee paid by passengers by 120 percent
    next year from $2.50 to $5.50 a segment. As you are well aware,
    the airlines are complaining bitterly, and I think that this
    $1.5 billion tax increase will further undermine their ability
    to recover economically.
        In your formal testimony that you submitted, you justify
    your half a billion cut in airport investments by arguing that
    several airports are not yet charging the full allowable
    passenger facility charge that they are allowed under law. You
    seem to indicate that the proper way to invest in airports is
    through another $350 million in fees instead of from
    appropriations from the Trust Fund.
        Does the administration have any concern for the views of
    the airlines that air passengers are already over-taxed and
    that that level of taxation is undermining the airlines'
    financial viability?
        Secretary Mineta. I was not part of that discussion,
    Senator, when the DHS and OMB were talking about the $2.50 to
    $5.50 increase. I did talk to some people afterward about that
    and the impact on the airlines, but I was not part of the
    discussion beforehand.
        Senator Murray. Well, I guess my concern is that you are
    advocating a $350 million increase at the same time that the
    administration is advocating $1.5 billion in higher fees for
    airport security. That is kind of a double whammy to the
    airlines when they are all struggling.
        Secretary Mineta. The PFC's were enacted in law as user
    fees. Some local airports are utilizing them and we still have
    a number that have not adopted the PFC as a user fee. I think
    of it as a pass-through to the passenger rather than something
    that is absorbed by the airline.
        Senator Murray. Well, to the consumers and to the airlines,
    it does look like tax increases from two places in the
    administration.

                             CROSS-BORDER TRUCKING

        Well, let me ask about an issue that I know the chairman of
    this committee remembers well, and that is the U.S.-Mexico
    negotiations on cross-border trucking. That was 3 years ago
    now, and we spent a lot of time working together to make sure
    that adequate safety measures were in place prior to the
    implementation of cross-border trucking between the United
    States and Mexico.
        As required in that bill, the Inspector General continues
    to review and report to us the status of the safety provisions
    we included in the bill, and I understand that you still have
    not executed a memorandum of understanding with the Mexican
    Government which would allow the border to open. Why has it
    taken so long to reach an agreement with the Mexican Government
    on cross-border trucking?
        Secretary Mineta. Mostly because of their own reluctance to
    do so. I have had a number of meetings with Secretary Cerisola,
    and every time I meet with him, I bring up this subject. We
    have had a memorandum pending in their office for over 2 years
    and we are trying to get this memorandum of agreement
    completed. We have not been able to bring this to closure. I
    know that we have suggested that this be a topic for
    conversation between President Bush, Mexican President Fox, and
    Canadian Prime Minister Martin when they meet.
        Senator Murray. So you believe this is a reluctance on
    behalf of Mexico to move forward with cross-border trucking?
        Secretary Mineta. I think they have had tremendous pressure
    from their own trucking association, Canacar, to move forward
    on this. You appropriated funds in 2002 to put our workforce in
    place, and we have done that. We are utilizing inspectors that
    are not on the border at other inspection points, but we are
    ready to move at any time that we get that memorandum of
    agreement signed to allow our inspectors to go to their
    terminals and to the maintenance facilities of their trucking
    companies.

                         ADDITIONAL COMMITTEE QUESTIONS

        Senator Murray. Well, Mr. Chairman, thank you. Again, it is
    a pleasure to work with you on this committee and I look
    forward to that. I will submit any other questions I have for
    the record.
        Senator Bond. Thank you very much, Senator Murray. This has
    been an interesting start for a very challenging subcommittee.
        Secretary Mineta, as always, we appreciate your tolerance
    of the questions and your good responses. We will have further
    questions for the record. Obviously, we are going to be seeing
    a lot of each other in the months to come. I thank you and your
    staff.
        [The following questions were not asked at the hearing, but
    were submitted to the Department for response subsequent to the
    hearing:]
               Question Submitted by Senator Christopher S. Bond
        Question. A year ago, there was testimony that Federal Transit
    Administration did not have an effective method to consider the
    congestion relief on highways that new transit systems were intended to
    provide. The Federal Highway Administration and FTA were directed to
    work on a solution to this issue.
        What steps have the agencies taken and when do you expect to have
    an improved method for identifying how much congestion relief will be
    provided by new transit systems?
        Answer. Currently, locally developed travel forecasting procedures
    are incapable of producing reliable estimates of congestion relief due
    to the construction of a New Starts project. FTA has coordinated with
    FHWA to identify problems with these travel forecasting procedures,
    suggested remedies, and worked with several travel forecasters from
    areas considering New Starts projects to test these remedies. The
    success of these remedies will be understood once these local efforts
    are completed. Preliminary results indicate that there are significant
    barriers to implementation of these remedies nationally that will allow
    FTA to evaluate this highway congestion relief. However, a better
    understanding of the effort needed to overcome these barriers will be
    gained after additional testing is performed. The timing of
    implementation of improved methods will be dependent upon the extent of
    the problem with local travel forecasting procedures nationally and the
    magnitude of effort required to address these long standing problems.
    FTA plans to report findings of this research effort in the Summer of
    2005.
                                     ______

                   Question Submitted by Senator Mike DeWine

                       CRITICAL BRIDGE REPLACEMENT NEEDS

        Question. Secretary Mineta, I am interested in knowing what plans
    the Department has this year and in future fiscal years to address
    critical bridge replacement needs throughout the country, particularly
    with respect to the functionally obsolete Brent Spence Bridge
    connecting Ohio and Kentucky along Interstate 75.
        Answer. Replacing and rehabilitating deficient bridges is an
    important Departmental objective. The administration recommends
    increased funding for the bridge program in its surface transportation
    reauthorization proposal--the Safe, Accountable, Flexible, and
    Efficient Transportation Equity Act of 2003. The administration also
    recommends that preventive maintenance be eligible for Federal funding
    as a means to expanding the service life of existing bridges.
        The Brent Spence Bridge services I-75 between Ohio and Kentucky.
    Replacement of the structure has received significant attention both
    locally and nationally. There are several program funds that the State
    could use to replace bridges, including the Highway Bridge Replacement
    and Rehabilitation Program (HBRRP) described in Title 23 United States
    Code, section 144. The HBRRP funds are apportioned annually to the
    States that have the responsibility for project-level decision making,
    setting priorities and allocating the available funds to the project.
    As a functionally obsolete structure, the Brent Spence Bridge is
    eligible for HBRRP funds. The needs of the Brent Spence Bridge compete
    with other projects for the funds available. Due to the size of the
    structure, funds have also been allocated to the Brent Spence Bridge
    through the Bridge Discretionary Program. In fiscal year 2004, $2
    million was designated to this project through this program. In fiscal
    year 2005, $4 million in funds were designated through this program. As
    work progresses, the project continues to be eligible for HBRRP funding
    and other categories of highway formula funds.
                                     ______

                Questions Submitted by Senator Pete V. Domenici

                         CORRIDORS AND BORDERS PROGRAM

        Question. Secretary Mineta, as you know, Border States face unique
    transportation challenges arising from their proximity to foreign
    nations. For this reason, the Corridors and Borders Program was
    instituted to help alleviate these problems and to provide for much
    needed upgrades to existing highway infrastructure.
        These programs provide funding for planning, project development,
    construction and operation of projects that serve border regions near
    Mexico and Canada and high priority corridors throughout the United
    States. New Mexico has been the recipient of this funding and has found
    it an invaluable resource in maintaining both of our high priority
    corridors.
        Mr. Secretary, could you please provide this committee with an
    update on the Corridors and Borders program?
        Answer. The Federal Highway Administration (FHWA) prepared a report
    on the first 5 years (fiscal year 1999-fiscal year 2003) of the program
    under the Transportation Equity Act for the 21st Century (TEA-21). This
    report, The National Corridor Planning and Development and Coordinated
    Border Infrastructure Program (NCPD/CBI): History, Evaluation and
    Results, found that during the first few years of the program, the
    demand for grants under the program outpaced the available funds.
    Through the years, most of the funds authorized for the program have
    been designated by the Congress, and most of those funds have been
    designated for corridor projects. Five States, West Virginia, Texas,
    Kentucky, California and Washington accounted for over 40 percent of
    the awards in the first 5 years of the program.
        Question. What have been the positive effects of this program?
        Answer. Many projects are longer term, so their benefits have not
    been assessed during the short life of this program. Also, many
    projects are more costly than reflected in the grant allocation, and
    require contributions from other sources. However, anecdotal evidence
    from some recent success stories in Texas, New York, California and
    Washington State indicates that the program has some very positive
    effects such as alleviating congestion, improving highway/railroad
    crossing safety, and expediting project implementation. These success
    stories are highlighted in the report, and a brief narrative of each
    follows:

    World Trade Bridge, Laredo, Texas
        Mexico-U.S. trade increased in the 1980's and with it the traffic
    on the downtown Laredo Juarez-Lincoln Bridge. By the end of this
    decade, the State of Texas, the City of Laredo, the Mexican government,
    the City of Nuevo Laredo and others were discussing how to address this
    situation. In 1991, detailed coordination began for a new bridge
    outside the central business district that would carry commercial
    traffic. By 1993, projects were placed on the Texas multi-year
    transportation improvement program and in 1995 a comprehensive funding
    agreement was reached. The total cost of the new bridge and related
    improvements was about $100 million. The NCPD/CBI contributed about $6
    million of this total through one of the fiscal year 1999 awards.
        The new bridge opened on April 15, 2000. Downtown back ups
    disappeared and truck traffic was successfully diverted to the new
    bridge. Substantial job growth occurred in fiscal year 2001 and seems
    clearly related to the business opportunities created by the new
    bridge.

    Commercial Vehicle Processing Center, Buffalo, New York
        For a number of years, the Buffalo and Fort Erie Public Bridge
    Authority had been seeking to improve the operation of the border
    crossing at the Peace Bridge. In the late 1990's, a user group
    consisting of trucking associations, commercial carriers, brokers and
    the U.S. Customs Service developed ideas to meet this objective. One
    method that seemed promising was to develop procedures and train
    personnel to operate a Commercial Vehicle Processing Center (CVPC) on
    the Canadian side of the border. The CVPC would assist truck drivers
    with incomplete paperwork prior to the vehicles entering the inspection
    queue. Fewer vehicles failing the primary inspection would mean less
    congestion on the bridge. In fiscal year 1999, the FHWA awarded about
    $1 million in NCPD/CBI funds for developing procedures and training
    personnel for the CVPC. The Authority immediately began implementing
    this project and the CVPC opened in late fiscal year 1999. Within the
    first year, the number of vehicles failing the primary inspection fell
    from 36 percent to 15 percent. Border agencies and the U.S. Customs
    Service have recognized the CVPC as a success.

    Freight Action Strategies Corridor (FAST), Seattle Metropolitan Area,
            Washington State
        Beginning in 1994, local, State, port authority, private sector and
    Federal officials began developing plans to improve highway/railroad
    crossings and port access highways in the vicinity of the ports of
    Everett, Seattle and Tacoma, Washington. In 1997, a phased
    implementation plan was developed and in fiscal year 1999, the FAST
    corridor received the first of a number of awards from the NCPD/CBI
    program. From fiscal year 1999 through fiscal year 2003, FAST was
    awarded $32,000,000 in NCPD/CBI funds, including funds selected by the
    U.S. Department of Transportation (DOT) and funds designated by the
    Congress. The FAST project also received funds outside the NCPD/CBI
    Program, in Section 1602 of TEA-21, in Section 378 of the fiscal year
    2001 DOT Appropriations Act, and in Section 330 of Division I of the
    Consolidated Appropriations Act of 2003. The first complete grade
    separation project was completed in fiscal year 2001 and by January
    2003, ten such projects were complete or nearly so. As projects have
    been completed, traffic back-ups disappeared, safety improved and
    railroad efficiency increased. Because a high percentage of jobs in the
    Seattle metropolitan area (as many as one in three) are tied to
    international trade, systematic improvement of port access is seen as
    vital to the economic well being of the area.

    Alameda Corridor East (ACE), San Gabriel Valley, California
        Similar to the FAST program, local, regional, State and private
    sector parties have been working together since the late 1990's to
    improve highway/railroad grade crossings (including many grade
    separation projects) in an East-West corridor with high railroad
    traffic serving the Port of Los Angeles/Long Beach. The ACE corridor
    received funds from Section 1602 of TEA-21 and corridor officials
    credit this with jumpstarting the ACE program. The same officials state
    that, in the first phase of the program, $3 have been leveraged for
    every federal $1. The ACE corridor first received a NCPD/CBI award in
    fiscal year 2000 and subsequently received awards in fiscal year 2001,
    fiscal year 2002 and fiscal year 2003. These awards totaled $9,019,000.
    The first projects have resulted in less congestion, improved safety,
    and reduced emissions. This latter result is quite important because of
    the well-known air quality problems in the Los Angeles region. Without
    these improvements, increasing rail corridor traffic would worsen the
    congestion, safety and air quality problems as well as restrict
    economic development.
        Question. Where do you see this program going in the future?
        Answer. The administration has proposed to reauthorize the
    Corridors and Borders program. Under the administration's proposal, the
    corridor program would become a Multi-State Corridor Planning Program.
    The purpose of this program is to support and encourage transportation
    planning from a broader perspective, transcending traditional State and
    modal boundaries, to meet evolving freight and passenger transportation
    needs of the 21st Century. Similarly, the border program would become a
    Border Planning, Operations, and Technology Program. The purpose of
    this program is to focus on improvement to bi-national transportation
    planning, operations, efficiency, information exchange, safety, and
    security for the United States borders with Canada and Mexico.

                        INDIAN RESERVATION ROADS PROGRAM

        Question. Secretary Mineta, as you well know, the Indian
    Reservation Roads program is one that I have been intimately involved
    with since the early 1980's. In fact, it was in 1982, that leaders of
    the Navajo Nation came to me with the idea of allowing tribes to
    participate directly in the National Highway Trust Fund programs. I
    agreed with them and Congress agreed with me and the Indian Reservation
    Roads program was born.
        Mr. Secretary, could you please update this committee on the Indian
    Roads program?
        Answer. On July 19, 2004, after approximately 5 years of negotiated
    rulemaking between representatives of Indian tribes and the Federal
    Government, the Indian Reservation Roads (IRR) Program Final Rule (25
    CFR Part 170) was published. This rule established policies and
    procedures governing the IRR Program. It expanded transportation
    activities available to the tribes and provided guidance for planning,
    designing, constructing, and maintaining transportation facilities. It
    also established an IRR Coordinating Committee of 12 tribal
    representatives to provide input and recommendations to the Bureau of
    Indian Affairs (BIA) and the Federal Highway Administration (FHWA) on
    the IRR program.
        In addition, the Final Rule established a funding distribution
    methodology for IRR Program funds. As a result part of the negotiated
    rulemaking, the entire IRR inventory of 63,000 miles contribute towards
    the amount of IRR Program funds the tribes receive. The limitation on
    the growth of the inventory has been eliminated.
        IRR Program Funds are distributed by tribal allocation. The formula
    methodology used to determine each tribe's allocation is composed of
    three factors. The largest contributing factor is a tribe's ``cost to
    construct,'' which contributes 50 percent. A tribe's ``vehicle miles
    traveled'' (VMT) contributes 30 percent, while its ``population''
    contributes the remaining 20 percent. Each tribe's allocation is then
    calculated by its percentage of these factors as compared to the
    nationwide total. However, the actual distribution of the funds has
    been affected by the different continuing resolutions and extensions to
    the Transportation Equity Act for the 21st Century (TEA-21).
        The following funding amount has been made available for the Indian
    Reservation Roads Program during the past four highway authorizations:
      --Surface Transportation Assistance Act of 1982 (STAA)--$418 million;
      --Surface Transportation and Uniform Relocation Assistance Act of
            1987 (STURAA)--$400 million;
      --Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA)--
            $1.069 billion;
      --TEA-21--$1.47 billion.
        The current annual funding level is $275 million for the IRR
    program. After application of statutory and regulatory takedowns, the
    available funds are re-allocated from FHWA to the BIA, which is the
    only agency that receives these funds. The BIA then distributes the
    funds either directly to the tribes through self-governance agreements/
    compacts or to the BIA Regional Offices. If the funds are distributed
    to the BIA Regional Offices, they in turn provide the funds to the
    tribes through Indian Self Determination Education Assistance Act
    (Public Law 93-638) contracts, Buy Indian contracts, or perform the
    work themselves on behalf of a tribe. It should be noted that the
    Indian Reservation Roads Bridge Program (IRRBP), established under TEA-
    21, has dedicated $13 million of each year's IRR Program funds to the
    rehabilitation or replacement of deficient bridges within the IRR
    System. There are over 4,640 bridges on the IRR System. Approximately
    1,050 of these are deficient. To-date, these funds have been utilized
    for work on over 125 IRR bridges.
        Finally, as a result of TEA-21, FHWA developed through a rulemaking
    requirements and guidelines for three new management systems to assist
    BIA and tribal governments in identifying and prioritizing quality and
    quantifiable projects. In addition, FHWA, BIA, and tribal governments
    are working together both to develop an integrated transportation
    planning process to help the tribes work with the State and
    metropolitan planning organizations, and to improve their ability to
    facilitate long range advance funding for projects. There has also been
    considerable success with the tribes to develop safety audits and
    initiatives in cooperation with State and local governments.
        Question. Are there things about this program that need to be
    changed?
        Answer. The publication of the Final Rule is having major impacts
    on the way the Indian Reservation Roads program is administered. All of
    the new policies and procedures that came about through consensus in
    the negotiated-rulemaking process are in their first year of existence.
    These policies and procedures just need time to develop and function.
    For example, the inventory, long a contentious issue among the tribes,
    is now being updated electronically utilizing new software that leads
    the user through the process. The software has taken away much of the
    subjectivity of the reviewer as to what is or is not to be included in
    the inventory. Training for the BIA and tribes is taking place
    throughout the country. In addition, a Coordinating Committee composed
    of tribal and Federal representatives is being established to provide
    input and make recommendations to the Secretaries of the Interior and
    Transportation on ways to improve the delivery of the IRR Program. The
    duties and composition of the Coordinating Committee are clearly
    defined in the Final Rule, as well as the critical areas in which they
    are to concentrate their efforts.
        Question. Finally, taking into consideration the unique situation
    of the Indian people and their infrastructure needs, how does the
    Department address the issue of Indian Reservation Roads in its highway
    reauthorization proposal?
        Answer. SAFETEA, as proposed by the administration, includes many
    positive provisions addressing the infrastructure needs of the Indian
    people. These include:
      --A substantial increase in the Indian Reservation Roads Program from
            $275 million/year to $333 million/year;
      --Providing 100 percent obligation limitation to the IRR Program;
      --Allowing design to be an eligible use of IRRBP funds;
      --Allowing IRR Program funds to be used as the non-Federal match on
            any project funded under Title 23 and the transit chapter (53)
            of Title 49;
      --Establishing a new Federal Lands Safety Program, which would
            provide approximately $7.2 million to the BIA and tribes to
            address specific safety related projects or issues on tribal
            transportation systems. In addition, FHWA and BIA are embarking
            on a cooperative outreach program focusing on capacity building
            and program development.
                                     ______

                  Questions Submitted by Senator Patty Murray

      SHOULD THE AMTRAK REFORM BILL BE PART OF THE SURFACE TRANSPORTATION
                                     BILL?

        Question. Mr. Secretary, you said that you and the President
    believe that intercity passenger rail service is an integral part of
    the Nation's surface transportation system. The Congress is currently
    debating a surface transportation reauthorization bill. Last year, when
    that bill went to conference, the Bush Administration threatened to
    veto that bill for two reasons. One was the overall size of the bill;
    the other was the inclusion of any provisions related to Amtrak.
        Why does the administration object to tackling the challenge of
    reforming Amtrak as part of the surface transportation reauthorization
    bill?
        Answer. The issues surrounding the highway and transit programs are
    extremely complex as evidenced by the fact that it has now been 2 years
    since TEA-21's authorization expired. Similarly, the issues surrounding
    intercity passenger rail are extremely complex as evidenced by the fact
    that it has been 3 years since that authorization expired. However, the
    issues are not the same for all three. Intercity passenger rail has
    never before been considered as part of the reauthorization of the
    highway and transit programs, for a number of reasons, including the
    fact that Amtrak is a private corporation. To consider these complex
    and, in many ways unrelated, issues in one ``omnibus'' piece of
    legislation would add to the delay and uncertainty currently being
    experienced by the States, regional transportation authorities, and the
    traveling public, in addressing this Nation's mobility needs.
        Question. If Amtrak is part of the Nation's surface transportation
    system, why are you so adamant that this legislation move separately?
        Answer. The issues are sufficiently different that the Department
    believes that two separate pieces of legislation can be enacted more
    quickly and effectively than one. For instance, in the event one aspect
    of the intercity passenger rail reauthorization package is
    unacceptable, reauthorization of all modes will not be held up. In
    addition, the intercity passenger rail issues that Congress faces are
    not overlapping issues with other modes of transportation. For the
    other modes, unlike Amtrak, there is no question of ownership of
    infrastructure. There are already funding sources, and mechanisms in
    place for distributing those funds. These issues for Amtrak are
    significant and should not be lumped together with the issues facing
    the existing transportation programs.

                         OPERATING AUTHORITY VIOLATIONS

        Question. In August 2002, you issued a rule requiring State
    inspectors to place out of service any commercial vehicles operating
    without proper authority. However, the Inspector General's January 2005
    progress report stated that while nearly all of the States had taken
    steps to enforce operating authority violations, problems exist with
    the rule's implementation. Some States will place trucks out-of-service
    while others do nothing when they find a truck without proper operating
    authority.
        What specific steps do you plan to take to make sure that operating
    authority violations are handled consistently across the Nation?
        Answer. In August 2002, the Federal Motor Carrier Safety
    Administration (FMCSA) amended the Federal Motor Carrier Safety
    Regulations (FMCSRs) to require that a motor carrier subject to the
    registration requirements under 49 USC 13902 may not operate a
    commercial motor vehicle in interstate commerce unless it has
    registered with FMCSA. These motor carriers were further prohibited
    from operating beyond the scope of their registration. If an
    unregistered carrier's motor vehicle is discovered in operation, or
    being operated beyond the scope of the carrier's registration, the
    motor vehicle will be placed out of service and the carrier may be
    subject to additional penalties (49 CFR 392.9a).
        The States are required to enforce registration requirements as a
    condition for receipt of Motor Carrier Safety Assistance Program
    (MCSAP) funding. States have 3 years to adopt all new FMCSRs in order
    to provide sufficient time for changes to State law. In some cases,
    States automatically adopt FMCSA's new requirements while in other
    States, changes to regulations are required and in others, actual
    legislation is required. The States are approaching the end of the 3-
    year grace period. FMCSA has provided guidance to Federal field and
    State MCSAP officers to standardize the identification, verification,
    and enforcement when appropriate. FMCSA is developing a State-by-State
    national program review to evaluate each State's MCSAP program for
    compatibility with the FMCSRs, and operating authority will be one of
    the major focus elements in this review. FMCSA has developed and
    deployed a system for roadside officers to access real-time data with
    regard to a carrier's operating authority and insurance coverage. The
    roadside officer can access this data through the Licensing and
    Insurance (L&I) website or a toll-free telephone number. To further
    standardize roadside operations, the Commercial Vehicle Safety Alliance
    (CVSA) will include 392.9a in their Out-of-Service criterion in the
    near future.

                        MAINTENANCE TECHNICIAN AGREEMENT

        Question. Mr. Secretary, last year, a Federal arbitrator ruled that
    the FAA had not met the minimum staffing levels needed for the agency's
    air traffic control maintenance functions based on the agreement that
    was reached in fiscal year 2000 between the FAA and its unions. Your
    budget request includes $5.4 million to hire 258 additional technical
    employees in order to meet the minimum staffing level of 6,100 as
    required by the arbitrator. However, I understand that the FAA's
    staffing report from just last month indicates that the FAA would need
    to hire as many as 400 new technicians to reach the required level.
        How do you explain the fact that there are nearly 150 fewer
    technicians than what was stated in your budget request?
        Answer. Both FAA and the Professional Airways Systems Specialists
    (PASS) agreed to meet the 6,100 staffing level goal in fiscal year
    2006. FAA is currently hiring technical employees and will be in
    compliance by the agreed upon date.
        Question. Will you direct the FAA to be more aggressive in filling
    the vacant technical positions and reach the required level in fiscal
    year 2006? I have also been told that the attrition rate of safety-
    sensitive technician positions was 40 percent higher than average. This
    concerns me greatly as I hope it does you.
        Answer. The FAA is aggressively working to hire and train
    technicians in order to reach the 6,100 level by the agreed upon date.
    DOT is unsure of how the 40 percent attrition rate was calculated by
    PASS. Historically the FAA has found that the attrition rate in the
    technical workforce has ranged from a high of 5.9 percent in fiscal
    year 2000 to 4.8 percent in fiscal year 2004.
        Question. Shouldn't we be alarmed we are losing these highly
    skilled positions--specializing in safety--at such dramatic rate?
        Answer. Historically, the months of December and January have had
    the greatest number of retirements. Both FAA and PASS agreed to meet
    the 6,100 goal in fiscal year 2006, and FAA is aggressively hiring and
    training technical employees in order to comply with this agreement.
        Question. Since I understand it takes 3 to 5 years to fully train
    these safety-sensitive technicians, how can you assure us that safety
    won't be compromised given this potential void?
        Answer. To address this increased hiring and the long time period
    that it takes to fully train safety technicians, FAA has ramped up its
    training capacity in 2005 by 300 percent at the FAA Academy in Oklahoma
    City, Oklahoma, to train new technicians. Once new technicians have
    successfully completed the training course, they will be placed in
    those locations that may be currently understaffed.

                    SEVERE CUTS IN THE AIRPORT GRANT PROGRAM

        Question. Mr. Secretary, last year, the President's budget cut the
    FAA's air traffic modernization program by $400 million below the
    previous fiscal year. Much to my dismay, we went along with most of
    those cuts. This year, the President's budget proposes a smaller cut to
    the F&E account but slashes the FAA's airport grant program by $472
    million or 13.5 percent below last year's level. When you compare your
    budget request to the levels in the Vision 100 authorization bill
    signed by the President, the cut to the airport grant program is even
    more dramatic--$600 million or nearly 17 percent.
        Since air travel was down significantly over the last 3 years, the
    efficiency and capacity challenges that gripped the FAA prior to
    September 11 have not been as urgent. However, today, we find that air
    travel is now finally inching near or exceeding pre-9/11 levels and the
    need to reduce delays, build additional capacity and improve customer
    service may once again become a pressing matter.
        How is it that you decided to cut the airport grant program at a
    time when air travel is now finally rebounding and airports are seeking
    to make capacity improvements?
        Answer. The fiscal year 2006 budget proposal takes into account the
    needs and changing financial conditions in the airport industry. The
    FAA's latest estimates of capital development eligible for Federal
    funding for the period 2005-2009, as identified in its biennial
    National Plan of Integrated Airport Systems (NPIAS), is down 15
    percent. Airports are scaling back or deferring their development plans
    because of financial uncertainty of the airline industry. Examples of
    development that are being scaled back generally include landside
    projects such as terminal and ground access. However, major capacity
    enhancing projects, such as new runways at major airports, are
    proceeding.
        Industry Financial Experts report:
      --Bond issues supporting new construction declined in the last 2
            years and only modest increases are projected in the next 18 to
            24 months.
      --Airports will continue to exercise caution in committing funds for
            new capital development due to financial uncertainties of the
            commercial aviation segment.
        The 2006 Budget addresses these industry findings:
      --The administration's budget submittal reflects a good balance of
            meeting important airport infrastructure needs while taking
            into account fiscal reality.
      --The $3 billion proposed budget is adequate to support all high
            priority safety and capacity projects. The budget request
            proposes a one-time adjustment to the Airport Improvement
            Program allocation formulas to assure a minimum discretionary
            amount of $520 million.
      --The basic structure of the FAA's current formulas is retained,
            including doubled entitlements for primary airports and
            maintaining non-primary entitlement for general aviation
            airports. The budget also allows FAA to have the discretionary
            resources available to achieve national priorities for airport
            capital investments.

                         DECLINING TRUST FUND REVENUES

        Question. The Inspector General's ``top management challenge''
    report highlights the growing gap between the budget request of the FAA
    and the amount of revenue that is generated through the aviation trust
    fund. While passenger traffic is returning, the average cost of a plane
    ticket has gone down and therefore the ticket tax revenue has decreased
    as well. In the current budget environment, the competition for general
    funds will remain fierce.
        Is the administration considering alternative funding mechanisms
    for the future financing of Federal aviation needs?
        Answer. Yes. There is a need for fundamental change because there
    is a mismatch between the FAA's growing budget requirements and revenue
    sources that will hamper its ability to meet the demand for services.
    The FAA needs a stable source of funding that is based both on costs
    and the services provided so that FAA can meet its mission in an
    extremely dynamic business environment.
        Question. What options are under consideration?
        Answer. All options are on the table at this time, and the FAA has
    begun to develop a set of viable proposals. The areas the FAA is
    looking at include user fees and taxes, alternatives for funding long-
    term capital requirements, and an appropriate level of contribution
    from the General Fund.

               IS FTA CHANGING THE RULES OF THE NEW STARTS GAME?

        Question. Just last week, your Federal Transit Administrator
    notified the transit community that the Bush Administration no longer
    intends to support transit ``new start'' projects that don't have a
    ``medium'' or higher rating for cost-effectiveness. There are four
    projects that received a ``recommended'' rating from the FTA and
    received funding in your 2006 budget request that do not qualify under
    this new criteria: Beaverton, Oregon; Denver, Colorado; Dallas, Texas;
    and Salt Lake City, Utah.
        Your budget requests a total of $158.8 million for six projects in
    the final design phase including the four I just mentioned. Also, you
    just sent up a Full Funding Grant Agreement for the project in
    Charlotte, North Carolina but that project wouldn't qualify under your
    new criteria either. Your budget requests $55 million for that project.
        Based on the FTA's new announcement, do you still stand by your
    budget requests for these five projects? Under your new policy, will
    you continue to request funding for these projects in future years?
         Answer. In the President's Fiscal Year 2006 Budget, four proposed
    projects identified as ``Anticipated FFGAs'' received specific funding
    recommendations and are not affected. This includes $55 million for the
    Charlotte, North Carolina project. However, as a general practice, the
    administration will target its funding recommendations in fiscal year
    2006 and beyond to those proposed New Starts projects able to achieve a
    ``medium'' or higher cost-effectiveness rating.
        The six projects listed under the category ``Other Projects,''
    including the four mentioned in your question, did not receive a
    specific funding recommendation in the President's Budget. In fact, as
    noted in the Budget and the Annual New Starts Report submitted to
    Congress in February, FTA did not anticipate that all six projects
    would ultimately receive a funding recommendation, and the President's
    Budget set aside only $159 million of the $260 million that could be
    utilized if all six projects were ready for funding by the time
    Congress takes up the fiscal year 2006 Transportation appropriations
    bill. FTA plans to advise the Appropriations Committees' prior to
    Senate mark-up of the administration's funding recommendations for
    these projects. Funding these projects beyond fiscal year 2006 will
    depend on the annual project rating and other factors.
        The administration's reauthorization bill says nothing about this
    new policy change. The House- and Senate-passed reauthorization bills
    do not make this policy change.
        Question. Why is DOT now imposing this new policy with no
    legislation in the middle of the year?
         Answer. The change in how the administration will target its
    recommendations for funding to projects that achieve a ``medium'' or
    higher rating for cost-effectiveness does not require legislation. The
    President and his administration must make numerous tradeoffs and
    decisions as budget recommendations to Congress are developed. The
    issue was raised in the context of finalizing the fiscal year 2006
    budget and annual New Starts report, and the change in policy was
    announced as soon as the decision was made. The policy change simply
    states that, as a general practice, the administration will no longer
    target funding to any project that receives a ``medium-low'' rating for
    cost-effectiveness. The actual project ratings (not recommended,
    recommended, and highly recommended) are not affected by this change.
    Also, the new administration funding recommendation policy does not
    apply to the four projects identified in the President's Budget under
    the category ``Anticipated Full Funding Grant Agreements'' or to the 16
    projects that already have full funding grant agreements.

          WHAT PROGRESS HAS BEEN MADE IN PIPELINE SAFETY RESEARCH AND
                                  ENFORCEMENT?

        Question. Mr. Secretary, as you well know, I have been a strong
    advocate for funding increases for the Office of Pipeline Safety. Over
    the last few years, I have been pleased that we have been able to meet
    and/or exceed your budget request in the area of pipeline safety so
    that advances can be made in research.
        With the relatively stable funding of $9 million for the R&D
    program since fiscal year 2002, what kind of progress have you been
    able to make in increasing the safety of pipeline operations in recent
    years?
        Answer. Since fiscal year 2002, the PHMSA/OPS R&D Program has been
    working with industry to develop new and better tools to help operators
    improve their capability to inspect pipelines, measure internal and
    external corrosion, monitor the integrity of those lines which were
    ``unpiggable'', identify mechanical damage and improve damage
    prevention. All of these objectives relate directly to improving the
    operational safety of pipelines.
        In less than 3 years, the program has made a total of 49 awards
    addressing technology development and demonstration to increase safety
    in pipeline operations and consensus standards. These have given rise
    to eight U.S. Patent applications that improve the path of new tools
    toward commercialization.
        Some quantifiable enhancements are in-the-field inspection tools
    with a 50 percent increase in sensitivity to defects, capacity to
    inspect lines that are 30 to 50 percent smaller in size, and capability
    to identify defects on both longitudinal and circumferential welds of
    pipelines. The R&D Program has successfully developed and demonstrated
    new tools for: non-destructive testing of integrity of pipelines under
    roads; the mapping of all underground utilities with ground penetrating
    radar; and detection of leaks from medium altitude aircraft.
        Other improvements being generated by PHMSA research investments
    include tougher pipeline materials; better ways to find and eliminate
    defects before they become hazardous; and better methods for
    constructing, operating, and maintaining pipelines.
        Not only is this research program strengthening the industry's
    ability to effectively meet integrity management challenges but it is
    effectively addressing the public's demand for near-term solutions to
    public safety concerns. Research funding of the National Pipeline
    Mapping System results in increased public awareness of the location of
    pipelines and decreases the likelihood of their being damaged.
        The R&D Program contributes directly to safer pipeline operations
    by fostering development of new technologies that can be used by
    operators to improve safety performance and to more effectively address
    regulatory requirements; strengthening regulatory requirements and
    related national consensus standards; and improving the knowledge
    available to better understand safety issues.
         Question. Are there better inspection and analysis tools as a
    result of this funding? Please provide examples.
        Answer. Yes. The PHMSA research program is improving pipeline
    inspection technology and analysis tools and strengthening industry's
    ability to effectively manage pipeline integrity. Results from the R&D
    Program also have driven improvements in operators' ability to prevent
    damage to pipelines and detect leaks improve oversight of operations
    and control functions, and access and select stronger pipeline
    materials.
      --A significant outcome of the research program has been quantifiable
            enhancement the sensitivity of inspection tools. We now have
            tools capable of detecting defects that are at 5 percent of the
            material thickness. This is an improvement over 10 percent
            material thicknesses in the past.
      --PHMSA research has resulted in a significant increase in the miles
            of pipelines that can be inspected with internal instruments.
            Smarter and smaller internal inspection tools can inspect pipes
            smaller than 24 inches in diameter with increased ability to
            manipulate through valves and sharper bends.
      --New and enhanced tools for non-destructive inspection now can
            better detect deteriorated coatings; and use of non-intrusive
            tools to pass below roads is saving extensive construction
            costs and traffic congestion problems. Pipelines can now be
            inspected for internal and external defects up to 200 feet in
            length, an increase from only 25 feet in the past. To prevent
            mechanical damage, the R&D Program has worked with industry in
            the development and successful demonstration of new tools that
            utilize ground penetrating radar that can detect buried
            utilities 25-30 percent deeper through the earth than in the
            past and through reinforced concrete, critical to locating all
            below ground utilities before excavation projects.
        Results from the R&D Program have accelerated the development and
    demonstration of technologies that enable decision makers to understand
    risks to the public more completely and to deal with them more
    effectively. The R&D Program continues to strengthen the knowledge
    base, technology tools and consensus standards that play a critical
    role in the steady decline in pipeline incidents, even while the
    pipeline system is expanding. The future of pipeline technology holds
    promise for a dramatic improvement in our ability to fabricate,
    construct, operate, and maintain the Nation's pipeline infrastructure.
        Question. The Pipeline Safety Improvement Act of 2002 charged PHMSA
    to review and verify operator compliance with its new integrity
    management requirements, and, where appropriate, take enforcement
    action. Your budget justification states that the Pipeline and
    Hazardous Materials Safety Administration was surprised at the degree
    of difficulty that hazardous liquid operators had in complying with the
    new regulations and that more than 90 percent of the inspections
    resulted in enforcement action.
        Why is this the case?
        Answer. PHMSA's Integrity Management regulation required hazardous
    liquid pipeline operators to implement a comprehensive, systematic
    approach to the management of pipeline safety. The required structured
    set of program elements represented a fundamental change in the way
    most hazardous liquid pipeline operators manage pipeline integrity.
    PHMSA found that most operators needed to develop new or improved
    management and analytical processes (e.g., data integration and risk
    analysis), implement new methods and technologies, and expand the
    skills of their staff to effectively manage integrity. Even those
    operators with relatively mature programs needed to introduce more
    structure in procedures and documentation.
        Operators identified about 80 percent of the hazardous liquid
    pipeline mileage as meeting the requirements for integrity protection,
    including testing. This is a far greater amount than either government
    or industry anticipated. Thus significant operator resources have been
    directed to complete the required testing and subsequent analysis of
    data. While this has paid huge dividends in repairing numerous
    integrity threats in pipelines, in some cases, the need to complete
    assessments of test data has diverted operators from other prevention
    and mitigation tasks.
        The deficiencies that PHMSA identified most frequently during
    inspections are listed below. PHMSA is working with operators to make
    needed corrections:
      --Identification of preventive and mitigative measures to protect
            High Consequence Areas (HCAs).--The regulation requires
            pipeline operators to do more than assess their pipelines for
            defects. Operators must consider all threats to pipeline
            safety; identify additional measures to prevent failures that
            could result from such threats; and mitigate the consequences
            should such a failure occur. Fewer than half of the operators
            inspected (49 percent) had developed their risk analysis
            methods sufficiently to evaluate the effectiveness of their
            current protective measures and identify the most significant
            vulnerabilities. Further, they had not developed the management
            processes and implemented measures to address these
            vulnerabilities. Most operator efforts were focused on
            identifying pipeline segments that could affect HCAs and
            performing integrity assessments (in-line inspection and
            pressure testing) on the highest risk lines.
      --Considering all relevant risk factors in identifying potential
            pipeline integrity threats.--The regulation requires operators
            to consider all relevant risk factors to identify integrity
            threats and names specific factors. For some operators, this
            data was not readily available or in a format that was useable
            in their risk analysis models. Operators needed to apply
            significant resources and time to assemble this information and
            incorporate it into their risk models. As a result, more than a
            third (36 percent) of the operators had deficiencies in this
            program element.
      --Evaluation of integrity assessment results by qualified
            personnel.--The regulation requires that operator review of in-
            line inspection (smart pig) results be performed by individuals
            who are qualified to do so. Nearly half of the operators
            inspected (45 percent) had not addressed this requirement. Some
            operators had not established what skills and capabilities were
            required and thus could not demonstrate that their personnel
            reviewing assessment results had the required qualifications.
            In other cases, operators still needed to provide individuals
            with additional training, or even hire personnel with the
            requisite experience and background. A national consensus
            standard is now in place to guide operators on meeting this
            requirement.
      --Integration of other data in the evaluation of integrity assessment
            results.--The regulation requires operators to integrate other
            pipeline data (corrosion control records, right-of-way
            encroachment reports, etc.) in their review of in-line
            inspection results to more fully understand and characterize
            pipe condition and integrity threats. Inspectors from the
            Office of Pipeline Safety within PHMSA found that nearly half
            of the operators (43 percent) had made little progress in being
            able to implement this crucial requirement. To do so, operators
            had to develop new analytical tools and data bases to utilize
            the vast quantities of data for their pipeline network. Often
            this work involved bringing together information from different
            sources and in different formats (e.g., written files, pipeline
            maps, different legacy databases), and putting it in common
            formats. A number of operators were in the process of
            developing sophisticated Geographic Information Systems for
            this purpose.
      --Use of local knowledge to identify High Consequence Areas (HCAs).--
            While the National Pipeline Mapping System identifies HCAs
            nationwide, operators must make use of their knowledge of local
            conditions around the pipeline to identify additional high
            consequence areas that should be protected (e.g., new
            residential developments near a pipeline). More than a third of
            the operators (38 percent) had not implemented this requirement
            at the time of the inspection. To meet this requirement,
            operators needed to define and communicate HCA information
            requests to their field personnel, and then integrate the
            information received from the field in all aspects of their
            program (e.g., identifying pipeline segments that could affect
            these areas, determining the most appropriate integrity
            assessment tools, etc.). For many pipeline operators this was a
            significant logistical challenge.
        PHMSA took a vigorous enforcement posture on this rule to indicate
    to the industry that the agency was serious about the operators
    developing quality integrity management programs. PHMSA used a variety
    of enforcement tools to correct serious violations and program
    deficiencies, and to foster the continued development and improvement
    of integrity management programs.
    how will the research and technology innovation administration harness

                     TRANSPORTATION TECHNOLOGY INNOVATION?

        Question. With the passage of the ``Norman Y. Mineta Research and
    Special Programs Improvement Act,'' you are in the process of standing
    up two new modal administrations--the Pipeline and Hazardous Materials
    Safety Administration and the Research and Innovation Technology
    Administration. The new research and technology agency is supposed to
    have greater control and input into the research and development that
    is conducted within the Department's agencies.
        What does RITA plan to do differently in order to provide
    technological innovation?
        Answer. As envisioned by Secretary Mineta, RITA will be a
    Departmental resource for coordinating and managing the Department's
    diverse research, development and technology (RD&T) portfolio. RITA
    will coordinate and implement strategies to facilitate cross-cutting
    solutions to America's transportation challenges. In doing so, RITA
    will work with the DOT operating administrations to ensure that RD&T
    initiatives reflect sound investment decisions. Mechanisms will be
    established by RITA to ensure research results in deployable
    applications and that there is a systematic and focused process for
    transforming research findings into marketable products that will
    improve our Nation's transportation system. This approach will help to
    ensure RD&T effectiveness, eliminate unnecessarily duplication, and
    accelerate transportation innovations.
        Outside DOT, RITA will monitor research in other Federal agencies
    (e.g., Department of Energy and the Department of Homeland Security)
    that supports long-term transportation advances, and will identify
    opportunities for collaboration and potential applications of
    innovative technologies to crossmodal issues. RITA will also promote
    public-private partnerships to speed up the delivery of technological
    innovations to market. Finally, RITA will facilitate DOT participation
    in the national Science and Technology Council, including such efforts
    as the National Nanotechnology Initiative and the Hydrogen Initiative.
        Question. Please explain how you will overcome any obstacles on the
    part of the modes in this regard since they have traditionally done
    their own.
        Answer. DOT has already made significant progress in overcoming the
    obstacles of stove piping among the modes. On May 2, 2005, the
    Secretary signed DOT Order 1120.39A. This Order establishes the DOT
    RD&T Planning Council and RD&T Planning Team. It also describes the
    RD&T planning process that ensures DOT-wide coordination, integration,
    performance and accountability of DOT's RD&T modal and multimodal
    programs.
        The RD&T Planning Council is chaired by the RITA Administrator and
    includes the heads of each DOT operating administration and the
    equivalent officials from the Office of the Secretary. This senior-
    level council sets broad RD&T policy and ensures RD&T coordination.
        The RD&T Planning Team, chaired by the Associate Administrator for
    Research, Development, and Technology, includes representation from the
    across the Department, supports the Planning Council and provides
    coordination for those officials managing each operating
    administration's research program.
        Transparency is a key element in achieving consensus and buy-off
    from the modes. These changes are not intended to take over the role of
    each operating administration in conducting research to supports its
    mission. The intent is to foster closer ties among the operating
    administrations and identify areas where collaborative efforts might
    improve performance and results.
        Working through the RDT&T Planning Council and Team, the
    Department's RD&T agenda will be aligned with the DOT Strategic Plan
    and with Secretarial and administration priorities and policies. The
    operating administrations will continue to conduct RD&T activities
    based on their agency missions, input from stakeholder groups,
    knowledge of transportation systems, and technologies, within the
    overall framework of the Secretary's RD&T priorities and the
    Department's RD&T agenda.
        DOT's RD&T planning process includes three elements: multiyear
    strategic planning, annual program planning, and budget and performance
    planning. This process was described in Research Activities of the
    Department of Transportation: A Report to Congress, dated March 2005.

                                SAFETY WORKFORCE

        Question. In 1996, the FAA significantly increased the number of
    aviation safety inspectors in light of the 90-Day Safety Review that
    was conducted in the aftermath of the ValuJet crash in Florida.
    Unfortunately, the number of inspectors has been consistently below the
    standard of 3,297 that was set in that review. In fact, Mr. Secretary,
    I believe the National Civil Aviation Review Commission that you
    chaired called for even higher inspector levels. I understand that the
    FAA may lose as many as 250 inspectors this year through attrition and
    that the agency has no intention to back-fill for these positions. This
    greatly concerns me.
        Why aren't you filling vacancies for these critical safety
    positions?
        Answer. During fiscal year 2005, the FAA has been forced to reduce
    staffing, including our Flight Standards safety inspector workforce
    staffing. The reductions will be through attrition and will include
    both inspector and non-inspector positions. Since all reductions will
    be made solely through attrition, we cannot precisely predict what will
    occur in the safety inspector workforce and what will occur in the
    support workforce. In regards to reduction in the safety inspector
    workforce, we will make every effort to fill highly critical safety
    positions--such as principal inspectors assigned to major airlines--if
    such positions become vacant. Additionally, the fiscal year 2006 budget
    includes an increase of 97 safety and inspection engineers.
        Question. Wouldn't you agree that we shouldn't be reducing the
    number of inspectors in an era when a number of airlines are struggling
    financially and outsourcing an increasing portion of their maintenance
    work?
        Answer. The following steps are being taken to ensure that the
    cutbacks in the number of inspectors don't undermine the efficiency,
    competitiveness, and safety of the U.S. aviation industry.
      --Safety will always come first, and the FAA will not reduce its
            oversight of the air carriers. Instead, the agency will reduce
            its ability to certify new operators, repair stations and
            aircraft components, so inspectors can focus on safety
            oversight rather than new certifications.
      --The FAA will ensure that air carriers and air agencies will meet
            basic standards through a system safety approach. This includes
            analyzing data gathered through targeted inspections, focusing
            surveillance on high-risk areas and where appropriate, revising
            or developing policy and guidance materials.
      --The FAA will delay or defer some new certification activities
            related to growth of existing operators, or applications for
            new operators or products in order to absorb these reductions
            without resorting to cuts in safety oversight.
                                     ______

                Questions Submitted by Senator Richard J. Durbin

                                     AMTRAK

        Question. Why did the administration only include a fraction of the
    funds Amtrak needs in the fiscal year 2006 budget when this level of
    funding will send the railroad into insolvency?
        Answer. Since 2003, the administration has unsuccessfully sought to
    engage the Congress in a discussion about the perilous condition of
    intercity passenger rail service and the need to reform how this form
    of transportation is provided. The budget request was intended as a
    ``wake-up'' call that intercity passenger rail service as presently
    provided cannot be sustained, not just over the long-term, but in the
    short-term as well. Without meaningful reform legislation by the
    Congress and the administration, reform will come through the
    bankruptcy courts. That is a means of reform that the Department would
    prefer to avoid, but, unfortunately, cannot be ruled out.
        Question. Does the administration support reauthorization of
    Amtrak? Or would the administration rather break the intercity
    passenger railroad up and privatize operations?
         Answer. The administration supports authorization of a new
    approach to providing intercity passenger rail service that embodies
    five principles of reform: create a system driven by sound economics;
    require that Amtrak transition to a pure operating company; introduce
    carefully managed competition to provide higher quality rail services
    at reasonable prices; establish a long-term partnership between States
    and the Federal Government to support intercity passenger rail service;
    and, create an effective public partnership, after a reasonable
    transition, to manage the assets of the Northeast Corridor. While the
    administration's vision would encourage competition for contracts from
    States to provide specific services, that vision is not based upon
    privatization of operations.
        The word ``privatization'' has been used too loosely in this debate
    to imply that the administration approach would remove government
    funding and involvement in the intercity passenger rail system. This is
    a misrepresentation. Regarding train operations, the administration's
    proposal is to allow States to compete services among qualified
    vendors, including potentially the existing Amtrak organization,
    private companies, or government transportation entities. States would
    spend their public funds on this function, similar to how they solicit
    contracts to private companies to build and maintain publicly-owned
    roads and bridges. This element of competition is intended to help
    control costs and to encourage the development of innovative services
    that meet a State's and, therefore, the particular transportation needs
    of the public. Similarly, for capital projects, the administration plan
    would allow States to conduct competitions taking bids from a variety
    of contractors. Like other Federal transportation programs, the Federal
    Government would make matching grants to States for the capital
    expenses. Ultimately, it is the States and interstate compacts that
    would oversee, manage, and help fund intercity passenger rail services,
    with the private sector potentially performing these functions under
    contract.
                                     ______

                 Questions Submitted by Senator Byron L. Dorgan

                 ESSENTIAL AIR SERVICE COST-SHARING: BACKGROUND

        Question. I was also disappointed that the President seeks to
    require all communities receiving EAS funds to provide non-Federal
    matching funds. Communities in North Dakota that participate in EAS,
    such as Devils Lake, Jamestown and Dickinson-Williston, are more than
    210 highway miles from a medium or large hub airport, and will have to
    provide 10 percent. This is patently unfair and goes against the
    purpose of the EAS program to promote and protect air service to rural
    areas, and I will fight hard to prevent the President's plan from
    taking effect.
        Given that Congress explicitly rejected such a harsh cost-sharing
    requirement in the FAA reauthorization process, why would the
    administration propose it now after the reauthorization bill has
    passed? Isn't this patently unfair to rural America?
        Answer. Since deregulation of the airline industry, the Essential
    Air Service (EAS) program has gone without any fundamental change
    despite the major changes in the airline industry. The administration
    still believes that significant reform of EAS is necessary to bring the
    program into the 21st Century.
        With respect to the cost-sharing aspect of the administration's
    reform proposal, local contributions could come from many sources,
    including local businesses, local governments, or the State.
        Most Federal programs of this kind require some type of local
    contribution, and the EAS program has operated for 27 years without
    communities being required to make any contribution. The Small
    Community Air Service Development Program has shown us that small
    communities are willing and able to contribute funds for improved air
    service.
        For too long, many communities--there are a few exceptions--have
    taken air service for granted as an entitlement and done little or
    nothing to help make the service successful. Requiring a modest
    contribution should energize civic officials and business leaders at
    the local and State levels to encourage use of the service, and as
    stakeholders in their service, the communities will become key
    architects in designing their specific transportation package.

                                     AMTRAK

        Question. I am very disappointed that Amtrak funding was
    essentially eliminated in the President's budget, including only $360
    million to allow the STB to support commuter service if Amtrak should
    terminate its commuter services in the absence of subsidies. I am
    particularly concerned about the impact of any cuts to Amtrak on long
    distance trains, such as the Empire Builder.
        Does the administration support intercity passenger rail? Does the
    administration have a plan that would continue long-distance Amtrak
    trains?
        Answer. The administration does support intercity passenger rail
    service where such service can be based upon sound economics. The
    administration's legislative proposal, the Passenger Rail Investment
    Reform Act, helps improve the economics of intercity passenger rail by
    providing for a Federal/State capital investment partnership, limited
    competition to assure that the highest quality services are provided at
    the best cost, and a phase out of Federal operating subsidies to allow
    sufficient time for these initiatives to take hold. The Passenger Rail
    Investment Reform Act would continue intercity passenger rail services
    that can meet their operating expenses or that are viewed as important
    enough that a State or group of States will provide any needed
    operating subsidy.

                                  QUIET ZONES

        Question. The Federal Railroad Administration was directed to do a
    rulemaking in 1994 on locomotive horns, but still has not issued a
    final rule. The FRA has announced that interim final rule will take
    effect April 1, 2005 (this was delayed from December, 18, 2004).
        Will the interim final rule indeed come out on April 1, and will
    that be considered a final rule, or might it be changed again? We have
    communities that are relying on final rulings from the FRA on this
    issue so they can move ahead with quiet zone planning.
        Answer. The Federal Railroad Administration's final rule on ``Use
    of Locomotive Horns at Highway-Rail Grade Crossings'' was published in
    the Federal Register on April 27, 2005.
                                     ______

                   Questions Submitted by Senator Tom Harkin

                          GASOHOL CONSUMPTION IMPACTS

        Question. Many years ago the country adopted a national policy
    promoting the use of alternative fuels and our energy independence. The
    production and consumption of gasohol supported that national policy.
    However, support of that policy and the consumption of gasohol had a
    direct negative impact on the revenues attributed to the Highway
    Account of the Highway Trust Fund and a direct negative impact on the
    level of highway investment possible. Fortunately, Congress eliminated
    this impact last year. Producers of ethanol continue to receive an
    incentive--now through tax credits, and the Highway Account of the
    Highway Trust Fund is receiving the same revenues whether our vehicles
    are consuming gasohol or gasoline. These additional revenues are a
    welcome addition to the Trust Fund as we work to increase our much
    needed highway investments.
        As of January 1, 2005 the Highway Account receives full revenue
    credit for gasohol consumption, and it should be possible for FHWA to
    revise the estimated State-by-State trust fund contributions.
        When will FHWA revise its estimate of the trust fund contributions
    by State to reflect the most current information and use that
    information in the distribution of funds? And will those adjustments be
    done in time so that the revised analysis will be used for this fiscal
    year's allocations?
        Answer. Pursuant to current law, FHWA uses the latest available
    data on contributions to the Highway Account of the Highway Trust Fund
    when apportioning funds to States. On October 1 of each fiscal year,
    the date that funds are to be apportioned, the latest available
    contributions data are for the fiscal year 2 years prior. As might be
    expected, data for the fiscal year that ended just 1 day earlier are
    not available at that time. Thus, fiscal year 2005 apportionment
    formulas that use Highway Account contributions as a factor, would use
    fiscal year 2003 contributions as the basis for apportionment.

                        TRANSPORTATION INVESTMENT LEVELS

        Question. By virtually all measures, this country continues to
    under invest in our highway infrastructure as unfunded needs continue
    to grow. The Federal motor fuel user fee, accounts for over 90 percent
    of the Highway Trust Fund revenues. However, the buying power of the
    current motor fuel user fee rate has declined by over 21 percent since
    1994.
        What steps would the administration take to increase the level of
    revenue needed to keep up with inflation and also to address the future
    economic costs of underinvestment in our surface transportation
    network?
        Answer. The administration will continue to work with our State and
    local partners to advance best practices in the management of our
    surface transportation assets, so that the resources available can be
    utilized in a more cost-effective manner. Public-private partnerships
    and other innovative financing mechanisms the administration has
    encouraged represent an opportunity to leverage our public
    infrastructure investment without placing an excessive burden on
    taxpayers.

                  AIRPORT FUNDING--AIRPORT IMPROVEMENT PROGRAM

        Question. Smaller communities are relying more and more on the
    availability of an airport capable of handling corporate jets to
    attract business. For these communities the Airport Improvement Program
    provides crucial funding to invest in airport improvements and
    expansions without which the area's opportunity to attract and even to
    keep businesses will be sharply reduced. Many States have also
    established State programs to complement the Federal funding. Many
    small and medium hub airports are also seeing significant construction
    needs.
        I was very disappointed to see that the administration wants to
    reduce funding from $3.5 billion to $3 billion, at a time when we
    should be encouraging the expansion of job opportunities in communities
    and smaller urban areas in rural America.
        Aside from the cuts in Amtrak, the administration appears to have
    singled out this program for a large cut.
        For Carroll, a small town airport in Iowa, the Kansas Region is
    moving to stop a runway expansion project in midstream after local
    funds had been spent, an unusual action. What is the Department going
    to do to provide adequate improvements for general aviation airports if
    funding is reduced?
        Answer. Carroll County requested Airport Improvement Program (AIP)
    funding to re-align, re-grade and pave its crosswind runway. In fiscal
    year 2004, the airport used $224,200 of non-primary entitlements to
    realign and re-grade the crosswind runway. The cost to pave the runway
    is $990,000 and paving the access taxiway is $274,500. Paving the
    crosswind runway is a low priority project and will not compete well
    against higher-priority primary runway projects.
        FAA has offered to seed Carroll's crosswind runway and restore it
    as a turf runway. This option provides Carroll County with an improved,
    usable runway, which is consistent with FAA policy. Another option
    would be to use its non-primary entitlements to pave the runway in
    phases that establish usable lengths. There are other funding options
    that are available to the airport, including using state apportionment
    funds or approaching FAA with an innovative financing plan.
        The FAA knew that with the reduction in AIP, it was important to
    preserve the basic structure of entitlement formulas developed in the
    Wendell H. Ford Aviation Investment and Reform Act for the 21st Century
    (AIR-21) and continued under Vision 100--Century of Aviation
    Reauthorization Act to ensure a stable funding stream from entitlement
    funds. The FAA's proposal includes a request for Congress to enact
    special one-time legislation that would permit distribution of AIP
    funds using the ``Special Rules'' contained in Section 47114 of title
    49, United States Code. This section provides for doubling entitlements
    and for continued entitlement funding for non-primary airports. This
    would be accomplished by incorporating specific statutory language in
    the fiscal year 2006 appropriations bill directing the use of the
    ``Special Rules'' notwithstanding a level of AIP funding below $3.2
    billion. These entitlement funds, combined with discretionary funds
    when needed for high priority projects, will ensure continued funding
    for general aviation improvement projects.
        Question. What impact does the Department see for a reduction in
    entitlement funds for small and non-hub airports?
        Answer. With the reduction in AIP, it was important to preserve the
    basic structure of entitlement formulas developed in AIR-21 and
    continued under Vision 100 to ensure a stable funding stream from
    entitlement funds. Airports and the FAA have developed long-range
    investment plans based on these rules. The disruption to long-range
    investment plans could seriously interfere with the development of the
    national airport system and strain financial resources of many small
    airports that rely heavily on AIP grants to meet their needs.
        The President's fiscal year 2006 budget request includes special
    one-time legislation that would permit distribution of AIP funds using
    the ``Special Rules'' contained in Section 47114 of title 49, United
    States Code. This section provides for doubling entitlements and for
    continued entitlement funding for non-primary airports. This would be
    accomplished by directing the use of the ``Special Rules''
    notwithstanding a level of AIP funding below $3.2 billion.
        Using this approach, airports will experience a very modest
    reduction in entitlement amounts. However, discretionary funding will
    mitigate this reduction, which will be used to: (1) meet the FAA's
    Letter of Intent (LOI) commitments; (2) entertain new LOI candidates;
    and (3) fund needed safety, security, and related projects.

                     TRANSIT BUS AND BUS FACILITIES FUNDING

        Question. The administration's budget combines the Fixed Guideway
    modernization, Urbanized and non-urbanized formula programs, the Bus
    and Bus Facilities capital program, Planning and Research and a number
    of other programs, some of which are new programs, into a Formula
    Grants and Research Program. While most of the current activities
    retain some identity and specific funding within the Formula Grants and
    Research Program, it appears that what has been lost in the new program
    is the bus and bus facilities program.
        What is the administration's position on the importance of a
    program to assist States and local agencies maintain and improve their
    bus fleet?
         Answer. The administration agrees that it is important to assist
    States and local agencies maintain and improve the condition of their
    bus fleets, since 95 percent of the Nation's communities are served
    only by bus operations. We believe that is best done through including
    the funds in the formula programs rather than through a discretionary
    program. Formula funding would provide the funds to more communities
    nationwide and funding would be more predictable and stable. This would
    allow State and local agencies the means to better plan to meet their
    bus capital replacement and improvement needs. Because the formula
    funds are available for obligation for 3 (nonurbanized formula) or 4
    (urbanized formula) years, grantees can accumulate funds to support
    major bus procurements or facilities projects. The transfer provisions
    proposed will allow flexibility to trade funds among programs,
    providing grantees support for one-time projects. FTA grantees can also
    take advantage of flexible funding provisions to use highway funds for
    transit capital projects.

                          INTERCITY BUS TRANSPORTATION

        Question. Iowa has an excellent system of regional transit agencies
    that provide transit service in all counties of the State. However,
    while it is important to provide transit service to citizens within our
    urban areas, it is also important to provide options for service
    between our urban centers. People who do not have access to the
    personal auto for the trips of between 100 and 200 miles must often
    rely on the private sector through our inter-city bus carriers.
        As the need to provide longer distance service to our rural non-
    drivers, the elderly and disabled increases; what do you see as the
    Federal role or responsibility?
         Answer. The private sector has an important role to play in
    maintaining intercity service. Since the Intermodal Surface
    Transportation Efficiency Act of 1991, however, Federal transit
    legislation has recognized the need for Federal financial support to
    sustain some of the most vulnerable service. The nonurban formula
    program under Section 5311(f) requires States to use 15 percent of
    their annual apportionment under the nonurbanized formula program to
    support intercity bus service, unless the Governor certifies that the
    rural intercity bus needs of the State are adequately met. In a recent
    ``Dear Colleague'' letter, FTA encouraged the States to take full
    advantage of this provision to minimize the impact of recent and
    ongoing service reductions by the largest national intercity bus
    carrier. The States affected to date have worked successfully with
    regional intercity bus operators and with rural transit systems to
    maintain many of the discontinued routes.
        We agree with your assessment of the importance of rural transit
    and intercity connections. The administration supported significant
    increases in rural transit funding in the Safe, Accountable, Flexible
    and Efficient Transportation Equity Act of 2003 (SAFETEA), and proposed
    to strengthen the intercity bus provision by requiring consultation
    with the private providers before certifying that needs are adequately
    met.

                           RURAL TRANSPORTATION NEEDS

        Question. As the gap between the funding available for
    transportation investments and the national transportation needs
    continues to expand, there is the temptation to redistribute or
    redirect our investments and focus on the large urban centers. Whether
    it is highway, transit, aviation or rail passenger funding, the
    commitment to a national transportation system must be maintained.
        Can we have your assurance that this country will retain a national
    transportation system--providing service to rural America as well as
    urban centers?
        Answer. The Department is deeply committed to ensuring mobility in
    both rural and urban America, and we look to all modes to play a
    continuing role in meeting traveler needs.
        Regarding the availability of long-distance service options, you
    may be aware that the Department is presently preparing a report to
    Congress that addresses Greyhound's recent service cutbacks, many of
    which have occurred in rural areas. Our preliminary findings are
    encouraging. First, many of the affected communities had few or no
    passengers riding Greyhound's buses during the past year; service
    cutbacks in those areas pose little or no impact. Second, where some
    passenger base (ridership) still exists but Greyhound has nonetheless
    found that service cutbacks are critical to sustaining its long-term
    operating strategy, other carriers have stepped in to provide service.
    The other carriers have lower operating costs and may have different
    route structures that allow them to provide the service more
    profitably. Similarly, some of these replacement carriers are in a
    better position to take advantage of available Federal capital and
    operating subsidies that help sustain service where it might otherwise
    be unprofitable even for them to operate. Finally, in addition to
    carriers stepping up to offer services, many affected States have been
    making greater use of available program support, notably FTA's 5311(f)
    program, and working more closely with alternative carriers to sustain
    service. The combination of carrier and State response is helping to
    mitigate effects of Greyhound's cutbacks--where there have been impacts
    at all. Many of these same resources are available to provide intercity
    travel wherever Amtrak cutbacks might occur.
        The administration's SAFETEA proposals also increase long-distance
    travel options, especially for those dependent upon access to publicly
    available transportation, through expanded support for intercity bus
    service. SAFETEA's measures include funding of intermodal terminals
    used by intercity bus carriers; increasing Section 5311(f)'s funding
    for rural area intercity bus service and strengthening the Section's
    provisions for State and carrier cooperation; ensuring intercity bus
    access to publicly funded intermodal passenger facilities; and
    continued funding of lift equipment that helps carriers meet the
    Americans with Disabilities Act accessibility requirements. All of
    these measures seek improved access to the Nation's intercity travel
    network, and we are very hopeful that emerging reauthorization
    legislation preserves support for these measures.
        The administration's passenger rail proposal, the Passenger Rail
    Investment Reform Act, includes a new Federal-State partnership to fund
    capital improvements, much like the successful programs relied on in
    other modes of transportation, especially the Federal Transit
    Administration's (FTA) Section 5309 New Starts Program. The Federal
    Government will offer 50-50 matching grants to States for development
    of infrastructure projects that improve passenger rail service. The
    matching grants will provide an incentive for States to make capital
    investments that support high quality, integrated regional rail
    services.
        As in the Section 5309 New Starts Program, regional, State or local
    authorities will be empowered to make decisions about rail passenger
    service, planning where it is and what best meets their transportation
    needs; they will also be in a position as well to ensure rail operators
    are providing a reliable, efficient and cost effective service. State
    and local governments are better situated to specify the service to be
    run, to monitor performance, and to control operating costs.
        The most recent legislation to reauthorize Federal aviation
    programs, Vision 100 (Public Law 108-176), established an Alternate
    Essential Air Service Pilot Program and a Community Flexibility Pilot
    Program. By creating these pilot programs, Congress endorsed the idea
    that flexibility, needs assessment, and cost-effectiveness have roles
    to play in connecting communities to the air transportation system. For
    example, providing for on-demand surface transportation to another
    airport and promoting air taxi and charters in lieu of higher cost
    scheduled service were two provisions aimed at achieving rural area
    access to the Nation's air network more cost-effectively. This
    adherence to flexibility, needs assessment, and cost-effectiveness
    should contribute to the long-term assurance of mobility for the full
    spectrum of America's various transportation user groups.

                              SUBCOMMITTEE RECESS

        Senator Bond. The hearing is recessed.
        [Whereupon, at 11:32 a.m., Tuesday, March 15, 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
                                      2006

                                  ----------

                            THURSDAY, APRIL 7, 2005

                                           U.S. Senate,
               Subcommittee of the Committee on Appropriations,
                                                        Washington, DC.
        The subcommittee met at 9:30 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

                            Internal Revenue Service

    STATEMENTS OF:
            MARK W. EVERSON, COMMISSIONER
            J. RUSSELL GEORGE, TREASURY INSPECTOR GENERAL FOR TAX
                ADMINISTRATION

                OPENING STATEMENT OF SENATOR CHRISTOPHER S. BOND

        Senator Bond. Good morning. The Senate Appropriations
    Subcommittee on Transportation, Treasury, Judiciary, Housing,
    Urban Development, and Related Agencies will come to order. I'm
    going to have to get used to that, Senator Murray. The
    committee is often called the THUD committee but we will go
    with the full name for this event.
        We welcome Internal Revenue Service Commissioner Mark
    Everson and J. Russell George, the Treasury Inspector General
    for Tax Administration to this morning's hearing. I look
    forward to hearing each of your views on the IRS's fiscal year
    2006 budget as well as issues related to the administration and
    enforcement of our Nation's tax code. With the April 15 tax
    filing deadline rapidly approaching, you can see everybody
    smiling about what a wonderful day that will be. As a result,
    we're especially looking forward to Commissioner Everson's
    testimony on the current state of the IRS and how the service
    is responding not only to taxpayers' needs but what has become
    popularly described as the ``tax gap''; namely, what taxes
    should be paid and what taxes are actually paid.
        We also are looking forward to the IG's perspective on the
    strengths and weaknesses of the IRS's capacity to effectively
    collect taxes.
        As I understand the budget request for 2006, the IRS is
    making renewed efforts to reduce the tax gap through an
    increased investment in enforcement funding. I understand and
    support these efforts. Closing this gap is especially important
    as the Federal Government seeks to reduce the deficit and
    reform Social Security. I believe that those of us who pay
    taxes as we should bear a heavy burden when 15 percent of taxes
    that are owed are not collected. Consequently, I've appreciated
    discussions about how we can close that gap so that we can get
    the taxes that are actually owed and enable the government to
    lower the deficit that we face.
        In particular, the IRS is proposing to close this gap by
    increasing the Nation's investment in enforcement, proposing an
    8 percent increase in enforcement. Moreover, the budget
    proposes that no less than $6.446 billion must be used
    exclusively for tax enforcement, which would result in an
    additional $446.5 million in contingent funding for
    appropriations. The use of this budget mechanism is justified
    because the government collects $4 for every $1 spent for
    enforcement. I'm not convinced of the arithmetic. I am
    convinced, however, additional enforcement spending will result
    in additional collections. This is true despite the fact that
    the strength and weakness of our Nation's Federal income tax
    system is its reliance on the voluntary compliance of American
    taxpayers. Most Americans believe in the law and pay their
    taxes. Nevertheless, there will always be some that fail to
    comply or engage in outright fraud. This is the IRS's greatest
    managerial challenge and I believe the IRS should have the
    resources to meet that challenge.
        That's why effective enforcement of the tax laws are so
    critically important and why I support an increase in the
    funding for enforcement efforts. Enforcement cannot be lax,
    ineffective, or uneven; otherwise, more people will be
    encouraged to commit fraud. We also must ensure enforcement
    funds are used for enforcement and not other priorities. I'm
    disappointed that the subcommittee does not get adequate credit
    under the convoluted budget scoring principles for the savings
    achieved through enforcement, especially since OMB has proposed
    the underfunding of so many other parts of our bill. If we
    could get credit for the additional collections coming from
    enforcement, we would be able to meet many of our threshold
    needs. However, the overall budget has been cut by 2 percent
    with many functions in our budget requiring cost-of-living
    increases which are not addressed. Housing, for example, does
    not get 2 percent less expensive. As a result, this budget puts
    us in a very difficult position, a theme that we will be
    reiterating in our discussions with all of the other agencies
    that come before us.
        The primary mission of the IRS is to ensure the full and
    fair compliance of all taxpayers to meet their tax obligations.
    This is the underlying purpose of the IRS's budget. However,
    I'm concerned about the proposed 1 percent decrease in taxpayer
    service funding. The IRS needs to balance customer service with
    its compliance and enforcement efforts. As a result, the IRS
    must provide high quality and in-depth customer service to
    assist taxpayers, especially low-income taxpayers. I believe
    that most people who fail to comply with the code do so
    unintentionally because of its difficulty and complexity.
    Active and timely guidance from the service is imperative to
    ensure taxpayer compliance.
        Nevertheless, I remain concerned about the proposed
    reduction in customer service, especially since the IRS has
    improved its customer service and guidance over the past 2
    years. I'm especially impressed over the improvement through
    internet, telephone, and in-person assistance. E-file options
    have become especially important, helping to reduce the burden
    of filing tax returns both for the government and the taxpayer.
        Unfortunately, the biggest hurdle facing taxpayers and the
    IRS and all of us is the Federal Tax Code, its regulations and
    other guidance, which constitute more than 54,000 pages. It is
    too complex, too confusing, and too costly. On a daily basis, I
    hear complaints from small tax practitioners and businesses
    that the code has become unmanageable and confusing, resulting
    in excessive cost and administrative burdens that far exceed
    reasonable tax compliance. I believe it was Walt Kelly's
    ``Pogo'' who said those famous words, ``We have met the enemy
    and he is us''. This is our responsibility and, unfortunately,
    even with all the wisdom in the Appropriations Committee, we
    don't write the tax code. Nevertheless, I firmly support a
    comprehensive reform of the tax code based on simplicity and
    reasonableness. This alone would result in substantially
    reduced tax fraud by making the process simpler and the system
    far fairer for all taxpayers.
        Finally, I direct concerns to an area of particular
    importance to me: the ongoing efforts of the IRS to modernize
    the IRS computer system known as Business System Modernization
    or BSM. The ultimate success of this system is critical to
    collections. Historically, the IRS has long been dependent upon
    antiquated computer systems to perform basic tax administration
    activities. As a result, Congress created a special business
    systems account to fund the replacement of these outdated
    systems. Nevertheless, the cost for BSM is fast approaching $2
    billion. The key feature of the modernization program and the
    customer account data engine, with acronym being CADE, is
    hampered by development problems and cost overruns while
    remaining inadequate and ineffective. For example, the report
    on Custodial Accounting Project, CAP, showed that it was
    significantly behind schedule and over budget. This system was
    designed to correct longstanding weaknesses in the IRS
    financial management systems, which account for approximately
    $2 trillion in tax collections annually. Additionally, TIGTA
    found the IRS and CAP contractor did not adequately manage
    system requirements. In another example, TIGTA reported that
    the security audit system used to record the online activity of
    IRS employees through audit trails was accepted by IRS even
    though the required functions the IRS paid for were not
    operating. The bottom line is that scheduling and cost
    estimation have been a big problem. Almost every system is
    behind schedule and over cost and is delivering less
    functionality than originally planned.
        Commissioner, your budget request is $199 million for BSM.
    I'm not convinced this system works adequately, but ultimately
    the IT system is the heart of the entire collection and
    compliance system. BSM must be fixed and must be made workable
    to establish clearer requirements and benchmarks for its
    progress. As I understand it, the system was supposed to be
    completed in 10 years. I don't believe anyone believes this
    schedule is now achievable as schedule delays and cost over-
    runs continue to rule--this is not the exception in this
    ongoing effort: schedule slippages and cost over-runs have been
    epidemic and, in fact, I believe the IRS is running late and is
    over-budget on all seven core projects related to BSM. I'm
    concerned BSM is becoming the 21st century version of the TSM
    program which was the IRS's prior modernization effort that was
    abandoned after 6 years and $4 billion. TSM was a total loss.
    The current BSM effort began in 1998 and has already cost $2
    billion. This program, like TSM before it, raises more
    questions than answers.

                               PREPARED STATEMENT

        Commissioner, I support your efforts in enforcement and
    closing the tax gap. I applaud your efforts but an effective
    BSM is critical. I'm looking forward to working with you and
    the IRS on these efforts. I also applaud your commitment on
    addressing the funding, schedule, and requirement needs of the
    BSM. I thank you for coming to testify today and I look forward
    to your testimony and the testimony of Mr. George on the many
    challenges confronting the IRS in the 21st century. It's now my
    pleasure to 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, Housing and Urban Development and Related Agencies will
    come to order. We welcome Internal Revenue Service Commissioner Mark
    Everson and J. Russell George, the Treasury Inspector General for Tax
    Administration, to this morning's hearing. I look forward to hearing
    each of your views on the IRS's fiscal year 2006 budget as well as
    issues related to the administration and enforcement of our Nation's
    tax code.
        With the April 15 tax filing season deadline rapidly approaching,
    we are especially looking forward to Commissioner Everson's testimony
    on the current state of the IRS and how the Service is responding not
    only to taxpayers' needs but what has become popularly described as the
    ``Tax Gap''; namely, what taxes should be paid and what taxes are
    actually paid. We also are looking forward to the IG's perspective on
    the strengths and weakness of the IRS's capacity to effectively collect
    taxes.
        As I understand the budget request for fiscal year 2006, the IRS is
    making renewed efforts to reduce the tax gap through an increased
    investment in enforcement funding. I understand and support these
    efforts. Closing this gap is especially important as the Federal
    Government seeks to reduce the deficit and reform social security.
        In particular, the IRS is proposing to close this gap by increasing
    the Nation's investment in enforcement by proposing an 8 percent
    increase in enforcement. Moreover, the budget proposes that no less
    than $6.446 billion be used exclusively for tax enforcement which would
    result in an additional $446.5 billion in contingent funding for
    appropriations. The use of this budget mechanism is justified because
    the government collects $4 for every $1 dollar spent for enforcement.
    While I am not convinced of the arithmetic, I am convinced that
    additional enforcement spending will result in additional collections
    to a point. This is true despite the fact that the strength and
    weakness of our Nation's Federal income tax system is its reliance on
    the voluntary compliance of American taxpayers. Most Americans believe
    in the law and pay their taxes. Nevertheless, there will always be some
    that fail to comply or engage in outright fraud. This is the IRS's
    greatest managerial challenge and the IRS should have the resources.
        That is why effective enforcement of our tax laws is so critically
    important, and why I support an increase in the funding of enforcement
    efforts. Enforcement cannot be lax, ineffective, or uneven; otherwise
    more people will be encouraged to commit fraud. We must ensure
    enforcement funds are used for enforcement and not other priorities. I
    am disappointed that the subcommittee does not get adequate credit and
    savings for its investment in enforcement, especially since the
    administration has proposed underfunding of so many other parts of our
    bill.
         The primary mission of the IRS is to ensure the full and fair
    compliance of all U.S. taxpayers with their tax obligations. These
    efforts cannot through enforcement and compliance solely. Consequently,
    I am very troubled by the proposed 1 percent decrease in Taxpayer
    Service funding. The IRS needs to balance customer service with its
    compliance and enforcement efforts.
        As a result, the IRS must provide high quality and in-depth
    customer service to assist taxpayers, especially low-income taxpayers.
    I believe that most people who fail to comply with the code do so
    unintentionally because of its difficulty and complexity. Accurate and
    timely guidance from the Service is imperative to ensuring taxpayer
    compliance.
        Nevertheless, while I remain concerned about the proposed
    reductions in customer service, the IRS has improved its customer
    service and guidance over the past few years. I especially am impressed
    over improvements through the internet, telephone and in-person
    assistance. E-file options have become especially important, helping to
    reduce the burden of filing tax returns for both the government and the
    taxpayer.
        Unfortunately, the biggest hurdle facing taxpayers and the IRS is
    the Federal tax code, its regulations and other guidance, which has
    morphed to more than 54,000 pages--this is too complex, confusing, and
    costly. On an almost daily basis, I hear complaints from small tax
    practitioners and businesses that the Code has become unmanageable and
    confusing, resulting in excessive cost and administrative burdens that
    far exceed reasonable tax compliance. I firmly support a comprehensive
    reform of the tax code that is founded in simplicity and
    reasonableness. This alone would result in substantially reduced tax
    fraud by making the process simpler and the system far fairer for all
    taxpayers.
        Finally, I'd like to direct my concerns to an area of particular
    importance to me: the ongoing efforts of the IRS to modernize the IRS
    computer systems, known as Business Systems Modernization (BSM). The
    ultimate success of this system is critical to collections.
        Historically, the IRS has been long dependent upon antiquated
    computer systems to perform basic tax administration activities. As a
    result, Congress created a special business systems modernization
    account to fund the replacement of these outdated systems.
    Nevertheless, the cost for the BSM program is fast approaching $2
    billion. The key feature of the modernization program, Customer Account
    Data Engine (CADE), is hampered by delays in development and cost
    overruns while remaining inadequate and ineffective.
        For example, TIGTA's report on the Custodial Accounting Project
    (CAP) showed that it was significantly behind schedule and over budget.
    This system was designed to correct longstanding weaknesses in the IRS
    financial management systems systems, which account for approximately
    $2 trillion in tax collections annually. Additionally, TIGTA found the
    IRS and the CAP contractor did not adequately manage system
    requirements. In another example, TIGTA reported that the system
    (Security Audit and Analysis System) used to record the online activity
    of IRS employees through audit trails which was accepted by IRS even
    though the required functions IRS paid for were not operating.
        The bottom line is that scheduling and cost estimation have been a
    very big problem for IRS. Almost every system is behind schedule, over
    cost, and is delivering less functionality than originally planned.
        Mr. Commissioner, your budget request seeks $199 million for BSM. I
    am not convinced this system works, but ultimately the IT system is the
    heart of the entire collection and compliance system. BSM must be
    fixed. IRS needs to establish clear requirements and benchmarks for
    progress. As I understand it, this system was supposed to be completed
    in 10 years. I do not believe that anyone believes this schedule is now
    achievable and schedule delays and cost overruns continue to be the
    rule--not the exception--to this ongoing effort. These schedule
    slippages and cost-overruns have been epidemic. In fact, I believe the
    IRS is running late and is over budget on all seven core projects
    related to BSM.
        I am very concerned that BSM is becoming the 21st century version
    of the Tax Systems Modernization (TSM) program, which was the IRS's
    prior modernization effort that was abandoned after consuming 6 years
    and $4 billion in Federal tax dollars. That effort was a complete loss.
        The current BSM effort began in 1998 and has already cost almost $2
    billion. This program, like TSM before it, raises more questions than
    answers.
        Commissioner Everson, I support your efforts in enforcement and
    closing the tax gap. I applaud your efforts. However, an effective BSM
    is critical to these efforts. I am looking forward to working with you
    on these efforts. However, I also am looking to your commitment on
    addressing the funding, schedule and requirement needs of the BSM.
        I thank you again coming to testify before the subcommittee this
    morning. I look forward to your testimony and the testimony of Mr.
    George on the many challenges confronting the IRS in the 21st century.
        I now turn to my Ranking Member, Senator Murray.

                       STATEMENT OF SENATOR PATTY MURRAY

        Senator Murray. Thank you very much. Mr. Chairman, I want
    to welcome back IRS Commissioner Everson and I want to welcome
    Russell George who is our new Treasury Inspector General for
    Tax Administration testifying before this subcommittee for the
    first time. In 8 days, millions of Americans who play by the
    rules will go to the post office to file their tax returns.
    These honest taxpayers should be appalled by the IRS's findings
    released last week that reveal that the agency will fail to
    collect between a quarter and a third of a trillion dollars
    it's owed this year because of tax cheats. That figure is the
    equivalent of the amount we spent on the entire Department of
    Defense a couple of years ago. It represents roughly $1 out of
    every $5 that is owed by American taxpayers.
        According to the IRS, the majority of these unpaid taxes
    take the form of unreported income by businesses, partnerships,
    estates, and so-called S corporations. Thankfully, the IRS now
    recognizes they need to get serious with tax cheats. The agency
    is asking for almost an 8 percent increase for tax law
    enforcement and a budget that is extremely frugal when it comes
    to other areas of domestic spending.
        While some Senators have expressed concern that boosting
    IRS's enforcement budget could cost the agency to return to its
    troubled past when IRS agents used excessive force to harass
    taxpayers, I want to believe the agency has learned from its
    past mistakes and would use this funding boost to go after the
    real criminals. But what troubles me about this proposed IRS
    budget is the lack of balance between the desire to boost
    enforcement and the need to fund critical services to
    taxpayers. A detailed review of the budget request for the IRS
    shows that buried within the overall funding increase for the
    agency is almost a quarter billion dollars in anticipated cuts
    in current activities. Most disappointing is that the majority
    of those cuts come in the form of cuts in direct taxpayer
    services. Proposals to achieve these cuts include closing as
    many as one out of every four taxpayer assistance centers in
    the United States. The IRS wants to eliminate phone filing, a
    tool currently used by more than 5 million individuals and
    business every year. Other proposed cuts in taxpayer services
    include shortening phone service hours, discontinuing tax law
    assistance through the internet, limiting distribution of some
    outreach publications and face-to-face contacts with
    practitioners, and eliminating phone-routing sites and
    staffing.
        In last year's hearing, the commissioner shared with us his
    motto that ``service plus enforcement equals compliance''. That
    motto is also prominently featured in his testimony this year.
    However, I fear a review of the budget request might indicate
    the motto should more appropriately be ``only enforcement
    yields compliance so let's cut services to pay for it''. I
    believe that service to taxpayers is still a critical mission
    of the IRS and I know I'm not alone in believing this. While a
    recent IRS Oversight Board Taxpayer Attitude Survey found that
    62 percent of taxpayers thought the IRS should get more money
    for enforcement, 64 percent of taxpayers said the IRS should
    get more money to assist taxpayers on the phone and in person.
    But it's precisely those types of services that the IRS wants
    to cut.

                               PREPARED STATEMENT

        Now, while she's not appearing before us today, I have
    reviewed the submitted testimony of the Taxpayer Advocate, Nina
    Olson. The Office of the Taxpayer Advocate was created by
    Congress so there would be staffed professionals with access to
    the commissioner to constantly look out for the interests of
    individual taxpayers as the IRS develops his processes and
    procedures. The Advocate is also charged with assisting
    taxpayers in resolving problems with the IRS and communicating
    the interests of taxpayers directly to Congress. According to
    Ms. Olson, closing taxpayer assistance centers at this time
    will irrevocably harm taxpayers. She points out that the IRS
    has not offered alternatives to the face-to-face interaction of
    these centers. It seems the only face-to-face alternative left
    is for affected taxpayers to drive much farther to another
    center. Especially because the IRS is moving so quickly on
    these new proposals, I would like to use a portion of today's
    hearing to discuss in detail precisely what the impact will be
    on individual taxpayers resulting from IRS-proposed cuts, as
    called for in the administration's budget. The tax code is
    complicated enough without our cutting back on the level of
    assistance our citizens have come to expect as they seek to
    file the taxes accurately and on time. Thank you very much, Mr.
    Chairman.
        [The statement follows:]

                   Prepared Statement of Senator Patty Murray

        Thank you, Mr. Chairman.
        I want to welcome back IRS Commissioner Everson. I also want to
    welcome Russell George, our new Treasury Inspector General for Tax
    Administration, who is testifying before us for the first time.
        In 8 days, millions of Americans who play by the rules will go to
    the post office to file their tax returns. These honest taxpayers
    should be appalled by the IRS's findings, released last week, that
    reveal that the agency will fail to collect between a quarter and a
    third of a trillion dollars it is owed this year because of tax cheats.
        That figure is the equivalent of the amount we spent on the entire
    Department of Defense a couple of years ago. It represents roughly $1
    out of every $5 that is owed by American taxpayers.
        According to the IRS, the majority of these unpaid taxes take the
    form of unreported income by businesses, partnerships, estates, and so-
    called ``S-corporations.''
        Thankfully, the IRS now recognizes that they need to get serious
    with tax cheats. The agency is asking for almost an 8 percent increase
    for tax law enforcement in a budget that is extremely frugal when it
    comes to other areas of domestic spending.
        While some Senators have expressed concern that boosting IRS's
    enforcement budget could cause the agency to return to its troubled
    past, when IRS agents used excessive efforts to harass taxpayers, I
    want to believe that the agency has learned from its past mistakes and
    would use this funding boost to go after the real criminals.
        What troubles me about this proposed IRS budget is the lack of
    balance between the desire to boost enforcement and the need to fund
    critical services to taxpayers. A detailed review of the budget request
    for the IRS reveals that buried within the overall funding increase for
    the agency is almost a quarter billion dollars in anticipated cuts in
    current activities.
        Most disappointing is that the majority of those cuts come in the
    form of cuts in direct taxpayer services. Proposals to achieve these
    cuts include closing as many as one out of every four Taxpayer
    Assistance Centers in the United States.
        The IRS wants to eliminate phone filing, a tool currently used by
    more than 5 million individuals and businesses every year. Other
    proposed cuts in taxpayer services include:
      --shortening phone service hours;
      --discontinuing tax law assistance through the Internet;
      --limiting distribution of some outreach publications and face-to-
            face contact with practitioners; and,
      --eliminating phone-routing sites and staffing.
        In last year's hearing, the Commissioner shared with us his motto
    that, ``Service Plus Enforcement Equals Compliance.'' That motto is
    also prominently featured in his testimony this year. However, I fear a
    review of the IRS's budget request might indicate that the motto should
    more appropriately be: ``Only Enforcement Yields Compliance--So Let's
    Cut Services to Pay For It.''
        I believe that service to taxpayers is still a critical mission of
    the IRS--and I know I am not alone in believing this. While a recent
    IRS Oversight Board Taxpayer Attitude Survey found that 62 percent of
    taxpayers thought that the IRS should get more money for enforcement,
    64 percent of taxpayers said that the IRS should get more money to
    assist taxpayers on the phone and in person.
        But it is precisely those types of services that the IRS wants to
    cut.
        Now, while she is not appearing before us today, I have reviewed
    the submitted testimony of the Taxpayer Advocate, Nina Olson. The
    Office of the Taxpayer Advocate was created by Congress so that there
    would be staffed professionals with access to the Commissioner to
    constantly look out for the interests of individual taxpayers as the
    IRS develops its processes and procedures.
        The Advocate is also charged with assisting taxpayers in resolving
    problems with the IRS and communicating the interest of taxpayers
    directly to Congress.
        According to Ms. Olson, ``closing Taxpayer Assistance Centers at
    this time will irrevocably harm taxpayers.'' She points out that the
    IRS has not offered alternatives to the face-to-face interaction of
    these centers. It seems the only face-to-face alternative left is for
    affected taxpayers to drive much farther to another center.
        Especially because the IRS is moving so quickly on these new
    proposals, I would like to use a portion of today's hearing to discuss
    in detail precisely what the impact will be on individual taxpayers
    resulting from IRS-proposed cuts, as called for in the administration's
    budget.
        The tax code is complicated enough without our cutting back on the
    level of assistance our citizens have come to expect as they seek to
    file their taxes accurately and on time.
        Thank you, Mr. Chairman.

        Senator Bond. Thank you very much, Senator Murray. Senator
    Dorgan, do you have a brief opening statement?

                      STATEMENT OF SENATOR BYRON L. DORGAN

        Senator Dorgan. Mr. Chairman, first of all, thank you for
    holding this hearing. I think recent announcements about the
    size of the tax gap should cause all of us great concern. It's
    something I want to visit with the IRS officials about. Also,
    the issues of taxpayer assistance, I assume my colleague was
    just discussing that as I walked in. Let me defer and hear from
    the commissioner and then I will ask some questions.
        Senator Bond. Thank you very much, Senator Dorgan, and
    Commissioner Everson, we're making your full statement part of
    the record and I believe you have provided a summary. We invite
    you to give that now. Thank you.

                          STATEMENT OF MARK W. EVERSON

        Mr. Everson. Chairman Bond, Ranking Member Murray, Senator
    Dorgan, I'm happy to be here. I appreciate the opportunity to
    testify on the President's request.
        The President's 2006 request for the IRS is crafted to
    continue the necessary rebuilding of our enforcement
    capabilities, and it maintains a stable commitment to our
    important IT modernization program. Enforcement and
    modernization were categorized earlier this year by the GAO as
    high risk areas of government-wide importance. The 2006 budget
    request calls for a modest amount of belt-tightening in
    taxpayer services. The cut to services of 1 percent is
    consistent with the requests for domestic discretionary
    programs other than those associated with homeland security. In
    a report issued last year, the GAO stated, ``Taxpayer services
    are much improved, raising a question about the appropriate
    balance to strike between investing in further service
    improvements and enforcement. At the same time, the use of
    IRS's walk-in assistance sites is declining. The improvements
    in telephone service, increased web site use, and the
    availability of volunteer sites raise a question about whether
    the IRS should continue to operate as many walk-in sites.
    Reconsidering the level and types of services is an option--but
    not a recommendation--to be considered by IRS management and
    the Congress.''
        [The information follows:]

                      GAO's Comments on Walk-In Assistance

        ``. . . the use of IRS's walk-in assistance sites is declining. The
    improvements in telephone service, increased Web site use, and the
    availability of volunteer sites raise a question about whether IRS
    should continue to operate as many walk-in sites. Reconsidering the
    level and types of service is an option--but not a recommendation--to
    be considered by IRS management and the Congress.''--Statement of James
    R. White, Director, Tax Issues.

                           PRESIDENT'S BUDGET REQUEST

        The President's request for the IRS adopts just this
    approach. I am comfortable with this request and support it
    wholeheartedly. I want to stress to you, Senator Murray, that I
    believe that we will provide good services. If enacted at the
    requested level without constraining language, we will continue
    to do our job on the service front.
        The budget will hold Business System Modernization funding
    steady at substantially the same level as 2005. In terms of
    modernizing our big computer systems at the IRS, after years of
    cost over-runs and missed delivery dates, we've finally turned
    the corner. In the past 9 months, two important systems have
    come on-line. We have a new financial system to help better
    manage the agency, and more importantly, this filing season the
    IRS has already processed over 1 million 1040EZ tax returns
    using the first new processing system in 40 years. The 2006
    budget continues investment in three critical areas: further
    work on return processing, collections, and electronic filing.

                              ENFORCEMENT FUNDING

        Let me turn to the need for more enforcement funding.
        As you mentioned, 2 weeks ago we announced that the gross
    tax gap--that's the difference between what taxpayers should
    pay and what they actually pay on a timely basis--exceeds $300
    billion per year. Average Americans pay their taxes honestly
    and accurately and have every right to be confident that when
    they do so, neighbors and competitors are doing the same. We've
    taken some important steps to bolster this confidence.

                                  AUDIT RATES

        We have ramped up our audits of individuals. You can see
    they've gone from 618,000, 4 years ago to over 1 million last
    year, and they will go up again in 2005. We've done this
    particularly for high-income individuals. You can see they've
    doubled from $192,000, pardon me, $92,000 to $195,000 over the
    same period, and they're going to go up again in a double-digit
    increase for 2005.
        We are doing more with corporations and we're doing more
    with criminal investigations. This next chart shows the
    referrals we've made to the Justice Department, which have come
    up significantly in the last several years. We recently
    announced collections of over $3.2 billion in the settlement
    initiative for Son of Boss, a particularly abusive shelter.
        The 2006 budget calls for nearly 8 percent increase for
    enforcement. This will enable us to expand our efforts over
    strategic compliance by corporations, individual taxpayers, and
    other contributors to the tax gap; ensure that attorneys,
    accountants, and other tax practitioners adhere to professional
    standards and follow the law; detect and deter domestic and
    off-shore based tax and financial criminal activity; and, deter
    abuse within tax-exempt and governmental entities and misuse of
    such entities by third parties for tax evasion or other
    unintended purposes. It's a very important subject that was the
    subject of an inquiry by the Finance Committee just 2 days ago.
        These investments will pay for themselves several times
    over. The IRS yields more than $4 in direct revenue from its
    enforcement efforts for the money invested in its total budget,
    including our service and outreach activities. That's to say,
    the $43 billion in enforcement revenue compares to the $10.2
    billion we are appropriated. The $10.2 billion includes
    everything we do, not just the enforcement, but the processing

    and the outreach, all those activities.

                              ENFORCEMENT REVENUE

        Now, last year, the $43 billion, that represented a 15
    percent increase from the year before, so you can see that is
    coming up. That is a result of all the other things you saw. I
    want to emphasize that these figures exclude the positive
    impact on compliance that occurs when someone learns in a
    casual conversation that their neighbor has been audited and
    then thinks twice about fudging his or her own return. So this
    is just the direct return.
        Let me make one additional point that the chairman has
    touched upon about enforcement.
        The President's budget calls for the Congress to adjust its
    302(a) allocation to the Appropriations Committee up to $446
    million, once the base level of $6.4 billion for IRS
    enforcement is fully funded and restricted for use only on IRS
    enforcement. The $446 million consists of $265 million for new
    enforcement initiatives and $182 million for maintaining
    current enforcement levels.

                               BUDGET RESOLUTION

        The Senate Budget Resolution contains language which would
    allow this proposal to proceed. The House Resolution does not.
    I urge you to see the Senate position maintained during the
    conference. This proposal will allow the IRS to devote
    resources where needed: in enforcement. Thank you.
        [The statement follows:]

                     Prepared Statement of Mark W. Everson

                                  INTRODUCTION

        Chairman Bond, Ranking Member Murray, and members of the
    subcommittee, thank you for the opportunity to testify today on the
    fiscal year 2006 budget request for the Internal Revenue Service.
        Our working equation at the IRS is service plus enforcement equals
    compliance. The better we serve the taxpayer, and the better we enforce
    the law, the more likely the taxpayer will pay the taxes he or she
    owes.
        This is not an issue of service OR enforcement, but service AND
    enforcement. As you know, IRS service lagged in the 1990's. In
    response, we took important and necessary steps to upgrade service--we
    significantly improved the answering of taxpayer telephone inquiries
    and electronic filing to name just a couple areas.
        Unfortunately, improvement in service coincided with a drop in
    enforcement of the tax law. After 1996, the number of IRS revenue
    agents, officers, and criminal investigators dropped by over 25
    percent.

                                    TAX GAP

        We currently have a serious tax gap--the difference between what
    taxpayers are supposed to pay and what is actually paid--in this
    country. The results of the National Research Program indicate the
    Nation's tax gap increased slightly to between $312 billion and $353
    billion in tax year 2001. This compares to the old tax gap estimate for
    2001 of $311 billion based on earlier studies. By our best estimates,
    we lose almost $300 billion each year due to non-filing,
    underreporting, and underpayment, although this number reflects the
    fact that we do eventually recover about $55 billion of the gross tax
    gap.
        We launched the National Research Program (NRP) in 2001. We
    designed the NRP to measure individual taxpayer reporting compliance
    for tax year 2001. Over the course of the next 3 years, we randomly
    selected about 46,000 returns for review and examination. We largely
    completed these audits by the fall of 2004. To gather statistically
    valid data, the return selection process for the NRP included an
    oversampling of high income returns. This enables IRS researchers to
    draw valid conclusions about important sub-categories of taxpayers.
        For instance, slightly more than 6 percent of individual taxpayers
    filed Schedule C as sole proprietors in 2001. These taxpayers reflect a
    wide range of economic activity. To draw valid conclusions on Schedule
    C filers, the NRP examined about 21,000 individuals who filed a
    Schedule C, slightly less than 46 percent of the total sample.
        The current data from the NRP are preliminary, so the results are
    shown as ranges. As refinements are made to the tax gap analysis, some
    of these estimates may change. It is unlikely, but possible, that the
    final estimates of the tax gap will fall outside of the established
    range.
        The tax gap figure does not include taxes that should have been
    paid on income from the illegal sector of the economy.
        For Tax Year 2001, all taxpayers paid $1.77 trillion on time, a
    figure that represents from 83.4 percent to 85 percent of the total
    amount due. The 2001 tax gap, the difference between taxes owed and
    taxes paid on time is from $312 billion to $353 billion for all types
    of taxes.
        Overall, the noncompliance rate is from 15 percent to 16.6 percent
    of the true tax liability. The old estimate, derived from compliance
    data for Tax Year 1988 and earlier, was 14.9 percent.
        Late payments and other IRS enforcement and compliance efforts,
    including taxpayer audits and collection activities (payment
    arrangements, liens, levies and other legal actions) recover some of
    the Tax Gap. For Tax Year 2001, we expect eventually to collect an
    additional $55 billion of the tax gap, reducing the net amount of the
    tax gap to between $257 billion and $298 billion.
        Among the areas where taxpayer compliance appears to have worsened
    are:
      --Reporting of net income from flow-through entities, such as
            partnerships and S corporations;
      --Reporting of proprietor income and expenses, such as gross
            receipts, bad debts and vehicle expenses; and,
      --Reporting of various types of deductions.
        Among the areas where compliance seems to have improved is the
    reporting of farm income.
        Overall, compliance is highest where there is information reporting
    and/or withholding. For example, most wages, salaries and tip
    compensation are reported by employers to the IRS through Form W-2.
    Preliminary findings from the NRP indicate that less than 1.5 percent
    of this type of income is misreported on individual returns.
        IRS researchers anticipate identifying other specific areas of
    deterioration and improvement in the coming months as they complete the
    detailed analysis of the study's data.
        Today I will give you an update on what we've accomplished over the
    past year, speaking in particular about enforcement, the area where our
    challenges remain the greatest. We must restore the balance between
    service and enforcement, but that will not come at the expense of
    taxpayer service. In recent years, we have begun to attack the decline
    in enforcement by revitalizing our investigations, audits and
    prosecutions against those who do not pay their taxes. The President's
    fiscal year 2006 budget--if approved by Congress--will help with our
    efforts to boost enforcement while maintaining our levels of service.
    This budget includes $265 million for initiatives aimed at enhancing
    the enforcement of tax laws.
        Before I talk specifically about our fiscal year 2006 budget
    request, let me first talk about our progress in service. By service,
    we mean helping people understand their tax obligations and making it
    easier for them to participate in the tax system.
        Electronic filing continues to grow. Last year Americans filed over
    61 million electronic returns. This year we expect that over half of
    all individual returns will be e-filed. Thus, it appears that
    individuals who file on paper will soon be in the minority. We take
    every opportunity we can to proclaim the benefits of electronic filing,
    including a reduction in processing errors and cost savings for
    taxpayers and the IRS. E-filing is fast, convenient and gets your
    refund to you in half the time of paper returns.
        Use of our website, IRS.gov, is also up sharply. During the filing
    season, it is one of the busiest websites in the world. We average more
    than 1 million visits a day. Just to give you a frame of reference: one
    major search engine reported that in a recent week we were surpassed
    only by Paris Hilton, Clay Aiken, Pamela Anderson, Britney Spears, and
    a poker game. During the past year, we have also rolled out important
    new on-line services to tax professionals to help them better serve
    their clients.
        In terms of modernizing our big computer systems at the IRS, we've
    finally turned the corner. Since March 2004, two important systems have
    started operating. First, we have a new financial system to help better
    manage the agency. And secondly, and more importantly, for the first
    time in 40 years, the IRS is processing tax returns on a new computer
    system. We started with 1040EZ returns and have processed over 1
    million as of April 4. This is a big step forward in our effort to
    modernize our antiquated computer systems.

                 CONTINUING SERVICE AND INCREASING ENFORCEMENT

        We are quite aware of the need to operate efficiently, consolidate
    operations and drive down costs wherever we can. In today's fiscal
    environment, we recognize that resources are tight. Nevertheless, we
    are determined to do all we can to improve service and modernize the
    IRS. In the last several years, we have begun to arrest the decline in
    enforcement and stabilize IRS enforcement staffing; now 73 percent of
    taxpayers completely agree that it is every American's duty to pay
    their fair share of taxes, up from 68 percent in 2003. A 2004 IRS
    Oversight Board commissioned NOP World study revealed 79 percent of
    taxpayers believe it is very important for the IRS to enforce
    compliance from high-income individuals and 85 percent believe it is
    very important for the IRS to enforce compliance from corporations. But
    in order to continue to reverse the downward trend of compliance, we
    must continue to use our resources wisely.
        We are working aggressively to improve productivity and achieve
    cost savings, which we will apply to other priority areas, such as
    enforcement. The fiscal year 2006 budget reduction initiatives focus
    mainly on targeted reductions in assistance, outreach, and processing
    program areas. Reductions will also be achieved through improved
    efficiencies and re-engineering of business processes in key program
    areas in accounts management, submission processing, media and
    publications, field assistance, and outreach and education.
    Approximately 65 percent of these reductions will occur in assistance,
    20 percent in outreach and 15 percent in processing. We will minimize
    the impact on taxpayers by providing alternative means to obtain
    service, wherever possible. Our budget estimates all these taxpayer
    service reengineering initiatives will yield $134 million in savings we
    can reinvest in other program areas. The reductions represent a
    balanced approach in program delivery and service to taxpayers to
    enable them to meet their tax obligations.
        We estimate savings of $75 million to $95 million from additional
    efficiencies in our field assistance, accounts management and toll-free
    telephone operations. We will achieve these savings, in part, because
    of our recent consolidation our Customer Accounts Service organizations
    and revamping our business processes. For example, due to the steady
    decline in taxpayers corresponding with us about their accounts, we
    will need fewer resources to manage these accounts. We are also
    adjusting the hours of our toll-free telephone operations from 15 to 12
    hours daily, Monday through Friday in the local times zones, beginning
    in 2005. We expect minimal impact to our level of service for taxpayers
    who call us. Another portion of these savings will come from reducing
    the number of walk-in sites. In recent years, the number of taxpayers
    walking into a Taxpayer Assistance Center (TAC) site for assistance has
    decreased from a high of nearly 10 million contacts in fiscal year 2000
    to about 7.7 million contacts in fiscal year 2004. This trend reflects
    the increased availability and quality of services that do not require
    travel or waiting in line. Examples include improved access to IRS
    telephone service, the increasing availability of volunteer assistance,
    and the many services now available through IRS.gov, such as ``Free
    File'' and ``Where's My Refund.'' In addition, the ability to download
    forms online has also contributed to the decline in the number of
    customers walking into a TAC. We have also continued to improve our
    telephone service for taxpayers who call the IRS with questions. The
    use of other alternatives, such as volunteer return assistance at
    Volunteer Income Tax Assistance (VITA) sites and Tax Counseling for the
    Elderly (TCE) sites, has steadily increased while the number of TAC
    contacts decreased. In fiscal year 1999, for example, VITA sites filed
    almost 584,000 returns, and TCE sites filed 446,000 returns. In the
    next 5 years, the numbers of returns filed through these sites
    increased 88 percent, reaching 976,000 VITA returns and 958,000 TCE
    returns in fiscal year 2004.
        Because of these other options, fewer taxpayers need to travel to
    an IRS office to get the services they need. There are currently about
    400 TAC sites across the country which are serviced by approximately
    2,300 TAC employees. We believe that adjusting the TAC sites to more
    closely align to this decreased walk-in volume will yield staffing and
    building cost savings of $45 million to $55 million of the $75 million
    to $95 million in savings, and allow us the flexibility to improve
    efficiencies and concentrate more on front-line enforcement.
        We have developed a criteria model that measures the impact on
    taxpayers across the country. The criteria include: location, employee
    cost, facilities cost, workload, and demographic measurements. In
    anticipation of the closing of approximately 70 TACs and their
    employees, we have requested authority to offer early-outs and buy-outs
    to all eligible IRS TAC personnel. We expect to have further
    announcements in the near future.
        In addition to reducing the number of TAC sites, we will save $20
    million to $31 million in outreach programs though reductions in
    printing and postage and additional efficiencies in our outreach
    organizations. For example, we will save more money in printing and
    postage as taxpayers shift to e-filing, and as we eliminate redundant
    services and publications.
        We will save another $17 million to $23 million by retiring
    Telefile, implementing program enhancements in the processing of
    employment tax returns, and re-engineering processes in Submission
    Processing. We will redirect taxpayers who previously used Telefile to
    e-file alternatives, such as Free File, that are available through
    IRS.gov so we maintain an acceptable level of service.
        Though we are re-engineering how we provide service, we will
    continually strive to improve service to taxpayers. Having stated this,
    I must address the fundamental issue of enforcement.
        While the President's Budget Request to Congress would increase IRS
    enforcement activities by 7.8 percent, given the current budgetary
    constraints, we responsibly proposed to reduce spending in other areas
    throughout the Service. We are confronted with difficult choices.
        Average Americans pay their taxes honestly and accurately, and have
    every right to be confident that when they do so, their neighbors and
    competitors are doing the same. Let me provide an overview of the steps
    we have taken over the past year to bolster this confidence, turning
    briefly to each of our four service-wide enforcement priorities.
        Our first enforcement priority is to discourage and deter non-
    compliance, with emphasis on corrosive activity by corporations, high-
    income individuals, and other contributors to the tax gap.
      --In 2004, audits of high-income taxpayers jumped 40 percent from the
            year before. We audited almost 200,000 high-income individuals
            last year--double the number from 2000.
      --Overall, audits for individuals exceeded the 1 million mark last
            year, up from 618,000 4 years earlier.
      --In 2004, the number of audits of the largest businesses--those with
            assets of $10 million or more--finally increased after years of
            decline.
        The centerpiece of our enforcement strategy is combating abusive
    tax shelters, both for corporations and high-income individuals. I will
    touch upon two important initiatives of the past 12 months.
        We have continued our program of settlement offers for those who
    entered into abusive transactions in the past but would like to get
    their problems behind them. Last May, we made a settlement offer
    regarding the Son of Boss tax shelter, a particularly abusive
    transaction used by wealthy individuals to eliminate taxes on large
    gains, often in the tens of millions of dollars. In this program, for
    the first time, the IRS required a total concession by the taxpayer of
    artificial losses claimed. I am pleased with the response to the offer.
    So far, $3.2 billion in taxes, interest and penalties have been
    collected from the 1,165 taxpayers who are participating in the
    settlement initiative. The typical taxpayer payment was almost $1
    million, with 18 taxpayers paying more than $20 million each and one
    paying over $100 million. Processing of individual settlements
    continues.
        Based on disclosures we have received from promoter investigations
    and from investor lists from Justice Department litigation, we have
    determined that just over 1,800 people participated in Son of Boss.
    When the project concludes in the coming months, we expect the
    collected figure should top $3.5 billion.
        In February 2005, we announced a second important settlement
    initiative--this one involving executive stock options. This abusive
    tax transaction involved the transfer of stock options or restricted
    stock to family-controlled entities. These deals were done for the
    personal benefit of executives, sometimes at the expense of public
    shareholders. This shelter was not just a matter of tax avoidance but,
    in some instances, raises basic questions about corporate governance.
    Again, the settlement offer is a tough one: full payment of the taxes
    plus a penalty.
        A noteworthy point about the stock option settlement offer is that
    our actions in this matter were closely coordinated with the Securities
    and Exchange Commission and the Public Company Accounting Oversight
    Board.
        Our settlement initiatives and increased audits have sent a signal
    to taxpayers: the playing field is no longer as lopsided as it once
    was. Non-compliant taxpayers might have to pay the entire tax,
    interest, and a stiff penalty. A taxpayer might have to wrestle with
    questions like ``how much am I going to have to pay the lawyers and
    expert witnesses to litigate this thing?'' Moreover, going to court is
    a public matter. Damage to one's reputation is a potential factor. Many
    wealthy individuals, otherwise seen as community leaders, may not want
    to be identified as paying less than their fair share in taxes.
        Another example of cooperation in the battle against abusive
    shelters is in the international arena. A year ago, I announced the
    formation of what has come to be known as the Joint International Tax
    Shelter Information Centre. Since last Labor Day, we have had an
    operational task force of personnel from Australia, Canada, the United
    Kingdom, and the United States working together on-site here in
    Washington. We are exchanging information about specific abusive
    transactions. Results to date are promising. Thus far, we have
    uncovered a number of transactions which, but for the Centre, we would
    have unraveled only over a number of years, if ever. It makes sense
    that we continue to work with other countries because, in this
    increasingly global world, we are up against what is, in essence, a
    reinforcing commercial network of largely stateless accounting firms,
    law firms, investment banks, and brokerage houses.
        The government stepped up its use of civil injunctions in 2001 to
    prohibit promoters from selling illegal tax schemes on the Internet, at
    seminars or through other means. Currently the courts have issued
    injunctions against 99 abusive scheme promoters--81 permanent
    injunctions and 18 preliminary injunctions. They have issued
    injunctions against 17 abusive return preparers--all permanent
    injunctions. And an additional 49 suits have been filed by Justice
    seeking injunction action--28 against scheme promoters and 21 against
    return preparers. Injunctions issued have involved schemes such as:
      --Using abusive trusts to shift assets out of a taxpayer's name while
            retaining control;
      --Misusing ``corporation sole'' laws to establish phony religious
            organizations;
      --Using frivolous ``Section 861'' arguments to evade employment
            taxes;
      --Claiming personal housing and living expenses as business expenses;
      --Filing tax returns reporting ``zero income''; and,
      --Misusing the Disabled Access Credit.
        The IRS has another 1,000 investigations ongoing for possible
    referral to the Department of Justice; and individual examinations are
    being conducted on thousands of scheme participants. Most of the
    investigations and examinations are being conducted by the IRS Small
    Business/Self-Employed (SB/SE) Division.
        Our second 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. Altogether, there are approximately 1.2 million tax
    practitioners. The vast majority of practitioners are conscientious and
    honest, but even honest tax professionals suffered from the sad and
    steep erosion of ethics in recent years by being subjected to untoward
    competitive pressures. The tax shelter industry had a corrupting
    influence on our legal and accounting professions.
        We have done quite a bit since March 2004 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. The IRS standards set
    forth rules governing what does and does not qualify as an independent
    opinion about a tax shelter.
        Last year, the government won a series of court opinions on
    privilege. The cases established that promoters who develop and market
    generic tax shelters can no longer protect the identity of their
    clients by hiding behind a false wall of privilege.
        Abusive tax shelters often flourished because penalties were too
    small. Some blue chip tax professionals actually weighed potential fees
    from promoting shelters, but not following the law, against the risk of
    IRS detection and the size of our penalties. Clearly, the penalties
    were too low. They were no more than a speed bump on a single-minded
    road to professional riches.
        But these speed bumps have become speed traps. Last fall, Congress
    enacted the American Jobs Creation Act. The legislation both created
    new penalties and increased existing penalties for those who make false
    statements or fail to properly disclose information on tax shelters.
    Under the new law, the IRS can now impose monetary penalties not just
    on tax professionals who violate standards, but also on their
    employers, firms, or other entities if those parties knew, or should
    have known, of the misconduct.
        Our third enforcement objective is to detect and deter domestic and
    off-shore based criminal tax activity and related financial criminal
    activity.
        Last year, the IRS referred more than 3,000 cases to the Justice
    Department for possible criminal prosecution, nearly a 20 percent jump
    over the previous year. We continue our active role in the President's
    Corporate Fraud Task Force. We are going after promoters of tax
    shelters--both civilly and, where warranted, criminally. This tactic is
    a departure from the past. Previously, during a criminal investigation,
    all civil activity came to a halt. The result was that our business
    units were reluctant to refer matters for criminal investigation lest
    they lose their traditional turf. But, we are now moving forward on
    parallel tracks with the Department of Justice. We have a number of
    important criminal investigations. The enforcement model is changing.
        Our fourth enforcement priority is to discourage and deter
    noncompliance within tax-exempt and government entities, and misuse of
    such entities by third parties for tax avoidance purposes.
        Consider, for example, certain credit counseling agencies.
    Increasingly, it appears that some credit counseling organizations have
    moved from their original purposes, that is, to counsel and educate
    troubled debtors, to inappropriately enrolling debtors in proprietary
    debt-management plans and credit-repair schemes for a fee. These
    activities may be disadvantageous to the debtors and are not consistent
    with the requirements for tax exemption. Further, a number of these
    organizations appear to be rewarding their insiders by negotiating
    service contracts with for-profit entities owned by related parties.
    Many newer organizations appear to have been created as a result of
    promoter activity.
        Some shelter promoters join with tax-exempt organizations to create
    abusive shelters. The organization receives a large fee from the
    taxpayer who is taking advantage of its tax-free status. That is an
    unintended abuse of the tax exemption that our Nation bestows upon
    charities.
        It is heartening to see leading members of the nonprofit community
    taking steps to address abuses. I particularly want to salute the
    Independent Sector--which recently delivered a constructive report to
    the Senate Finance Committee. The report states that ``government
    should ensure effective enforcement of the law'' and calls for tougher
    rules for charities and foundations. The report calls for stronger
    action by the IRS to hold accountable charities that do not supply
    accurate and timely public information. I encourage the accounting,
    legal, and business communities to be as enthusiastic about confronting
    abuses and the erosion of professional ethics as the nonprofit
    community. An interesting point to note is that the report supports
    mandatory electronic filing of all tax returns for nonprofits.
        The threat to the integrity of our Nation's charities is real and
    growing. At the IRS, we take it very seriously. We are augmenting our
    resources in the nonprofit area. By the end of September, we will have
    increased the number of our personnel who audit tax-exempt
    organizations by over 30 percent from 2 years earlier. If 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.
        As we move forward with these priorities, we will leverage our
    success to achieve greater results within our fiscal year 2006 budget
    request.

                               BUDGET RESTRUCTURE

        To facilitate full alignment and integration of the Service's goals
    and measures with its resources, we are proposing to restructure our
    budget beginning in fiscal year 2006. These changes will facilitate a
    more accurate assessment of the overall value of IRS programs, simplify
    the full costing of programs, and allow the IRS to demonstrate
    incremental increases in an initiative's effectiveness based on the
    level of funding received.
        In addition, this new budget structure will enable us to manage
    activities more effectively. The normal processing of tax returns
    generally proceeds from pre-filing activities to filing activities, and
    finally to compliance activities, should they prove necessary. Although
    these activities are interrelated, we currently distribute their
    resources among three appropriations, with unevenly distributed support
    costs. This system makes it difficult to manage, track, and report the
    full cost of a given Taxpayer Service or Enforcement program.
        This new budget structure will enable us to prepare a true
    performance-based budget by providing the capability to integrate
    operational and support costs into one appropriation, thereby allowing
    us to cost budget activities and programs fully for the first time. The
    new structure will also facilitate the full incorporation of
    performance measures into the budget, as the measures could be tied to
    funds in one appropriation rather than a series of program activities
    dispersed across multiple appropriations. The proposed new budget
    structure will allow stakeholders to assess more accurately the overall
    value of IRS programs, and make program reviews, such as the Office of
    Management and Budget's Program Assessment Rating Tool (PART), more
    effective, thus providing greater accountability and results-oriented
    management focus.
        The proposed budget structure combines the three major
    appropriations accounts--Processing, Assistance and Management (PAM);
    Tax Law Enforcement (TLE); and Information Systems (ISY)--into one
    appropriation called Tax Administration and Operations (TAO).
        The Taxpayer Service and Enforcement programs of the TAO
    appropriation are divided among eight critical program areas. These
    budget activities focus on Assistance, Outreach, Processing,
    Examination, Collection, Investigations, Regulatory Compliance, and
    Research. Full funding for each activity will be reflected in the
    budget, along with key performance measures. As we continue to move
    toward the development and implementation of this new structure, we
    will refine these program areas and the associated resource
    distributions to provide more accurate costing.
        Let me now provide more details on the budget request for the IRS.
       president's fiscal year 2006 budget seeks increase in enforcement
        The President's fiscal year 2006 budget requests $10.7 billion for
    the IRS, a 4.3 percent increase over the fiscal year 2005 enacted
    level. This request represents a 1 percent decrease in Taxpayer Service
    and a 2 percent decrease in Business Systems Modernization (BSM), but
    an 8 percent increase in enforcement.
        This budget includes $265 million for initiatives aimed at
    enhancing the enforcement of tax laws. This request is above the
    increases to fund the pay raise and other cost adjustments ($182
    million), for a total of $446 million for new enforcement investments
    and cost increases. It is important the Congress fully fund these cost
    increases and new enforcement investments. The President's budget
    proposal to fund them as contingent appropriations reflects the
    importance of this investment to the administration.
        To ensure full funding of the new enforcement investments, the
    budget proposes to employ a budget enforcement mechanism that allows
    for an adjustment by the Budget Committees to the section 302(a)
    allocation to the Appropriations Committees found in the concurrent
    resolution on the budget. In addition, the administration will also
    seek to establish statutory spending limits, as defined by section 251
    of the Balanced Budget and Emergency Deficit Control Act of 1985, and
    to adjust them for this purpose. To ensure full funding of the cost
    increases, either of these adjustments would only be permissible if the
    Congress funds the base level for IRS enforcement at $6.4 million and
    restricts the use of the funds to the specified purpose. The maximum
    allowable adjustment to the 302(a) allocation and/or the statutory
    spending limit would be $446 million for 2006, bringing the total
    enforcement level in the IRS to $6.9 million.
        We will use the additional funds for enforcement in several key
    ways to combat the tax gap. Combating tax non-compliance is a top
    priority for us. Americans deserve to feel confident that when they pay
    their taxes, their neighbors and competitors are doing the same. These
    investments will yield substantial results.
        The IRS yields more than $4 in direct revenue from its enforcement
    efforts for every $1 invested in its total budget. In fiscal year 2004,
    we brought in a record $43.1 billion in enforcement revenue--an
    increase of $5.5 billion from the year before, or 15 percent. Beyond
    the direct revenues generated by increasing audits, collection, and
    criminal investigations, our enforcement efforts have a deterrent
    effect on those who might be tempted to skirt their tax obligations.
        The nearly 8 percent increase for enforcement activities in the
    administration's 2006 IRS budget request will increase audits of
    corporations and high-income individuals as well as expand collection
    and criminal investigation efforts.

                            DETAILED BUDGET SUMMARY

        Our fiscal year 2006 request of $10.7 billion includes a transfer
    from the Justice Department of $53.913 million and 329 FTE for our
    portion of the Interagency Crime and Drug Enforcement (ICDE)
    appropriation, $277.6 million for a 2.3 percent pay raise and non-labor
    inflationary costs, and $264.6 million for initiatives aimed at
    enhancing our enforcement efforts. This request also includes a $22
    million rent reduction to result from consolidation of space, and the
    $134.1 million reduction to taxpayer service activities that we will
    responsibly leverage through productivity improvements and program
    reengineering, as previously discussed. We will take a balanced
    approach to these targeted reductions.
        In addition to the taxpayer service reengineering initiatives, we
    also expect to continue to realize savings, which we reinvest to other
    key areas, through the following other reengineering initiatives:
      --Savings from Increased Individual Master File (IMF) E-Filing
            (Reduction: -$7,700,000 and -190 FTE; Reinvestment: +$7,600,000
            and +12 FTE).--This savings is based on processing efficiencies
            from the projected decrease in IMF paper returns and processing
            costs for electronically filed IMF returns in Submission
            Processing Centers. These savings will be reinvested to enable
            us to continue our consolidation of IMF returns processing into
            fewer Submissions Processing sites.
      --Consolidation of Case Processing Activities to Maximize Resources
            Devoted to Front-Line Operations (Reduction: -$66,654,000 and
            -649 FTE; Reinvestment: +$66,654,000 and +585 FTE).--Staffing
            for conducting case processing activities that support our
            examination, collection and lien-processing programs will be
            consolidated from nearly 100 sites and centralized among four
            campuses (Philadelphia, Cincinnati, Ogden and Memphis).
      --Consolidation of Insolvency Activities to Maximize Resources
            Devoted to Front-Line Operations (Reduction: -$14,928,000 and
            -134 FTE; Reinvestment: +$14,928,000 and +156 FTE).--Staff
            conducting insolvency operations to protect the government's
            interest in bankruptcy proceedings will be consolidated from
            numerous sites and centralized at the Philadelphia campus.
      --Detection and Deterrence of Corrosive Corporate Non-Compliance
            (Reduction: -$6,711,000 and -52 FTE; Reinvestment: +$6,711,000
            and +52 FTE).--By using improved issue-management and risk-
            assessment strategies for examining corporations, the IRS
            expects to realize productivity improvements. These savings
            will be reinvested to fund front-line enforcement activities.
        Finally, the fiscal year 2006 request includes several program
    increases, totaling $264.6 million:
      --Attack Corrosive Non-Compliance Activity Driving the Tax Gap
            (+$149,700,000 and +920 FTE).--This initiative increases
            coverage of the growing number of high-risk compliance problems
            and addresses the largest portion of the tax gap--
            underreporting of tax. It proposes a funding increase across
            all major domestic and international compliance programs to
            leverage new workload-selection systems and case-building
            approaches from continuing reengineering efforts.
      --Detect and Deter Corrosive Corporate Non-Compliance (+$51,800,000
            and +236 FTE).--This initiative addresses complex, high-risk
            issues in abusive tax avoidance transactions, promoter
            activities, corporate fraud, and aggressive domestic and off-
            shore transactions, resulting in increased corporate and high-
            income return closures and audit coverage. This initiative also
            includes critical post-filing support provided by outside
            experts to expedite the resolution of issues at the field
            examination level, reducing taxpayer burden, and increasing the
            credibility of the Service's positions on the most complex and
            potentially highest compliance impact issues sent to court.
      --Increase Individual Taxpayer Compliance (+$37,900,000 and +417
            FTE).--This initiative addresses the tax gap through: the
            identification and implementation of actions needed to address
            non-compliance with filing requirements; increased Automated
            Underreporter resources to address the reporting compliance tax
            gap; increased audit coverage; and expanded collection work in
            Taxpayer Assistance Centers.
      --Combat Abusive Transactions by Entities with Special Tax Status
            (+$14,460,000 and +77 FTE).--This initiative focuses on the
            most egregious cases of non-compliance and identifies
            compliance risks sooner, reducing burden on compliant customers
            and enabling the development of new interventions to curtail
            the growth of abusive transactions.
      --Curtailing Fraudulent Refund Crimes (+$10,772,000 and +22 FTE).--
            This initiative is aimed at attacking the increased
            questionable refunds and return preparer fraud identified
            through expanded operations of the Fraud Detection Centers
            located on IRS campuses. Fraudulent refund schemes are one of
            the most serious threats to voluntary compliance and an IRS
            investigative priority.
        The fiscal year 2006 request of $10.7 billion funds the IRS's three
    appropriations: Tax Administration and Operations (TAO) for operations,
    service and enforcement; Business Systems Modernization (BSM) for
    modernization; and, the Health Insurance Tax Credit (HITCA) for
    administering a refundable tax credit for qualified individuals. I will
    describe each in turn.

                    TAX ADMINISTRATION AND OPERATIONS (TAO)

        For fiscal year 2006, we request funding of $10,460,051,000, an
    increase of 4.6 percent over the fiscal year 2005 appropriation of
    $9,998,164,640 for programs previously funded from the PAM, TLE, and
    ISY appropriations.
        The TAO appropriation provides resources for the IRS's service and
    enforcement programs. The IRS is responsible for ensuring that each
    taxpayer receives prompt and professional service. To that end, the
    IRS's assistance, outreach, and processing activities funded in the TAO
    appropriation are dedicated to providing assistance to taxpayers in all
    forms--electronic interaction, published guidance, paper
    correspondence, telephone contact, and face-to-face communication--so
    that taxpayers may fulfill their tax obligations timely and accurately.
    It also includes the resources the IRS requires to handle the
    processing and disposition of tax returns, refunds, and other filing
    materials.
        We are also responsible for the fair enforcement of the Nation's
    tax laws. Each year, a small percentage of taxpayers file erroneous
    returns or, for reasons both innocent and less benign, fail to file a
    return at all. The IRS conducts enforcement activities using a variety
    of methods, including correspondence audits, matching reporting
    documents (such as Forms W-2) to information on taxpayer returns, in-
    person audits, criminal investigations of those suspected of violating
    tax laws, and participation in joint governmental task forces. The
    IRS's examination, collection, investigations, regulatory compliance,
    and research activities funded in the TAO appropriation provide the
    resources required for equitable enforcement of the tax code and the
    investigation and prosecution of individuals and organizations that
    circumvent tax laws.

                      BUSINESS SYSTEMS MODERNIZATION (BSM)

        The IRS tax administration system, which collects $2 trillion in
    revenues annually, is critically dependent on a collection of 40-year-
    old, obsolete computer systems. Recognizing the long-term commitment
    needed to solve the problem of modernizing these antiquated systems,
    Congress and the administration created a special business systems
    modernization account. They designed the BSM program to bring the IRS's
    business systems to a level equivalent with best practices in the
    private and public sectors while managing the risks inherent in a
    program that is unquestionably one of the largest, most visible, and
    most sensitive modernization programs ever undertaken.
        In 2004, the modernization budget was $387 million. Based on the
    challenges the modernization program was facing, we realized the
    program needed to be smaller in 2005 so we requested a lesser budget of
    $285 million. In the end, Congress appropriated $203 million. One of
    the ways we are accommodating these changes is by substantially
    lowering the costs of the core infrastructure as well as the
    architecture, integration, and management parts of the BSM program in
    2005. These two areas are the programmatic elements of the program, and
    cost $160 million in fiscal year 2004. We certainly cannot justify that
    level of continued investment for a program that is roughly $200
    million. Therefore, we are dramatically reducing those core services to
    $107 million in fiscal year 2005 and we anticipate making additional
    reduction in fiscal year 2006. For fiscal year 2006, we request funding
    of $199 million for all BSM activities, substantially the same funding
    as the fiscal year 2005 appropriated level.
        Our most successful year ever for the modernization program was
    2004; we measured our success by the number of projects we delivered,
    the schedule and cost targets we hit, and the substantial improvements
    we made in program management.
        We delivered the first release of the Customer Account Data Engine
    (CADE) project in July 2004, allowing the IRS to process an initial set
    of the simplest tax returns on a new computer system for the first time
    in 40 years. We launched IRS's new Integrated Financial System (IFS),
    and declared it the IRS's financial accounting system of record. IFS
    will provide the capability for improved timeliness and accuracy of the
    financial reports and information available to IRS management and key
    stakeholders, facilitating continued clean financial audit opinions of
    the IRS. We deployed a full suite of e-Services products, providing tax
    professionals and businesses with new Web-based tools that dramatically
    improve their interface with the IRS. Additionally, we released
    Modernized e-File, whereby corporations and tax-exempt organizations
    can file their annual income tax and information returns
    electronically.
        We have also made significant improvements in our cost estimating
    and scheduling. In the Fall and Winter of 2003, we re-baselined the
    cost estimates and delivery schedules for each of the BSM program
    projects. Since then, we have shown a marked improvement in
    significantly reducing our variances between cost estimates and actual
    delivery costs from 33 percent in 2002 to 4 percent in 2004.
        In terms of improving program management, we identified four key
    areas that we had to address to enhance the performance of the
    modernization program:
      --Resizing our modernization efforts to better align with our
            management and skill capacity;
      --Engaging IRS business units to drive the modernization projects
            with a business focus;
      --Improving contractor performance on cost, schedule, and
            functionality; and
      --Hiring outside executives to achieve a better balance between large
            project management and tax administration experience.
        We have made significant progress in addressing each of these major
    challenges.
        First, the IRS will concentrate on a few key projects and will
    develop a track record of improved management and successful delivery
    of modernization projects.
        Second, the IRS assigned a business unit leader to each project
    with responsibility for leading the related BSM Governance Committee,
    and sharing accountability for delivering the modernization project as
    stated in their annual performance commitments.
        Third, we are making real progress in improving the accountability
    of the PRIME contractor. I meet monthly with the Chief Operating
    Officer of the Computer Sciences Corporation (CSC) to reinforce the
    accountability of the contractor to the IRS. Additionally, we have made
    major progress in restructuring BSM project contracts with the PRIME
    that shift an appropriate amount of financial risk to the contractor
    and tie costs to performance. These steps have resulted in improved
    contractor performance, as demonstrated in the deliverables in 2004 and
    the general adherence to costs and schedules.
        Fourth, we have made great progress in hiring experienced
    executives and seasoned managers from outside the agency who have
    expertise in running large-scale information technology programs and
    projects. A little over a year ago the mix of leadership at the top of
    the BSM program consisted of one outside expert and six internal IRS
    executives. Today, that mix will soon be five outside experienced
    outside experts and three internal IRS executives. This mix is a much
    better balance of the project management and technology talent and tax
    administration experience needed to successfully run the BSM program.
        While we were very successful in 2004, we have a lot of work ahead
    of us. It is critical that we continue this level of performance in
    2005 and beyond.
        Our focus for fiscal year 2005 is on maintaining substantial
    modernization work for three key tax administration systems that will
    provide additional benefits to taxpayers and IRS employees,
    specifically:
      --The Customer Account Data Engine (CADE) project;
      --Modernized e-File; and
      --Filing and Payment Compliance (F&PC).

                                      CADE

        CADE replaces the IRS's antiquated system called the Master File
    which is the Service's repository of taxpayer information. With CADE
    being the core fundamental component of the modernized systems, it is
    the IRS's highest priority technology project.
        We cannot over-emphasize the importance of CADE. The current Master
    Files have served the IRS for more than 40 years. However, they were
    developed in a different era and rely on an obsolete programming
    language and a flat-file system that still requires batch updates.
    These systems are very expensive to maintain; development of new
    applications costs the IRS two to three times what it would cost if
    they were already retired. Yet the IRS must update the Master Files
    every year to take into account tax law changes. As importantly, the
    vast majority of the workforce who are familiar with these old systems
    will be retiring over the next few years and we cannot hire individuals
    with these obsolete skills. Until the Master Files are replaced, the
    IRS can not offer service approaching what a typical financial services
    firm offers today (such as full account views for employees and real-
    time account updates and settlement).
        The returns we are processing in CADE are the most basic of 1040EZ
    forms and have a narrow range of taxpayer information, but it marks the
    first time since the 1960's that the IRS has processed individual tax
    returns in a new way. The success of CADE proves that we can deliver
    technology that will process tax returns on a 24-hour cycle, breaking
    the 40-year-old standard of processing on a weekly cycle. As of March
    25, 2005, CADE had processed 965,000 returns and generated nearly $318
    million in refunds to taxpayers. This achievement is significant. CADE
    will have processed over 1 million 1040EZ tax returns by the time of
    this hearing and for the 2005 filing season that figure should reach
    over 1.3 million returns.
        The CADE system is scheduled to be phased in over several years,
    processing increasingly more complex tax returns. When fully
    operational, CADE will be a modern database that will house tax
    information for more than 200 million individual and business tax
    returns. It will provide a variety of benefits to taxpayers, such as
    faster refunds (by over 50 percent) along with daily postings of
    transactions and updating accounts, which (with other technology
    elements) will significantly improve customer service and enforcement.
    With CADE, we will have the flexibility necessary to respond quickly to
    our complex tax law and tax reform changes.
        One of the most significant changes that we introduced in 2004 was
    the segmentation of CADE releases into two annual deliveries--one in
    July and one in January. The July delivery will involve higher risk,
    more complex functionality, and the January delivery will include
    filing season changes combined with additional changes as capacity
    permits. For the July release, returns will be available from the
    previous 6 months which will enable us to test the higher risk, complex
    changes with high volumes, and then go live with reduced volumes, which
    will mitigate the operational risks.

                               MODERNIZED E-FILE

        Modernized e-File will provide a single point Federal/State filing
    option for Forms 1120, 1120S (corporations) and 990 (tax-exempt
    organizations) returns in many States via a Web Services interface. Our
    work on Modernized e-File will be comprised of Release 3.1, which
    includes additional Forms 1120, 7004 (Application for Automatic
    Extension of Time to file Corporation Income Tax Return) and 990, and
    tax law changes for filing season 2004. Release 3.1 deployed initial
    operating capabilities on schedule on January 10, 2005. Release 3.2
    will provide an interface with State tax information retrieval systems
    and a redesign of the signature matching process for Form 8453 (U.S.
    Individual Tax Declaration for Electronic Filing).

           FILING AND PAYMENT COMPLIANCE/PRIVATE COLLECTION AGENCIES

        In 2004, Congress passed the American Jobs Creation Act, allowing
    the IRS to use Private Collection Agencies (PCAs). The legislation
    authorized the IRS to augment our collection efforts by allowing us to
    use PCAs to pursue what has been deemed as uncollectible tax
    liabilities; these agencies will not have enforcement authority and
    will only contact delinquent taxpayers to arrange voluntary, full-
    payment installment agreements. We will use the Filing and Payment
    Compliance (F&PC) system to analyze tax collection cases and divide the
    complex cases requiring direct IRS involvement from the simple
    ``balance due'' cases that can be handled by PCAs. The use of PCAs is
    to supplement--not supplant--current IRS personnel. Quite frankly, this
    activity is geared for an inventory that the IRS currently can not
    chase with existing resources.
        PCAs will benefit the IRS in three major ways:
      --PCAs will help reduce the significant and growing amount of tax
            liabilities deemed uncollectible.
      --PCAs will help maintain taxpayer confidence in our tax system.
      --PCAs will allow the IRS to focus on more difficult cases and
            issues.
        We expect to issue a Request for Procurement (RFP) in the next
    several weeks. We plan to award contract in June 2005, to begin an
    initial limited release of the uncollected tax inventory in January
    2006. We provided all interested parties notification via the IRS.gov/
    Business Opportunity webpage and electronic letters.
        Safeguarding taxpayer rights is paramount. The same IRS standards
    for customer service and protection of taxpayer rights will be strictly
    enforced. PCAs will be prohibited from threatening or intimidating
    taxpayers or implying that enforcement action will be taken against
    them. Specific safeguards to protect the taxpayer include:
      --Fair Debt Collection Practices Act protections;
      --Protections against unauthorized disclosures;
      --Assistance from the National Taxpayer Advocate; and,
      --Protections with respect to third party contacts, installment
            agreements and communications.
        The IRS expects to place cases with PCAs using the following
    criteria:
      --The taxpayer does not dispute the liability;
      --The liability is reportable on the Form 1040 series of returns;
      --The balance due is greater than $100; and,
      --The case does not involve a restriction on collection or otherwise
            indicate that discretion or enforcement action may be required
            to resolve the liability.
        The delivery of the CADE project was a major milestone, but we
    still have a long way to go and a lot of work ahead of us as we
    introduce technology changes and expand into processing more complex
    tax returns at greater volumes. To that end, we recognize that a
    project of this complexity must continually look at new technologies
    that can support the level of development and implementation
    productivity needed for a project of this scale.
        We certainly hope, and expect, that we will build on the successes
    of 2004, and we will continue to mature the modernization program by
    gaining a solid reputation for on-time deliveries with high
    productivity.

               HEALTH INSURANCE TAX CREDIT ADMINISTRATION (HITCA)

        In August 2002, the President signed Public Law 107-210, the Trade
    Act of 2002, which, among other things, provides a refundable tax
    credit for the cost of health insurance for certain individuals who
    receive a trade readjustment allowance or a benefit from the Pension
    Benefit Guaranty Corporation (PBGC). The Health Insurance Tax Credit
    Administration (HITCA) Appropriation funds the costs to administer a
    refundable tax credit for health insurance to qualified individuals.
    The tax credit is equal to 65 percent of the health insurance premium
    paid by eligible persons for themselves and qualifying family members.
    For fiscal year 2006 we request funding of $20,210,000, a decrease of
    41.5 percent below the fiscal year 2005 appropriation of $34,562,272.
    Costs for the HITCA program have declined since implementation due to
    our active program oversight and management, as well as several cost-
    cutting initiatives we began to implement in March 2004. We developed a
    comprehensive action plan outlining cost-reduction initiatives and are
    following it to achieve these significant savings.

                              PROGRAM PERFORMANCE

        The IRS expects to achieve the following levels of performance
    after attaining full performance of the requested fiscal year 2006
    initiatives:
      --Increase in field examinations for high-income individuals with
            complex returns; significant increase in collection processed;
            and closing of over 40 percent more delinquent balance-due
            accounts in fiscal year 2008 than in fiscal year 2004.
      --Nearly double the audit coverage for individuals with income
            between $250,000 and $1 million, from 1.5 percent in fiscal
            year 2004 to 2.8 percent in fiscal year 2008.
      --Auditing 15 percent more individuals earning above $1 million, from
            3.4 percent projected for fiscal year 2004 to 3.9 percent in
            fiscal year 2008.
      --Significantly more collection cases processed, closing 50 percent
            more delinquent accounts in fiscal year 2008 than fiscal year
            2004.
      --Double the audit coverage for mid-size corporations, from 7.6
            percent in fiscal year 2004 to 16 percent in fiscal year 2008.
      --Increased efforts to deter abusive tax shelters among corporations.

                             LEGISLATIVE PROPOSALS

        The President's fiscal year 2006 request includes several proposals
    that will assist me in managing the agency more efficiently and
    effectively. These proposals, if enacted, will allow us to focus more
    resources on high-income, high-risk areas, automate several routine
    transactions, use electronic data to reduce costly manual transactions,
    consolidate resources related to judicial and counsel review, and
    broaden administrative authorities and accesses to support further
    electronic administration and tax reform. We are seeking to:
      --Make Section 1203 of the IRS Restructuring and Reform Act of 1998
            more effective and fair;
      --Curb the use of frivolous submissions and filings made to impede or
            delay tax administration;
      --Allow for the termination of installment agreements for failure to
            file returns and for failure to make tax deposits;
      --Consolidate judicial review of collection due process cases in the
            United States Tax Court;
      --Eliminate the monetary threshold for counsel review of offers in
            compromise;
      --Allow the Financial Management Service to retain transaction fees
            otherwise paid from IRS appropriations from levied amounts to
            recover delinquent taxes;
      --Extend the due date for electronically filed returns to provide
            additional incentive for taxpayers to e-file and expand the
            authority to require electronic filing by businesses and exempt
            organizations; and,
      --Allow IRS to access information in the National Directory of New
            Hires for tax administration purposes.

                                   CONCLUSION

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

        Senator Bond. Thank you very much, Commissioner. Now we
    turn to Mr. George.
        Now, again, as I said, your full statement will be
    submitted as a part of the record and we invite you to give a
    summary.

                         STATEMENT OF J. RUSSELL GEORGE

        Mr. George. Thank you, Mr. Chairman. Chairman Bond, Ranking
    Member Murray, Senator Dorgan. Thank you for the opportunity to
    testify this morning. As you consider the fiscal year 2006
    appropriation for the Internal Revenue Service, while I've held
    the position of Treasury Inspector General for Tax
    Administration for a little over 3 months, many of the issues I
    will discuss today are issues that I worked on over a decade
    ago. I served as a staff director and chief counsel of the
    House subcommittee with oversight responsibilities of the
    management and financial accounting practices of Federal
    agencies including the Internal Revenue Service. Unfortunately,
    many of the very same challenges facing the IRS not only
    persist 10 years later but in some cases have actually
    worsened. The office of the Treasury Inspector General for Tax
    Administration or, TIGTA, has identified 10 significant
    challenges facing the Internal Revenue Service.
        They are: modernizing IRS systems, ensuring tax law
    compliance, reducing tax law complexity, preventing erroneous
    and improper payments, providing quality customer service,
    protecting taxpayers and taxpayer rights, securing IRS
    employees, facilities, and information systems, integrating
    performance and financial management, managing human capital,
    and finally processing returns and implementing tax law changes
    during the tax filing season.
        My written statement addresses each of these challenges.
    Given the time constraints I will limit my comments to three of
    these issues, those being modernizing IRS systems, providing
    quality customer service, and ensuring tax law compliance.
        The first issue, modernizing IRS computer systems, that's
    been a persistent challenge for many years. Unfortunately, it
    will likely remain a challenge for the foreseeable future. In
    1986 the IRS initiated the tax systems modernization program to
    replace its antiquated computer systems. After spending over 10
    years and approximately $3 billion on tax systems modernization
    the program was scrapped and a new effort was begun. The new
    effort is called Business Systems Modernization. It is
    estimated that this modernization effort will last up to 15
    years and cost over $8 billion. While the program is
    progressing the modernization effort is behind schedule, it is
    over budget and it's still delivering less functionality than
    originally planned. TIGTA, the government accountability
    office, and the IRS oversight board have all expressed concerns
    about the ability of the IRS to effectively manage its
    portfolio or modernization projects. To succeed the IRS must
    demonstrate that it can handle the overall management of the
    modernization effort.
        A second challenge facing the IRS is one that affects many
    taxpayers this time of year, receiving quality customer
    service. As the commissioner noted in his testimony the IRS has
    made progress in customer service, however, I am concerned that
    the IRS may take a step backwards on customer service if it
    follows through with the proposal to close many taxpayer
    assistance centers. The taxpayer assistance centers are walk-in
    sites where taxpayers can receive answers to both account
    questions and tax law questions as well as receive assistance
    preparing their tax returns. The IRS is considering closing
    nearly 20 percent of the approximately 400 taxpayer assistance
    centers nationwide. As part of an ongoing audit we at TIGTA are
    reviewing the methodology used by the IRS to determine which
    taxpayer assistance centers to close. At this point I am
    skeptical that the IRS has adequate data to assess the impact
    that closing these centers will have on customer service. I'm
    also concerned that the IRS has insufficient data to draw
    conclusions on the likelihood that taxpayers who used these
    centers in the past will be able to use other methods of
    seeking help, such as the Internet or telephone. I strongly
    recommend that the IRS further research these issues before
    closing selected taxpayer assisted centers.
        Finally, on the topic of improving tax law compliance the
    IRS continues to and will always face challenges in ensuring
    that taxes are paid of time. According to IRS estimates the tax
    gap, which again is defined as the difference between what
    taxpayers are supposed to pay and what is actually paid is as
    noted approximately between $312 and $353 billion each year. To
    improve tax compliance the IRS must begin to use private
    contractors to collect taxes in the next year. While the use of
    private collection agencies could result in significant
    recoveries of unpaid taxes the potential for abuse exists. My
    office has developed a three-phase strategy to monitor this
    initiative. We will be vigilant in ensuring the IRS effectively
    uses its new authority to use private debt collectors while
    also ensuring that taxpayers due rights and privacy rights are
    protected.

                               PREPARED STATEMENT

        Mr. Chairman, members of the subcommittee, I hope this
    brief discussion of three of the major challenges facing the
    IRS aids you as you consider its fiscal year 2006
    appropriation. Thank you for allowing me to share my views. I
    look forward to taking whatever questions you might have 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 2006 appropriations for the Internal Revenue
    Service. As the relatively new Treasury Inspector General for Tax
    Administration--having been on the job for 16 weeks--my observations
    are based on the body of work my organization has developed through
    audits and investigations of the IRS. I will focus on the major
    challenges facing the IRS to assist you in your consideration of the
    IRS's fiscal year 2006 budget.
        Though I have been the Treasury Inspector General for Tax
    Administration (TIGTA) for only a few short months, my first experience
    conducting oversight of the Internal Revenue Service (IRS) dates back a
    number of years. In 1995, one of the initial charges I received as
    staff director of the House Subcommittee on Government Management,
    Information and Technology was to examine inefficiency at the IRS.
    Under then Chairman Stephen Horn's leadership, we reviewed several
    issues such as the IRS's tax systems modernization program, as well as
    ways to improve Federal debt collection practices. A decade later, I am
    disappointed to report that some of the same concerns Chairman Horn
    reviewed 10 years ago continue at the IRS today.
        While the IRS faces longstanding challenges, it deserves credit for
    making marked progress in an area that will always be a challenge:
    providing quality customer service to the American taxpayer.
    Commissioner Everson's guiding principle for the IRS is
    Service+Enforcement=Compliance. Over the past few years, TIGTA audits
    have shown the accuracy of information provided by the IRS to taxpayers
    with tax law questions has generally improved, the average time spent
    by taxpayers waiting for IRS assistance on the phone or in person has
    declined, and the general professionalism with which taxpayers were
    treated by the IRS has increased. Since most interactions between the
    IRS and taxpayers involve these types of customer services, it is
    encouraging to see that the IRS's focus on customer service has made
    headway.

                           CHALLENGES FACING THE IRS

        Despite such progress in customer service, improvements need to be
    made in this and other areas where significant challenges face the IRS
    in accomplishing its mission. The Treasury Inspector General for Tax
    Administration (TIGTA) has identified the following management and
    performance challenges that confront the IRS:
      --Modernizing IRS Systems;
      --Ensuring Tax Law Compliance;
      --Reducing Tax Law Complexity;
      --Preventing Erroneous and Improper Payments;
      --Providing Quality Customer Service;
      --Protecting Taxpayers and Taxpayer Rights;
      --Securing IRS Employees, Facilities, and Information Systems;
      --Integrating Performance and Financial Management;
      --Managing Human Capital; and,
      --Processing Returns and Implementing Tax Law Changes during the Tax
            Filing Season.\1\
    ---------------------------------------------------------------------------
        \1\ The filing season refers to the period from January through
    mid-April when most individual income tax returns are filed.
    ---------------------------------------------------------------------------
    Each of these areas presents its own unique challenges, which will be
    addressed individually in the remaining portion of my testimony.

                            MODERNIZING IRS SYSTEMS

        Modernizing the IRS's computer systems has been a persistent
    challenge for many years, and will likely remain a challenge for the
    foreseeable future. As I noted above, back in 1995, under Chairman
    Stephen Horn's leadership, the House Subcommittee on Government
    Management, Information and Technology began reviewing what was then
    referred to as tax systems modernization.
        The IRS initiated the tax systems modernization program in 1986.
    The purpose of the tax systems modernization program was to replace the
    antiquated computer systems that the IRS still relies on today to
    conduct tax administration. The tax systems modernization program
    intended to create a tax processing environment that was virtually
    paper-free, an environment where taxpayer information would be readily
    available to IRS employees to update taxpayer accounts and respond to
    taxpayer questions.\2\ The program, however, was plagued by management
    and technical weaknesses.\3\ After spending over $3 billion on tax
    systems modernization,\4\ the program was scrapped and a new effort was
    begun under a fresh moniker, Business Systems Modernization (BSM)
    program.
    ---------------------------------------------------------------------------
        \2\ See General Accounting Office Report GAO/AIMD/GGD-98-54, Tax
    Systems Modernization: Blueprint Is a Good Start But Not Yet
    Sufficiently Complete to Build or Acquire Systems (Feb. 1998).
        \3\ See General Accounting Office Report GAO/T-GGD-97-79, IRS
    Management: Improvement Needed in High-Risk Areas (Apr. 14, 1997).
        \4\ See General Accounting Office Report T-GGD-97-52, Modernization
    of Processes and Systems Necessary to Resolve Problems (Mar. 4, 1997).
    ---------------------------------------------------------------------------
        This latest effort to modernize the IRS's systems, the BSM program,
    began in fiscal year 1999. The purpose of the BSM program is to
    modernize the IRS's technology and related business processes.
    According to the IRS, this effort will involve integrating thousands of
    hardware and software components. Through March 2005, the IRS has
    received appropriations of approximately $1.8 billion to support the
    BSM program, and the fiscal year 2006 budget requests an additional
    $199 million. It is estimated that the BSM program will last up to 15
    years and cost over $8 billion.\5\
    ---------------------------------------------------------------------------
        \5\ The Internal Revenue Service Has Appropriate Processes to
    Accept Modernization Software From Developers (Reference Number 2005-
    20-028, February 2005).
    ---------------------------------------------------------------------------
        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\6\ to design, develop, and integrate the modernized
    computer systems.
    ---------------------------------------------------------------------------
        \6\ The PRIME stands for Prime Systems Integration Services
    Contractor.
    ---------------------------------------------------------------------------
        The joint effort between the IRS and CSC has shown progress. In
    July 2004, the IRS released the first part of the Customer Account Data
    Engine (CADE) project. The CADE is the foundation for managing taxpayer
    accounts in the modernization plan. The CADE will replace the IRS's
    existing Master File.\7\ Once fully operational, the capabilities of
    the CADE will far surpass those of the Master File.\8\
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        \7\ The Master File is the IRS database for storing taxpayer
    account information on individuals, businesses, employee retirement
    plans, and exempt organizations.
        \8\ 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 on-line 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.
    ---------------------------------------------------------------------------
        The first release of the CADE allowed the IRS to process some of
    the simplest tax returns, Form 1040EZ, using a new database of taxpayer
    accounts. The IRS has also deployed projects that provide value to
    taxpayers, such as ``Where's My Refund?,'' the web-based application
    that allows taxpayers to check the status of their refunds. In
    addition, the IRS and its contractors have built the infrastructure
    needed to support these projects and have developed an enterprise
    architecture to guide the Business Systems Modernization (BSM) program.
        Although progress is being made, the modernization program is
    behind schedule, over budget, and is delivering less functionality than
    originally planned. TIGTA, GAO and the IRS Oversight Board have
    expressed concerns over the IRS's ability to effectively manage its
    portfolio of BSM projects. Both TIGTA and GAO have recommended that the
    IRS slow the pace of the BSM program due to some of the risks that have
    surfaced. Specifically, the imbalance between the number and pace of
    the BSM projects and available management capabilities has added
    significant cost, schedule, and performance risks that have continued
    to escalate.
        In addition, 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 that CSC's performance and accountability
    are effectively managed.
        Without these four challenges being addressed, modernization will
    not succeed.\9\ In addition, IRS is reassessing its relationship with
    the PRIME contractor. For the past 6 years, the PRIME contractor has
    performed the role of system integrator and program manager for the BSM
    effort. In the new operating model, the IRS assumes responsibility for
    overall program management. The IRS must demonstrate that it can
    effectively manage the BSM program before its chances for success
    improve.
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        \9\ Annual Assessment of the Business Systems Modernization Program
    (Reference Number 2004-20-107, dated June 2004).
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                          ENSURING TAX LAW COMPLIANCE

        The IRS continues to face challenges in ensuring that taxes owed
    are paid on time. The importance of this issue cannot be overstated.
    The Nation's ability to provide for the general welfare and protect its
    citizens is based on the ability to raise revenue through taxes. Yet,
    the tax gap, which the IRS defines as the difference between what
    taxpayers are supposed to pay and what is actually paid, is at
    staggering levels.\10\ On March 29, 2005, the IRS released updated
    estimates of the tax gap. For tax year 2001, the IRS estimated the
    annual gross tax gap \11\ to be between $312 billion and $353
    billion.\12\
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        \10\ See written statement of Commissioner of Internal Revenue Mark
    Everson before the Committee on Finance United States Senate Hearing on
    ``Bridging the Tax Gap,'' (July 21, 2004).
        \11\ The amount of tax that is imposed for a given tax year, but is
    not paid voluntarily and timely.
        \12\ It is worth noting that the recently released tax gap figures
    noted above did not update key segments of the tax gap that are at
    least 15 years old, such as nonfiled tax returns and underreported
    corporate income tax for large corporations.
    ---------------------------------------------------------------------------
        For some time, the IRS, the Congress, and other stakeholders have
    been concerned about the slow erosion of voluntary tax compliance. IRS
    tax compliance programs must ensure that noncompliant taxpayers who do
    not meet their tax obligations are identified and penalized. The
    undermining of voluntary compliance begins when honest taxpayers
    believe that others are not paying their fair share.\13\
    ---------------------------------------------------------------------------
        \13\ The IRS fiscal year 2006 budget requests a significant
    increase in enforcement funds. As the IRS attempts to increase
    enforcement, it is worth considering the results of a 2003 GAO report.
    GAO found that the IRS's frontline enforcement employees understood--
    but feared--section 1203 of the Internal Revenue Service Restructuring
    and Reform Act of 1998. Section 1203 outlines conditions for firing IRS
    employees for committing any of 10 acts of misconduct. These
    enforcement employees also reported that, because of section 1203,
    their work takes longer and the likelihood of their taking an
    enforcement action, such as recommending a seizure has decreased. See
    General Accounting Office Report GAO-03-394, IRS and TIGTA Should
    Evaluate Their Processing of Employee Misconduct under Section 1203
    (February 2003).
    ---------------------------------------------------------------------------
        To improve tax compliance, the IRS must fully exercise its
    authority under the law. The American Jobs Creation Act of 2004 enables
    the IRS to use private contractors to collect unpaid taxes. While the
    use of private collection agencies could result in significant
    recoveries of unpaid taxes, the potential for abuse exists. TIGTA has
    developed a three phase audit strategy to monitor this initiative. In
    the first phase, TIGTA will review the IRS's planning and initial
    implementation of the program. 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 uses its new authority to use private
    debt collectors, while also ensuring that taxpayers' due process and
    privacy rights are protected.
        Congress has provided other statutory tools to the IRS to increase
    tax compliance. The IRS has the legal authority to charge a monetary
    penalty, called the Failure to Pay (FTP) tax penalty, against taxpayers
    who fail to pay their taxes on time.\14\ The law also requires the IRS
    to charge interest on FTP tax penalties.\15\ A recent TIGTA report
    found that the IRS computer system would assess the FTP tax penalty on
    taxpayers' accounts, but would not officially charge these assessments
    to accounts. By not assessing these penalties periodically, the IRS has
    foregone the interest associated with them. If the IRS had assessed all
    penalty accruals at least quarterly, TIGTA estimates that for calendar
    year 2002 alone, over $817 million in interest on accrued penalties
    would be due to the IRS.\16\ This is one example of how the IRS could
    better use the tools at its disposal.
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        \14\ 26 U.S.C.  6651 (2004).
        \15\ 26 U.S.C.  6601(e)(2)(A) (2004).
        \16\ This report also found that the IRS's current practice results
    in inconsistent treatment of taxpayers. Some taxpayers in hardship
    situations, such as victims of natural disasters or military personnel
    serving in combat zones, have accounts that are administered by the IRS
    manually rather than by computer. IRS personnel periodically calculate
    and manually assess penalties on these accounts. Because the manually
    computer FTP penalties are periodically assessed, interest is charged
    to these taxpayer accounts but not charged to taxpayer accounts
    administered by computer. Procedures Regarding the Failure to Pay Tax
    Penalty Result in Inconsistent Treatment of Taxpayers and Hundreds of
    Millions of Dollars in Lost Revenue (Reference Number 2005-30-052,
    dated March 2005).
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        In addition to more fully exercising authority provided by
    Congress, the IRS must obtain timely and reliable data on the tax gap
    to improve tax compliance. To collect such data, the IRS launched the
    National Research Program, a study of individual taxpayer reporting
    compliance for tax year 2001. The National Research Program is intended
    to produce timely and reliable data that will allow the IRS to better
    target its limited enforcement resources on taxpayers who are not
    complying with the tax law instead of law-abiding individuals.
        While timely and reliable data will help the IRS quantify
    noncompliant segments of the population, different approaches are also
    needed to determine how to most effectively address noncompliance. The
    Taxpayer Advocate's 2004 Annual Report to Congress depicts some of the
    complexities involved in structuring an enforcement program to address
    the tax gap. The Taxpayer Advocate also describes the efforts the IRS
    still needs to make to analyze the effectiveness of various compliance
    techniques.\17\ Similarly, in two recent audit reports, TIGTA
    identified examination programs that the IRS implemented nationwide
    before obtaining results on their possible effectiveness or before
    implementing an effective strategy to measure the results of the
    program.\18\
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        \17\ National Taxpayer Advocate 2004 Annual Report to Congress
    (Dec. 31, 2004).
        \18\ In TIGTA's judgment, the IRS implemented the High-Income
    Taxpayer Strategy, designed to target individuals with the financial
    resources to use sophisticated methods of tax avoidance, without a
    method and specific baselines to measure the strategy's success. In
    addition, the IRS introduced the Limited Issue Focused Examination
    (LIFE) process to reduce the length of examinations of large and mid-
    sized businesses. While the LIFE process has merit, the IRS implemented
    it nationwide before obtaining results on its possible effectiveness.
    The High Income Taxpayer Strategy Was Effectively Implemented, Although
    Its Success Still Needs to Be Determined (Reference Number 2005-30-012,
    dated November 2004) and The Limited Issue Focused Examination Process
    Has Merit, but Its Use and Productivity Are Concerns (Reference Number
    2005-30-029, dated February 2005).
    ---------------------------------------------------------------------------
        Accurate measures of the effectiveness of actions taken to reduce
    the tax gap are critical to the IRS for strategic direction, budgeting,
    and staff allocation. The Department of the Treasury also needs such
    measures for the purpose of creating tax policy. Additionally, the
    Congress could use this information to develop legislation that
    improves the efficacy of the tax system.
        In addition to gathering better compliance data, TIGTA, other
    oversight groups, and interested stakeholders have made a number of
    recommendations to close the tax gap. These recommendations include:
    reducing the complexity of the tax code; instituting withholding on
    non-employee compensation; improving compliance with estimated tax
    payments; using document matching to verify business income; addressing
    escalating levels of late filed returns; increasing resources in the
    IRS enforcement functions; and addressing delays in systems
    modernization. While reducing the complexity of the tax code lies
    outside the authority of the IRS, the remaining recommendations are
    within the IRS's discretion and should be acted upon to further tax
    compliance.

                          REDUCING TAX LAW COMPLEXITY

        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 Taxpayer Advocate's 2004 Annual Report to
    Congress, the most serious problem facing taxpayers and the IRS is the
    complexity of the Internal Revenue Code.\19\ 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.\20\
    ---------------------------------------------------------------------------
        \19\ National Taxpayer Advocate 2004 Annual Report to Congress
    (Dec. 31, 2004).
        \20\ Study of the Overall State of the Federal Tax System and
    Recommendations for Simplification, Pursuant to Section 8022(3)(B) of
    the Internal Revenue Code of 1986, Staff of the Joint Committee on
    Taxation, JCS-3-01 (Apr. 2001).
    ---------------------------------------------------------------------------
        The complexity of the code hampers the ability of the IRS to
    administer the Nation's tax system and confuses most taxpayers. The IRS
    has attempted to provide assistance to taxpayers with questions about
    the tax code through toll-free telephone lines, Taxpayer Assistance
    Centers (TACs), kiosks, and the IRS internet web 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.
        Our most recent audit of the accuracy of responses provided to tax
    law questions received via the toll-free telephone lines during the
    2004 Filing Season found that 62 percent of the answers given were
    correct.\21\ The IRS conducted its own tests and found an accuracy rate
    of 79 percent. Both of these figures were well below the IRS's accuracy
    goal of 85 percent for this service. Tax law complexity contributes to
    the IRS's challenges in reaching these accuracy goals, as well as to
    taxpayer frustration with attempting to decipher the tax code.
    ---------------------------------------------------------------------------
        \21\ Additional Effort Answering Tax Law Questions Would Improve
    Customer Service (Reference Number 2004-40-150, dated August 2004).
    ---------------------------------------------------------------------------
        Besides 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. Administering such a complex tax code
    makes the job of pursuing these abusive tax avoidance schemes
    challenging and costly to the IRS. For example, in 2004, the hours
    revenue agents spent per return on examinations increased by 23 percent
    for individual tax returns and 19 percent for corporate tax returns
    compared to 2003 figures.\22\
    ---------------------------------------------------------------------------
        \22\ TIGTA analysis of IRS Data Book information.
    ---------------------------------------------------------------------------
        As part of its goal to improve service to taxpayers, the IRS
    includes simplifying the tax process as an objective in its new
    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
    the Congress. Thus, the IRS must work extensively with these
    stakeholders, as well as the Department of the Treasury, to identify
    and develop legislative recommendations that would reduce tax law
    complexity and taxpayer burden.

                   PREVENTING ERRONEOUS AND IMPROPER PAYMENTS

        One of the goals of The President's Management Agenda is to reduce
    erroneous payments.\23\ Further, the Improper Payments Information Act
    of 2002 \24\ 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.
    ---------------------------------------------------------------------------
        \23\ 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.
        \24\ Public Law No. 107-300, 116 Stat. 2350.
    ---------------------------------------------------------------------------
        Improper and erroneous payments include inadvertent errors,
    payments for unsupported or inadequately supported claims, payments for
    services not rendered, payments to ineligible beneficiaries, and
    payments resulting from outright fraud and abuse by program
    participants or Federal employees. For the IRS, improper and erroneous
    payments generally involve improperly paid refunds, tax return filing
    fraud, or overpayments to vendors or contractors.
        Some tax credits, such as the Earned Income Tax Credit (EITC),
    provide opportunities for taxpayer abuse. The EITC is a refundable
    credit available to taxpayers who do not exceed a certain amount of
    income per year. The EITC was intended to provide significant benefits
    to the working poor, but some taxpayers have abused the credit, which
    has resulted in a significant loss of revenue to the Federal
    Government. An IRS compliance study of tax year 1999 returns estimated
    between $8.5 billion and $9.9 billion (27 to 32 percent) of the $31
    billion in EITC claimed for tax year 1999 should not have been
    paid.\25\ A TIGTA review of EITC claimed for tax year 2002 estimated
    that the IRS allowed over $16 million in potentially erroneous credits
    because the claimed qualifying ``child'' was significantly older than
    the primary taxpayer.
    ---------------------------------------------------------------------------
        \25\ IRS report, Compliance Estimates for Earned Income Tax Credit
    on 1999 Returns (dated February 2002).
    ---------------------------------------------------------------------------
        In addition to erroneous payments of credits, contract expenditures
    represent a significant outlay of IRS funds and are also susceptible to
    mistakes or abuse. The IRS approved payment of nearly a billion dollars
    for the Business Systems Modernization contract. Initially, neither the
    IRS nor the contractor could provide proper supporting documentation
    for approximately $9.5 million (approximately 54 percent of the $17.6
    million sampled) in direct charges.\26\ The contractor subsequently
    provided additional documentation, and TIGTA was able to verify all but
    approximately $52,200. Nevertheless, to assure that its billings are
    adequately justified and to facilitate timely independent reviews, the
    IRS should strengthen its invoice review process by routinely
    requesting and reviewing a sample of supporting documents.
    ---------------------------------------------------------------------------
        \26\ Improvements Are Needed in the Invoice Review Process for the
    Business Systems Modernization Contract (Reference Number 2004-10-117,
    dated June 2004).
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                       PROVIDING QUALITY CUSTOMER SERVICE

        Providing quality customer service to the taxpayer is not only a
    primary goal of the IRS, but it is also one of its major management
    challenges. The Commissioner has frequently stated that service
    combined with enforcement will result in compliance. Quality taxpayer
    service includes helping the taxpaying public understand their tax
    obligations while making it easier to participate in the tax system.
        Since the passage of the IRS Restructuring and Reform Act of 1998
    (RRA 98),\27\ the IRS's focus on customer service has led to many
    improvements. Taxpayer satisfaction rates with the IRS have increased
    since the Act's passage, growing almost 2 percent in 2004 alone.\28\
    Every year, the IRS helps millions of taxpayers understand their tax
    obligations by answering questions on its toll-free telephone lines or
    in person at local offices, making information available on its Web
    site, and responding to correspondence.
    ---------------------------------------------------------------------------
        \27\ Public Law No. 105-206, 112 Stat. 683 (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.).
        \28\ Special Report on IRS Fiscal 2006 Budget, IRS Oversight Board,
    March 15, 2005.
    ---------------------------------------------------------------------------
        The IRS internet site, www.IRS.gov, is an excellent source for
    forms, publications, and other guidance. Taxpayers visited the site
    over 139 million times last year.\29\ The site also received an award
    for being the Nation's most reliable government internet site.\30\
    Electronic filing of tax returns continues to grow, and the ability to
    check the status of tax refunds online has been a successful IRS
    project that is helpful to taxpayers.\31\
    ---------------------------------------------------------------------------
        \29\ IRS.gov Cited As Most Reliable Government Web Site, IR-2004-
    131, October 25, 2004.
        \30\ Id.
        \31\ Free File Tops Last Year's Total, IR-2005-36, March 23, 2005.
    ---------------------------------------------------------------------------
        As for the toll-free telephone system, access by taxpayers to the
    IRS via telephone has improved. Callers were able to connect with the
    IRS more easily and received better, quicker service. Surveys of
    callers during the 2004 filing season showed that the vast majority of
    taxpayers were satisfied with the services they received.\32\ While the
    IRS exceeded its goals in professionalism and timeliness, the accuracy
    of answers provided to taxpayers on tax law questions slipped in 1 year
    from 73 percent to 62 percent. TIGTA attributed this decrease to IRS
    employees not always using the required Probe and Response Guide to
    obtain sufficient information from taxpayers or the employees were not
    correctly interpreting the tax law.
    ---------------------------------------------------------------------------
        \32\ Taxpayers Experienced Improved Access to Toll-Free Telephone
    Services During the 2004 Filing Season (Reference Number 2004-30-144,
    dated August 2004).
    ---------------------------------------------------------------------------
        The IRS has obviously made strides in customer service over the
    past 7 years. TIGTA is concerned, however, that the IRS may disrupt the
    balance between customer service and enforcement by closing many of its
    Taxpayer Assistance Centers. 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. Over the past few years,
    customer service at Taxpayer Assistance Centers has shown
    improvement.\33\ Yet, the IRS is considering closing nearly a quarter
    of its approximately 400 TACs nationwide. TIGTA is skeptical that the
    IRS has adequate data to assess the impact that closing TACs will have
    on customer service.
    ---------------------------------------------------------------------------
        \33\ Customer Service at the Taxpayer Assistance Centers Is
    Improving but Is Still Not Meeting Expectations (Reference Number 2005-
    40-021, dated December 2004).
    ---------------------------------------------------------------------------
        From the information provided by the IRS to TIGTA, the IRS is using
    the following criteria to select TACs to close: location, labor cost,
    facility cost, workload, and demographics. The last criterion,
    demographics, falls short of capturing the information needed to make a
    well-informed decision. To compile information on the demographics of a
    particular TAC location, the IRS is collecting data, by zip code, on
    population size, income level, age, unemployment, and percent of
    population who e-file. TIGTA believes this information is insufficient
    to draw conclusions on the capability and likelihood that taxpayers who
    have used these centers in the past will be willing to use alternative
    methods of seeking help, such as the internet or telephone. I strongly
    recommend that the IRS further research these issues before closing
    TACs.

                    PROTECTING TAXPAYERS AND TAXPAYER RIGHTS

        Congress realized the importance of protecting taxpayers and
    taxpayer rights when it passed 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. However, revenue
            officers who issue levies manually still are not always
            properly notifying taxpayers of their appeal rights.\34\
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        \34\ Additional Efforts Are Needed to Ensure Taxpayer Rights Are
    Protected When Manual Levies Are Issued (Reference Number 2004-30-094,
    dated April 2004).
    ---------------------------------------------------------------------------
      --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.\35\
    ---------------------------------------------------------------------------
        \35\ Fiscal year 2004 Statutory Audit of Compliance With Legal
    Guidelines Restricting the Use of Records of Tax Enforcement Results
    (Reference Number 2004-40-066, dated March 2004).
    ---------------------------------------------------------------------------
      --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 for maintaining
            certified mail listings.\36\
    ---------------------------------------------------------------------------
        \36\ Fiscal year 2004 Statutory Review of Compliance With Lien Due
    Process Procedures (Reference Number 2004-30-086, dated April 2004).
    ---------------------------------------------------------------------------
      --Seizures.--The IRS did not always comply with legal provisions and
            internal procedures when conducting seizures. The TIGTA review
            did not identify any instances where taxpayers were adversely
            affected, but not following legal and internal guidelines could
            result in abuses of taxpayer rights.\37\
    ---------------------------------------------------------------------------
        \37\ Legal and Internal Guidelines Were Not Always Followed When
    Conducting Seizures of Taxpayers' Property (Reference Number 2004-30-
    149, dated August 2004).
    ---------------------------------------------------------------------------
      --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 for illegal tax protestor designations. We found
            that the IRS has not reintroduced such designations on the
            Master File, taxpayer accounts that were formerly coded as
            illegal tax protestor accounts have not been assigned similar
            designations, and current IRS publications do not refer to
            illegal tax protestors. However, a few illegal tax protestor
            references still exist in manuals, job aids, computer systems,
            and isolated case files.\38\
    ---------------------------------------------------------------------------
        \38\ Fiscal year 2004 Statutory Audit of Compliance With Legal
    Guidelines Prohibiting the Use of Illegal Tax Protester and Similar
    Designations (Reference Number 2004-40-109, dated June 2004).
    ---------------------------------------------------------------------------
      --Denials of Requests for Information.--The IRS improperly withheld
            information from requesters in 4.4 percent of the Freedom of
            Information Act \39\ and Privacy Act of 1974 \40\ requests, and
            14.6 percent of the 26 U.S.C.  6103 requests reviewed.\41\
    ---------------------------------------------------------------------------
        \39\ 5 U.S.C.  552.
        \40\ 5 U.S.C.  552a.
        \41\ Improvements Are Needed to Ensure Compliance With the Freedom
    of Information Act (Reference Number 2004-40-064, dated March 2004).
    ---------------------------------------------------------------------------
      --Collection Due Process.--IRS Appeals Officers and Settlement
            Officers substantially complied with the requirements of the
            law when conducting collection due process hearings. However,
            the Settlement Officers did not always address all the issues
            raised by the taxpayers.\42\
    ---------------------------------------------------------------------------
        \42\ Appeals Complied With the Provisions of the Law for the
    Collection Due Process (Reference Number 2004-40-067, dated March
    2004).
    ---------------------------------------------------------------------------
        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.

          SECURING IRS EMPLOYEES, FACILITIES, AND INFORMATION SYSTEMS

        As the Nation's primary revenue collector and an integral part of
    the Nation's critical infrastructure, the IRS is a prime target for
    anti-government protestors, international terrorists, and other
    extremists. Millions of taxpayers entrust the IRS with sensitive
    financial and personal data, which are stored and processed by IRS
    computer systems. The risks that sensitive data or computer systems
    could be compromised and that computer operations could be disrupted
    have increased over the last few years due to the external threats
    noted above and the increased connectivity of computer systems. In
    addition, IRS systems and data are vulnerable to unhappy taxpayers and
    disgruntled employees, as well as natural disasters. 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.
        For the past 4 years, TIGTA assessments have concluded that the
    security infrastructure and the applications that guard sensitive data
    are weak because of inadequate accountability and security awareness,
    as well as insufficient training for key security employees. The IRS
    has focused on technical solutions to this issue, but the primary
    causes are managerial and operational factors. For example, in 2004,
    TIGTA found that while security roles and responsibilities have been
    defined, we continue to identify significant security weaknesses
    throughout the IRS that can be attributed to employees not fulfilling
    their responsibilities.\43\ This results in the IRS failing to
    establish an organizational culture that strongly emphasizes the
    security and privacy of taxpayer data. In addition, some disaster
    recovery plans require additional development, testing, or personnel
    training to ensure that the IRS can quickly recover in the event of a
    disaster.
    ---------------------------------------------------------------------------
        \43\ Computer Security Roles and Responsibilities and Training
    Should Remain Part of the Computer Security Material Weakness
    (Reference Number 2004-20-155, dated September 2004).
    ---------------------------------------------------------------------------
        TIGTA has also identified security weaknesses in a number of IRS
    systems. For example, the IRS envisions the Security Audit and Analysis
    System (SAAS) as the audit trail collection and reporting system for
    the IRS's modernized applications. To date, no modernization
    applications are employing the SAAS for this purpose. This failure to
    employ the SAAS for audit trail collection and reporting results in at
    least two weaknesses. First, the IRS could deploy modernization
    applications without proper audit trail controls in place. Second, the
    IRS may spend additional resources to employ an application-specific
    audit trail that is not consistent with the IRS's architecture and
    would, in essence, represent a double investment in audit trail
    controls. Furthermore, the SAAS was accepted by the IRS despite the
    fact that it did not meet performance requirements.\44\
    ---------------------------------------------------------------------------
        \44\ For example, the SAAS users cannot query the audit trail
    information to generate reports. In addition, the functionality and
    software performance problems of the SAAS prevent the IRS business
    units from using it to identify questionable activities on modernized
    applications. See The Audit Trail System for Detecting Improper
    Activities on Modernized Systems Is Not Functioning, (Reference Number
    2004-20-135, dated August 2004).
    ---------------------------------------------------------------------------
        The IRS has taken several positive steps toward improving security
    in the IRS. In October 2003, the IRS combined key security activities
    into a single organization to promote better performance and consistent
    customer focus. Adequate security policies and procedures have been
    established and, in most cases, the IRS has the necessary hardware and
    software to provide adequate system security. While the IRS has become
    a leader in government under this management structure, it must
    emphasize the importance of security to its employees.
        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. Thus, 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. In addition, aggressive network control,
    monitoring, and incident response capabilities are necessary to prevent
    incursions into IRS systems from external and internal sources.

                INTEGRATING PERFORMANCE AND FINANCIAL MANAGEMENT

        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 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 National Research Program and they
    provide fresh data on taxpayer voluntary compliance levels--the first
    in more than a decade. Such data is 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, help pinpoint desired outcomes, and create a
    road map for the next decade that would complement the IRS's strategic,
    budget, and annual performance plans.
        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
    (FFMIA).\45\
    ---------------------------------------------------------------------------
        \45\ Public Law No. 104-208, 110 Stat. 3009.
    ---------------------------------------------------------------------------
        In audits of the IRS's financial statements, the GAO has concluded
    that the records 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. However, the IRS again had
    to rely extensively on resource-intensive compensating processes to
    prepare its financial statements. Without a financial management system
    that can produce timely, accurate, and useful information needed for
    day-to-day decisions, the IRS's financial stewardship responsibilities
    continue to be one of the largest challenges facing IRS management.
    ---------------------------------------------------------------------------
        \46\ Financial Audit: IRS's fiscal years 2003 and 2002 Financial
    Statement (GAO-04-126, dated November 2003).
    ---------------------------------------------------------------------------
                             MANAGING 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 Office of
    Management and Budget, 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 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 ability to attract new hires and retain existing
    employees. Thus, potential losses in critical occupational groups
    (e.g., Revenue Agents, Revenue Officers, Tax Compliance Officers),
    coupled with concerns regarding grade and competency gaps, further
    emphasize the need to strategically manage human capital.
        The Tax-Exempt/Government Entities Division is already understaffed
    to handle the current volume of customer calls. The Division's toll-
    free service is still maturing and acquiring new customers; however,
    without additional staffing or system enhancements, the level of
    service will deteriorate. This issue requires immediate attention
    because the Division relies on quality toll-free customer service to
    help ensure voluntary compliance among its customers, since it has very
    limited resources for more traditional compliance activities like
    examinations.
        In contrast, the Wage and Investment Division has reported that it
    has made significant progress in the human capital area. Examples
    include increased employee use of electronic learning and training by
    demand, and improved technical assessments for identifying skill levels
    and training needs of employees. In addition, the Division effectively
    planned and realigned its workforce as the result of reduced workload
    demands and technological improvements. Even so, more work needs to be
    completed to attract and retain high-quality employees, to increase
    productivity and quality, and to provide equal employment opportunities
    for all.
        The Criminal Investigation function has also moved forward in this
    area. The function is implementing a computer-based knowledge
    management program, which can immediately identify current subject
    matter experts. Skill transfer programs will be implemented to provide
    continuity of technical subject matter expertise, and continuing
    education programs will provide updated training on emerging issues,
    strategies, and operational priority subjects.
        The President's fiscal year 2006 budget may offer some relief in
    staffing shortages; however, the overall training and acclimation
    process will take some time. The IRS must devote significant attention
    to managing human capital to overcome the challenges noted above.

      PROCESSING RETURNS AND IMPLEMENTING TAX LAW CHANGES DURING THE TAX
                                 FILING SEASON

        Each filing season tests the ability of the IRS to implement tax
    law changes made by the Congress during the year. It is during the
    filing season that most individuals file their income tax returns and
    call the IRS if they have questions about specific tax laws or filing
    procedures. Correctly implementing tax law changes is a continuing
    challenge because the IRS must identify the tax law changes; revise the
    various tax forms, instructions, and publications; and reprogram the
    computer system used in processing returns.
        This year's filing season includes significant tax law changes
    created by the American Jobs Creation Act of 2004.\47\ One significant
    tax law change for the 2005 filing season that many taxpayers are
    familiar with is the ability to deduct sales tax instead of State and
    local income tax. Changes to the tax law can have a major effect on how
    the IRS conducts its activities, how many resources are required, and
    how much progress can be made on strategic goals. Generally, the
    Congress makes changes to the tax law each year, so some level of
    change is a normal part of the IRS environment. However, certain kinds
    of changes can significantly impact the IRS in terms of the quality and
    effectiveness of service and in how taxpayers perceive the IRS.
    ---------------------------------------------------------------------------
        \47\ Public Law No. 108-357, 118 Stat. 1418 (2004).
    ---------------------------------------------------------------------------
        To date, we have seen no significant problems during the 2005
    filing season. During the 2004 filing season, most of the 123.1 million
    individual income tax returns received through May 28, 2004 (including
    over 60 million received electronically, an increase of nearly 16
    percent from 2003) were timely and accurately processed. TIGTA
    determined that the IRS correctly implemented the key tax law changes
    that affected 2003 returns. However, TIGTA has previously identified
    tax law changes that have not yet been effectively implemented and
    could result in loss of taxpayer entitlements and erroneous tax
    reductions. For example, TIGTA identified taxpayers that are continuing
    to receive erroneous deductions for student loan interest, taxpayers
    with potentially unclaimed Additional Child Tax Credits, and taxpayers
    that were allowed questionable ``dual benefits'' for the tuition and
    fees deduction and the education credit.\48\ These tax law changes must
    be effectively implemented to fairly apply the law to all taxpayers.
    ---------------------------------------------------------------------------
        \48\ The 2004 Filing Season Was Completed Timely and Accurately,
    but Some Tax Law Changes Have Not Been Effectively Implemented
    (Reference Number 2005-40-016, dated Dec. 2004).
    ---------------------------------------------------------------------------
        I hope this discussion of the major challenges facing the IRS aids
    you in your consideration of the IRS's appropriation for fiscal year
    2006. Mr. Chairman and members of the committee, thank you for allowing
    me to share my views. I would be pleased to answer any questions you
    might have at this time.

        Senator Bond. Thank you very much, Mr. George. We will try
    to go 5 minutes each for questioning so all of us have an
    opportunity to go. Now, we will go as long as we can stand up
    to it. So let me begin.
        Mr. Everson. As long as you can stand up to it.
        Senator Bond. I haven't lost too many witnesses at the
    witness table but there have been one or two occasions. I doubt
    if this will be the case today, but looking at BSM and the
    customer account data engine, CADE, which is essential for the
    BSM, we are concerned that IRS has re-baselined the program and
    has a moving set of requirements which obscures oversight and
    allows success to be measured in terms of garbage in rather
    than revenue coming out.
        But let me ask two questions to begin. BSM, the biggest
    challenge you have, is fast approaching $2 billion, with CADE
    as a key feature. I would like to know, No. 1, how much will it
    cost to include all 120 million individual taxpayers? Moreover,
    since CADE currently only allows for the processing of the
    easiest returns of taxpayers using the EZ form, how many filers
    will be processed during the 2004 tax season by CADE?

                         BUSINESS SYSTEMS MODERNIZATION

        Mr. Everson. Let me back up and talk about the whole
    program for a moment, if I may? I agree with your
    characterization. As I stated, the whole program has been too
    costly and delayed, and didn't get us the functionality we
    needed. When I came in 2 years ago I immediately commissioned a
    set of reviews. The set of reviews were consistent, the four
    different reviews, and the conclusions that were reached were
    that No. 1, we were too ambitious. We had been encouraged by
    the oversight board and others to move very quickly. And we
    spent hundreds or millions of dollars; the funding stream on
    this was $400 or $500 million a year at one point. We felt we
    needed to resize the portfolio. We had inadequate business unit
    involvement, meaning customers, people that were going to use
    these things in the process. We changed that as well. We had
    uneven performance by the contractor. Now, it would be easy to
    blame everything on the contractor, but I don't think that was
    appropriate. The final thing is we had very little in the way
    of outside experts coming in and helping us, in terms of our
    staff. We've addressed each of those issues and I think that we
    have, as I said, turned a corner. We've reset dates and we met
    those dates last year in both CADE and in the financial system
    that we put on line.
        So we brought down the funding level from about $400
    million to this $200 million and we straight-lined it in fiscal
    year 2006, even though I think we could have made a case to
    increase it further this year. We want to proceed carefully and
    what we're doing now, Mr. Chairman, is limiting our ongoing
    work to just three areas so that we can stay on it. We're going
    to continue to work on this master file, the processing that
    includes the EZ's, and right now I think we're going to get 1.3
    million or 1.5 million out of the total filing season for 2004.
    I can't tell you because we're not looking at how quickly this
    will ramp up over the years, what the remainder of the CADE
    program will be. We will get that number to you as soon we've
    done some additional work on it. The second piece we're working
    on right now, as I indicated, is the collections. There's
    several hundred billion dollars of monies that haven't come in
    to the government. We need to update our systems so that we can
    work better, including the pieces done by the private
    collection agencies. That is the thrust of our modernization
    effort.
        And the last is electronic filing. We have mandated
    electronic filing for corporations. This change will speed up
    our audits. It cuts 1\1/2\ years out of the audit process,
    which now goes 5 years. It's way too long for us to detect
    what's going on in these corporations. We're working on those
    three areas, very limited, and I think we will meet our
    deadlines and our cost targets as we go forward because our
    record in the last year has been good.
        Senator Bond. Thank you, Commissioner. I would like to turn
    to Mr. George. How can the BSM be successful, within what time
    frame and at what cost? What is the TIGTA assessment?
        Mr. George. That's a very difficult question to answer, Mr.
    Chairman. When you look at CADE and then look at the fact that
    it's over $130 billion, $130 million over budget, and 30 months
    behind schedule already, and then of course when you look at
    the TSM, the Tax Systems Modernization effort that occurred 10
    years ago, it really doesn't give one a lot of encouragement
    that something as massive as BSM will be any much more
    successful unless a complete understanding as to what went
    wrong with TSM is had. I don't question that the current
    commissioner is examining the problems and has examined the
    problems of tax system modernization, but it involves not only
    the major prime contractor, Computer Science Corp, but many
    subcontractors. And we are in the process, Senator, of
    conducting audits on some of those sub-contractors and we'll
    share that information with this committee once those ordered
    audits are complete.
        Senator Bond. We appreciate your continuing to share this
    information with us. This hearing is just the beginning of our
    inquiries and we look forward to having that information.
        Let me ask one quick question to the Commissioner. Since
    the IRS is only getting 11 of the 15 items promised with the
    next CADE delivery in July, can you tell me how much the
    government will be refunded for the four dropped items?

                          CUSTOMER ACCOUNT DATA ENGINE

        Mr. Everson. I'm not sure to which items you are
    specifically referring. I will certainly take a look at that
    and provide the information for the record. We've had ongoing
    discussions and negotiations with the contractors and reached
    some pretty tough deals over the last year, where we've changed
    the way we're dealing with them and the relationship is subject
    to renegotiation. I want you to know my commitment here. I meet
    monthly with the President and chief operating officer of CSC
    and I've done that for a year and a half now, and their
    performance has improved significantly. We are continuing to
    hold their feet to the fire to make sure we get everything,
    every nickel's worth that the government pays.
        Senator Bond. Thank you very much, Mr. Commissioner.
    Senator Murray.
        Senator Murray. Thank you, Mr. Everson. I appreciate your
    testimony and as I talked about in my opening statement the IRS
    is talking about significant cuts to taxpayer services in order
    to pay for enforcement. You're proposing closing taxpayer
    assistance centers, reducing telephone service, eliminating
    phone-routing sites, discontinuing TeleFile, and reducing
    communications with practitioners. Last year, you published a
    comprehensive reorganization plan but those reductions are
    nowhere to be found in that plan. Why are you now suddenly
    proposing cuts when they were never a part of your recent
    reorganization plan?

                    IRS STRATEGIC PLAN AND TAXPAYER SERVICE

        Mr. Everson. Do you mean you're citing a strategic plan?
    I'm not sure what you mean by the reorganization plan.
        Senator Murray. The strategic plan that was published last
    year.
        Mr. Everson. We have set out a strategic plan and it has
    three objectives, which are to continue to maintain and improve
    taxpayer services, to significantly enhance enforcement, and to
    modernize the IRS. And I think that plan has guided all of our
    internal work and our budget discussions. Now, the IRS is not
    protected from overall fiscal realities so we have been asked
    to do our share and we are going to do our share to tighten our
    belt where we can. What we've done is gone through a very
    detailed process, and my two deputies are leading a lot of
    discussions to tighten up where we can. We're making a lot of
    increases in productivity and efficiency. You mentioned
    reducing phone services as an example. We've taken a look at
    the phones. Right now we provide 15 hours of access. We're
    going to bring that down to 12 hours. That is comparable to
    what Social Security and Blue Cross/Blue Shield do. Ninety-
    three percent of the calls that come in fall within those 12
    hours. We believe that we can save money through less overtime
    pay, but not reduce services there.

                            TAXPAYER SERVICE CENTERS

        Closing the tax centers, I understand that that will cause
    some disruption of services. It is relatively higher cost
    services and our decisions here are based upon just as GAO
    said, an increase in things like the VITA volunteer centers.
    There are 14,000 VITA sites around the country. There will
    necessarily be a shifting of work to these sites. We see other
    changes. For instance, the calls coming into our telephone
    system now are down 6 or 7 percent this year. That reflects
    movement activity over to the Internet, where contacts have
    doubled.
        Senator Murray. But there are always people who don't have
    access to the Internet.
        Mr. Everson. Absolutely, Senator. You look at tele-file as
    an example where in terms of individuals, that usage has been
    going down 10 or 15 percent a year. I've asked our people to
    come up with what were the tough choices, instead of bleeding
    away and cutting everything over a period of years by 5 percent
    or something. To take a look at what we do and then make the
    hard choices to not do 110 different things, to strip off some
    of those so that we can do well what we ought to do. There are
    some tough choices here. I agree with you.
        Senator Murray. But your budget says you want to improve
    taxpayer service by, ``make it easier for people to participate
    in the tax system'', and when you close centers that puts undue
    hardship on a number of people who are already living in more
    remote locations to travel further. So that is at odds with
    your statement, but let me ask you, how do you plan to measure
    the adverse impacts of these proposals on taxpayers?

                            TAXPAYER SERVICE CHANGES

        Mr. Everson. What we have done is gone through a process
    that looks at five different considerations. We ended up
    developing two models and we've taken input from a variety of
    people, including an advisory committee, an IRS advisory
    committee, and I----
        Senator Murray. It's a little hard to read.
        Mr. Everson. I think you have copies of this. It's my
    understanding, anyway. If you don't, I'll give you mine.

        We've looked across our system. We have 408 of these
    taxpayer assistance centers and have compared them using some
    three dozen factors that we have loaded into the models we've
    run. There are over 13,000 different data points, is my
    understanding. We're looking at geography. As you say, how far
    is it to the next TAC? How far is it to the next volunteer
    center? We'd look at the cost. Obviously, a part of this is
    trying to drive down cost and hold the funding to a reasonable
    cost. It includes employee cost, it includes a facilities cost.
    We've looked at workload, obviously. Some TACs that are in more
    rural states have one or two people as opposed to in larger
    cities. And we've looked at demographics, changes in the
    country. We had a team of 12 people that's been doing this work
    for the last several months and we've ended up developing two
    models. This was after an initial conversation we had with the
    taxpayer advocate who has said, make sure you're looking at
    things that affect taxpayer access and that gets more to this
    question of workload. And initially a model that we had had
    something like 37 TACs being closed. They were all in big
    locations, big cities, and high cost operations, but what we've
    now done is refine this to two different models. One of them
    ends up with 67 TACs closed in 27 States across the country.
    And that gives a slightly greater weight to employee facilities
    costs. The other ends up with 105 closed and that gives more
    weight to issues like workload and demographics. And the
    difference is, in some States you obviously end up with a
    deeper impact like in Washington or North Dakota or any place
    in going to the second model. Our inclinations are to go to
    option No. 1. We've been reviewing these options with others
    and we haven't reached any final decisions. We're still
    refining this.
        Senator Murray. Well, let me ask Mr. George, because in
    your formal testimony you expressed concern to us that the IRS
    may disrupt a balance between customer service and enforcement
    by closing some of these centers. Then you question whether the
    IRS has sufficient data to conclude the taxpayers that use
    these centers would be willing and able to use alternative
    methods to gain tax preparation assistance from the IRS. So
    given all of these uncertainties you've just seen do you
    believe the cost savings closing these centers will yield is
    worth the sacrifice that will be endured by taxpayers?
        Mr. George. Senator, we have no evidence that it will or
    won't just because the data is not there. But the one thing
    that I would note that is striking in terms of what is missing
    from the components of the criteria that the commissioner noted
    is the behavior of those who use the taxpayer assistance
    centers. As was noted we truly do not know what options they
    will or will not pursue of this and I do not believe that the
    Internal Revenue Service has considered that as a factor when
    it's considered.
        Senator Murray. Are you concerned that it's not a fair way
    to evaluate the system?
        Mr. George. I think it is not a complete way in which to do
    it.
        Senator Murray. Can you tell me exactly what you think
    needs to be added to it?
        Mr. George. I think a very comprehensive survey of the
    users of the taxpayer assistance centers using a methodology
    which is reasonable given the large numbers that are affected
    by this, something of that sort, Senator.

                              LEGISLATIVE LANGUAGE

        Mr. Everson. If I could prolong this for just a second. I
    want the committee to understand what the stakes really are
    here. I mentioned in the opening statement the impact if we're
    constrained from taking this action. We've gone through a very
    deliberate, careful process to try to squeeze down into the
    President's service mark. If you tell us not to do this and you
    use the President's mark for service as the ceiling, you will
    be doing things like forcing us into further cuts on services
    for telephones, stopping basic transcription of information
    like K1 data which we use for high income audits. We will be
    reducing support to our VITA programs because we have already
    gone through a whole series of belt tightening exercises over
    recent years. So I do caution you. Obviously, we will do
    whatever is said here but unless you----

                          EFFECT OF SERVICE REDUCTIONS

        Senator Murray. Are you telling us costs savings for option
    No. 1 or option No. 2?
        Mr. Everson. They both cost about $52 or $54 million, I
    can't remember which is which, but they're comparable for the
    two options.
        Senator Murray. For what time period?
        Mr. Everson. That is what comes out next year.
        Senator Murray. But we don't know whether that will mean
    reduced number of taxes paid because people don't get the
    correct assistance.
        Mr. Everson. I think that if we were to attempt to quantify
    that, it would be an excruciatingly long and detailed process
    because I've not seen any research that ties that kind of
    service changes directly to taxes paid give that answer. You
    would have to wait years to get that answer.
        Senator Murray. That may well be but if people do their
    taxes accurately the first time around it does save us money in
    not having to go back and forth with them.
        Mr. Everson. I agree with that. I agree with what the
    chairman said that if we simplify all this we would get a lot
    better answers. Now we're working in other areas, like the VITA
    sites, where TIGTA and others have said the quality of their
    return preparation isn't what it ought to be. We're trying to
    increase that service so those are the kinds of considerations
    we have getting at just what you're talking about.
        Senator Murray. I'm out of time.
        Senator Bond. Thank you very much, Senator Murray. Senator
    Dorgan.
        Senator Dorgan. Mr. Chairman, thank you very much. I thank
    you and the ranking member. At one point, I was a chairman and
    then ranking member of the subcommittee that funded the IRS.
    I've always been very supportive of the IRS. I'm a former Tax
    Administrator but I'll tell you over the years you almost run
    out of patience on this. This year we're told modernization, a
    program for which we have literally shoveled money out of this
    Congress, is behind schedule, over budget, and probably will
    produce a product less valuable than anticipated. You know at
    some point this is not the type of science that requires
    sending a person to the moon. Modernizing the computer system
    of the Internal Revenue Service ought to be able to be done. It
    is really disappointing to hear these reports and we do it
    every year. It's not just on your watch. Behind schedule, over
    budget, less valuable than we expect.
        With respect to the tax gap I just wanted to make a couple
    of comments and ask you, Mr. Commissioner, to respond. The tax
    gap continues to grow. I think we need to increase enforcement
    in order to respond to that but we can't increase enforcement
    at the cost of closing taxpayer assistance centers in my
    judgment. For 2 years I put money in your budget for the
    Inspector General to go have people anonymously visit taxpayer
    assistance centers every 2 months and tell us about the quality
    of the taxpayer assistance. One of the reasons I did that is
    because a large percent of the time the IRS employees
    themselves were giving inaccurate information and couldn't
    complete the tax returns properly. The results were still
    pretty miserable, frankly. The Inspector General now has
    reported about 44 anonymous visits to IRS Volunteer Income Tax
    Assistance centers and here's what they found. These are the
    centers that you would increase I think if you close some
    taxpayer assisted centers. From February to April last year
    Inspector General employees conducted 44 anonymous visits to
    VITA sites. Thirty-five tax returns were prepared. None of them
    were prepared correctly. Of the 35, if 28 of those returns had
    been filed the IRS would have incorrectly refunded $26,000. If
    the remaining 7 returns had been filed, the taxpayers would
    have failed to receive $4,500 in refunds. For 9 of the 44
    visits, tax returns were not prepared at all because the VITA
    sites weren't open, had been relocated or too many people were
    in line. But the fact is that of the 35 people who actually got
    help, none of them got correct help. All of them, 100 percent,
    incorrect. And so I mean to close taxpayer assisted centers
    themselves--that themselves have a pretty miserable record.
    Relying on VITA sites, I think is the wrong thing.
        Let me just say one other thing. I think big multinational
    corporations are having a field day with the Internal Revenue
    Service on the issue of transfer pricing. They're now doing
    business all across the world so you have related companies in
    this country and abroad. They are buying and selling to each
    other in order to move profits out of this country so that they
    can't be taxed. They inflate prices, or deflated prices as it
    were, and let me give you some examples. Tweezers, $4,800 each
    purchased from your own subsidiary. That is an inflated price.
    Safety pins, $29 each. Deflated prices, tractor tires for $7.
    Pianos for $50. Missile launchers for $52. There are two
    professors, Doctors Simon Pak and John Zdanowicz at Penn State
    and Florida International University, respectively, who are
    doing some research, that I helped fund through an earmark to
    determine about how much tax revenue we may be losing due to
    abnormal pricing. The IRS is using the arms-length method to
    deal with their pricing abuses. It's like trying to take two
    plates of spaghetti and fuse the ends together. It is
    impossible and the corporations are having a field day. In my
    judgment, there's massive tax avoidance and nobody seems to do
    much about it. And there are some obvious answers to it. I
    don't have time to deal with it here but I wanted to make this
    final point.
        We need more enforcement, better enforcement, smarter
    enforcement, and we need more taxpayer assistance and taxpayer
    assistance that is accurate. And if that requires additional
    funding we need to do that. You can't have a tax system you
    impose on the shoulders of the American people and say to them
    you comply even though paid IRS employees can't figure it out
    when a citizen walks up to get help. So you've got a tough job
    Mr. Everson. I want to be supportive of you but I'm telling you
    I'm really discouraged year after year to see modernization
    apparently failing and to see all of these other things pile up
    and the tax cap grow much larger. Now, is that a mouthful, and
    you deserve an opportunity to respond.

                                   COMPLIANCE

        Mr. Everson. You covered a lot of ground there. Maybe I'll
    be somewhat selective in what I respond to. Let's go to this
    chart.

        No one has spoken more aggressively or acted more
    aggressively to go after corporations and high income
    individuals than I have since coming onto this job 2 years ago.
    We asked for more money last year. We didn't get it all, and
    the President's request again gives a great deal of focus, as
    you can see, to corporations. We're asking for $63 million in
    new funding, and for high-income individuals compliance we're
    asking for $46 million. I agree with your assessment. The
    corporations, it's a relatively small portion of the tax gap.
    We did not update the corporate tax gap in our work, but I
    suspect that the gap is understated. We are working
    aggressively on this. We're doing something like establishing a
    joint international tax shelter information center here in town
    with counterparts from Britain, Australia, and Canada. We're
    sharing information and we're seeing many of the things you're
    talking about. Corporations, in too many instances, are not
    just interested in going through a low tax jurisdiction, they
    want to set up transactions that have two different treatments
    in two different taxing jurisdictions, and then no taxes paid.
    So we're working on this very aggressively. We do need that
    funding to keep giving that problem prominence, and we do that
    even though, in terms of a tax gap, the larger portion of the
    tax gap is in individuals and an understatement of income,
    largely associated with schedule C, their own sort of business
    activities. We give that prominence because of the sense of
    fairness that is so important to average Americans. They can't
    feel that just because you're rich or you're a company you get
    away with it. So I'm with you a 100 percent on that and so is
    the President in terms of the allocation of resources.

                         BUSINESS SYSTEMS MODERNIZATION

        BSM. I think there's a risk here that the committee is
    drawing the wrong impression. I do not disagree at all that
    this has been a troubled program, and it's tempting to say
    let's cut that program down to a $100 million or put further
    controls on it. That would, in my view, be exactly the wrong
    thing to do. We are just now getting a handle on this. We're
    just now delivering the systems. I think that the problems that
    Inspector General stated are absolutely correct, but that was a
    view from 2 years ago. We've acted and we are turning a corner
    here and if we act as if nothing has happened then you will
    choke it off and then we really will be at risk of this system
    cratering because we won't move forward. These fiscal pressures
    as you know, Senator, are not going to get any easier. If we
    don't invest in this technology, you won't get the services.
    Right now we're at over 50 percent of the returns being filed
    electronically. That is good news. It helps everybody. If we
    don't keep going on this--hold me accountable to do it right
    for sure--but if we don't continue to have a baseline of
    funding--and this $200 million is a very modest amount compared
    to where we were at $400 million or $500 million just 2 or 3
    years ago--I fear we will really not make it.
        Senator Dorgan. Mr. Chairman, could I just observe that if
    you are always turning a corner you may be going in a circle.
    The reason I say that and Mr. Everson I want you to succeed and
    I want to work with you and be helpful to you but for 8 years
    working on this subcommittee or some derivation of it, I've
    been told by Commissioners we're turning the corner. At some
    point it is apparently a track that we're on. So I guess in the
    final analysis, Mr. George, your work is very important. You
    tell us exactly what's happening down there. Mr. Everson, we
    want you to succeed. This is not criticism. It is frustration.
    So, Mr. Chairman, thank you for allowing me that therapy.
        Senator Bond. Senator Dorgan, I hope you feel better.
        Senator Dorgan. Much better. Thank you.
        Senator Bond. We look forward to hearing your suggestions
    how we can make sure we're turning the corner in the right
    direction based on your experience. Senator Murray.
        Senator Murray. Thank you very much. Mr. Chairman, I have a
    Veteran's Committee hearing that I want to get to so let me
    just ask you a quick question on the tax gap. Are there any
    findings in your report that are going to cause you to change
    your area of emphasis on enforcement?

                               COMPLIANCE BUDGET

        Mr. Everson. I would say that we've looked at this and the
    results are preliminary, Senator. We're going to be refining
    them over the course of the year. That is why we've established
    this range. The statisticians are continuing to go through all
    of these areas. I have been struck by the fact that our
    allocation of resources is generally consistent with what we're
    seeing in the gap. You can see that we're asking for more
    money. Last year we didn't really touch individuals and small
    businesses very much compared to the high income and the
    corporation. This year in the request we're starting to move
    past those two areas to cover that area more--that is where the
    big preponderance of the gap is. And so I think what we're
    doing here is generally consistent. The final point I would
    make for you to consider is that we've got two buckets of
    money: criminal activity and the tax-exempt area. They're not
    as directly tied to the gap. It's very tempting for the
    committee to just fund the things that get you the very best
    return, but we have other responsibilities, like maintaining
    the integrity of tax exemption, that are very important too. So
    while I think our resource allocation is consistent with the
    findings, we have to make sure we go beyond just the tax cap.
        Senator Murray. Okay. Thank you very much. Thank you, Mr.
    Chairman. I appreciate it.
        Senator Bond. Thank you very much, Senator Murray. I
    believe that we do need to support via some funding but we need
    clear benchmarks and requirements. We need a plan to lay out a
    straight path forward, so we know we're getting there. Mr.
    George, I'm sure, will be all over it to help us to determine
    that we're on that right path. TIGTA reported that the Security
    Audit and Analysis System that was developed to audit online
    activity of IRS employees was accepted by IRS even though its
    required functions IRS paid for were not operating. How much
    did it cost? What weaknesses still exist? And what are you
    doing to make the system work as advertised?

                                  IT SECURITY

        Mr. Everson. IT security is an issue of paramount concern
    for us. It is something that we've recognized. After I arrived
    at the agency, we stripped out our security functions from a
    variety of pockets in the agency and put together one mission
    assurance organization. One of my two deputies gives it the
    appropriate providence. I think that is bearing results. We've
    never had any penetrations from the outside of the IRS into our
    systems. TIGTA has correctly pointed out, as have others, that
    when you're inside the system there's maybe too much latitude,
    and we do have some problems where things can get compromised
    from time to time. We're working on that. We need to address it
    further. I think we're making progress. All I can tell you is
    that it is the subject of regular conversations at the most
    senior levels. So we're not going to move off this. We're going
    to continue to give it the prominence it needs because we don't
    want the security compromised. We recognize the terrible
    ramifications of that.
        Senator Bond. So you're telling me that we saw this theft
    of personal information from ChoicePoint by criminals accessing
    data, posing as legitimate users, but you're telling me that
    nobody has been able, from the outside, to access the IRS
    system? It is not vulnerable to similar attack?
        Mr. Everson. That is correct. Now I don't want to sound
    overconfident about that. But we have really good people who
    continue to work on that. People try to penetrate the system,
    Senator, from around the world everyday, but we've got good
    firewalls there. And we're going to continue to be vigilant to
    make sure we're doing absolutely everything we can to prevent
    that. I think TIGTA would certainly say within the firewalls
    we've got some more work to do as well.
        Senator Bond. I was kind of concerned when TIGTA called 100
    IRS managers and employees pretending to be help desk
    employees, and they were able to convince 35 managers and
    employees to reveal their account name and change their
    passwords to one suggested by TIGTA. Doesn't that show the
    likelihood of defeating security measures? What can be done to
    make sure that that problem does not recur?
        Mr. Everson. That's exactly the kind of thing I'm saying
    internally, within the firewalls, and we're obviously moving
    forward on a lot of what's in that report, and other measures.
    I think it is an area of continuing discussion and there's a
    lot of focus from TIGTA as we move forward on their stuff.
        Senator Bond. Mr. George, what's your comments on that?
        Mr. George. Well, Senator first of all to quote former
    Commissioner Sheldon Cohen, he thinks he is an honest man who
    has never been given the opportunity to cheat. And in effect
    that there are opportunities, that additional firewalls were
    maintained. Yes that would enhance the strength, in terms of
    outside attempts. But there's no question that internal access
    by disgruntled employees, it's a great risk to the IRS. And now
    that the Commissioner has restated his commitment to address
    that, I am more optimistic that something will and can be done.
    But it is something that TIGTA certainly will be monitoring,
    and we'll report back to you on.
        Senator Bond. Thank you, Mr. George. Well, the Taxpayer
    Service Budget, Commissioner, assumes a reduction of $134
    million through taxpayer service reengineering. Until this
    week, however, we had not received details on how the IRS plans
    to achieve these savings. The Taxpayers Advocate's testimony,
    as you know, said increasing enforcement and reducing service
    is based on more of an instinct than solid research. Can you
    lay out for us, and give us further detail, for the record, if
    that's appropriate, on how you arrive at these proposed cuts.
    We've had some discussions----

                         TAXPAYER SERVICE REENGINEERING

        Mr. Everson. I'm absolutely happy to do that. We've had a
    long process of 2 or 3 months of detailed planning and weighing
    of options. And I think it is a sound proposal and we will
    provide you those details.
        [The information follows:]

         Taxpayer Service Fiscal Year 2006 Budget Reduction Initiatives

                                   ASSISTANCE

        Closing selected Taxpayer Assistance Centers realigns service with
    changing trends.--TACs are one of the most expensive methods of
    customer service. The number of people accessing TACs continues to
    decline as more taxpayers use the IRS toll-free telephone system to get
    answers to their questions. Web-site use and e-filing continues to
    rise. Volunteer tax preparation and other outreach assistance is also
    increasing. The IRS created a business model based on five neutral
    criteria to identify the most appropriate TACs to close. Based on
    internal and external input on the model, taxpayer-centric needs, such
    as workload, geography, and demographics were given greater weight than
    labor and facilities costs. The estimated savings are $45 million-$55
    million.
        Changing the Toll-Free Telephone Hours of Operation.--The hours of
    toll-free telephone operations will change beginning October 2005 from
    15 to 12 hours 8:00 a.m. to 8:00 p.m., Monday though Friday, in local
    time zones. Current call volume is low during the late evening and
    early morning. Ninety-three percent of the calls come in from 8 a.m. to
    8 p.m. The change in level of service is minimal. The estimated savings
    are $10 million-$16 million.
        IRS will reduce Electronic Tax Law Assistance (ETLA) service.--The
    will reduce the level of service in fiscal year 2006. Less than 150,000
    tax law inquiries were received in fiscal year 2004. This compares with
    over 8.6 million tax law inquiries handled via our toll-free lines. The
    IRS will discontinue providing ETLA in early fiscal year 2006 for
    customers living in the United States. ETLA will continue for customers
    located overseas (Taxpayers living abroad and Military Personnel)
    because this is their only toll-free communication tool. The estimated
    is still being evaluated but is less than $1 million.
        The IRS is closing non-continuing call-sites.--The IRS will
    consolidate work in its Boston, Chicago, Des Moines, Houston, Omaha,
    and Wichita telephone call-sites into its larger phone centers for
    greater efficiency and lower costs. The change will be invisible to
    customers. Taxpayers won't notice a change; their calls are currently
    routed and answered nationwide. The IRS has 26 call-sites nationwide--
    these six non-continuing sites are satellites of the 26 sites.
    Nationwide the IRS has approximately 15,000 employees providing
    customer service. Savings from staff realignment have not yet been
    finalized. Rent savings of up to $1.2 million will be achieved
    primarily in fiscal year 2007.
        Updates in processing of applications for Employer ID numbers
    submitted through the Internet.--The IRS will complete upgrades to its
    system for accepting applications through the Internet for employer
    identification numbers (EINs). The current system for accepting the EIN
    applications at the front-end of the process is automated. This will
    improve back-end processing of the applications. By September 2006, 100
    percent of the forms submitted through the Internet should be fully
    automated. The estimated savings are $2 million-$5 million.
        Efficiencies in managing customer accounts will result in
    savings.--The process improvements and productivity gains achieved over
    the past few years, along with the decline in correspondence from
    taxpayers who have account or tax law inquiries, have changed the need
    for the same staff levels. The estimated savings are $15 million-$17
    million.

                                    OUTREACH

        Greater efficiencies in distributing tax products, increases in e-
    filing and use of Internet to download tax products will decrease
    printing and postage costs.--For example: The IRS's forms distribution
    site will be more efficient and save staff, printing and postage
    resources as a result of consolidating operations from three sites to
    one site. Other savings include mailing out fewer tax packages because
    more taxpayers are filing electronically. The IRS will reduce excess
    quantities of tax products based on increases in e-filing and internet
    downloads of tax forms and publications, and by streamlining some tax
    products. The estimated savings are $5 million-$10 million.
        Discontinuing lower value products in outreach programs and
    reducing some program travel will have little affect on customers.--IRS
    will discontinue developing some lower value publications and outreach
    material used to support volunteer tax assistors and outreach partners.
    For example, the IRS will discontinue some small quantities of end-of-
    season flyers, brochures and pamphlets used by its field staff, and
    reduce some operational travel. The estimated savings are up to $1
    million.
        Realigning and refocusing communications, outreach, and liaison
    efforts within the Small Business/Self-Employed (SB/SE) Division.--The
    merger will improve service to small business taxpayers and tax
    professionals, clarify the individual missions, coordinate programs,
    and minimize any overlapping responsibilities. Efficiencies gained
    through the realignment will allow the IRS to redirect staff resources
    to front line enforcement efforts. The estimated savings are $15
    million-$20 million.

                                   PROCESSING

        IRS will discontinue TeleFile.--The IRS will end its TeleFile
    program after August 16, 2005. TeleFile allows taxpayers to file
    certain forms by telephone: Form 1040EZ, Income Tax Return for Single
    Filers and Joint Filers with No Dependents; Certain State individual
    tax returns, Form 4868, Application for Automatic Extension of Time to
    File U.S. Individual Income Tax Return, and Form 941, Employer's
    Quarterly Federal Tax Return. Decline in use for most forms (e.g., less
    than 4 million of the 16 million eligible EZ filers used TeleFile),
    coupled with increasing costs to maintain the system, and the growth of
    other electronic filing options led to the decision to end the program.
    The expected printing and postage savings is $4 million-$5 million.
        Improved efficiencies in processing tax returns.--The IRS will have
    additional savings due to improved efficiencies in its Service Center
    campus processing operations, through re-engineering of its processes,
    and because more taxpayers are e-filing or using computer software to
    prepare their tax returns. For example: The IRS is evaluating its
    current processing procedures so that it can reduce unnecessary labor
    costs, especially when the returns are prepared by taxpayers and
    practitioners using computer software. The IRS will improve its
    productivity rates in data transcription of data from the forms. The
    expected savings are $9 million-$12 million.
        Enhancements to processing of paper Forms 941 will improve
    productivity.--The IRS will modify its existing Service Center
    Recognition/Image Processing System (SCRIPS) to add a new application
    for processing paper Employer's Quarterly Federal Tax Return, Forms
    941. This will result in improved productivity rates and increased
    accuracy in data capture. Fewer additional seasonal employees will be
    needed. The estimated savings are $4 million-$6 million.

        Senator Bond.--We would also like to have Mr. George's
    review of it so we can take a look at it.
        You've already discussed the criteria that you're
    considering to close Taxpayer Assistance Centers. And you have
    not, as I understand it, made a determination which of the, on
    the blue chart, which methodology you're going to use.
        Mr. Everson. That's correct. I think we're leaning towards
    the option No. 1, which has the impact of the smaller number of
    sites being closed. But we're still assessing that over the
    next coming weeks.
        Senator Bond. All right. The tax gap you mentioned--how did
    you calculate the $4 received for every dollar of enforcement
    spending?

                              RETURN ON INVESTMENT

        Mr. Everson. The chart that you saw there of enforcement
    revenues, that's a pretty simple thing. We track the
    collections, which is the bulk of this money. We've got a small
    strip, a couple of billion dollars of monies that come in from
    document matching activities. And then the rest is from our
    audits. And we follow how much money comes in from each of
    those actions. And now that is turning back up, that is a
    comparison. That $43 billion, that's cash in hand. And that
    compares, as I said, to the total budget that you've given us
    of $10.2 billion. It's a gross simplification. The $10.2
    includes the $6 plus billion for enforcement, but also all the
    other money for processing returns or answering phones, or the
    outreach that we do. And I'm simply pointing out to everybody
    that you get $4:$1 on average. Now you get better than that,
    obviously, if you look only at enforcement programs.
        Senator Bond. If you took the audit function and the
    enforcement function alone, you might get a higher number?
        Mr. Everson. You would get a higher number, and what we try
    to do, Senator is run a balanced program here. We could invest
    in certain strips of activity that would get you $10:$1 or
    $20:$1, but then you would be ignoring other areas. And you'd
    be, maybe, going after more middle class people just on under
    reporting as opposed to trying to run a balanced system, where
    you go across that whole tax gap map. If you look at the tax
    gap map there are a lot of activities in there that you have to
    get after. And you have to show some enforcement presence
    across everything.
        Senator Bond. Mr. George, do you have any input on those
    figures?
        Mr. George. We're in the process now, Senator, of
    evaluating the methodology and the conclusions that you heard
    the Commissioner state. And so we will issue that report as
    soon as we can. And we'll give that to you.
        Mr. Everson. That $43 billion in the methodology has been
    audited by GAO years ago when that system was set up. So I
    think the integrity of that number is pretty well established.
        Senator Bond. Mr. George, as related by Senator Dorgan,
    your oversight of the VITA program had some pretty stunning
    results. Out of 35 VITA returns, they were zero for 35 in
    accuracy, which doesn't get you into a higher league certainly
    if you're batting zero. Did you present particularly difficult
    returns? How did you structure this?
        Mr. George. Senator, there's no question that the
    complexity of tax law is a factor. And so that then leads to
    the degree to which VITA volunteers are trained. So we do have
    some question as to whether or not that is being effectively
    done. Lastly, volunteers did not in effect follow normal
    procedures in many instances. Some of the mistakes that were
    made could have been avoided had they, for example used intake
    sheets properly and were supervised properly. The problems we
    found are something that we don't believe are insurmountable.
    Again, through proper training and through appropriate
    oversight. We think many of the problems could be avoided in
    the future.
        Senator Bond. Commissioner, what do you propose to do to
    fix that problem?

                                  VITA PROGRAM

        Mr. Everson. Let me make a couple comments on this. I think
    that in response to your question, were these overly complex
    returns, the answer is yes. And in fact TIGTA is looking at
    this year, I believe both parties agree--and the Inspector
    General wouldn't notice because he wasn't here last year--a
    more representative sampling of the returns. It does not yield,
    based upon the work that is being done now, a good return or a
    good rate, but it doesn't yield a zero either. So I think that
    the change in the methodology of how the returns have been
    selected shows an improvement. Now we have taken their
    recommendations and are working on them with one exception.
    We've done more training; we're working on the software, and
    the whole series of things. We're making sure people are using
    the guide. There was some contention around one suggestion, and
    we backed away from the proposal, that we have IRS observers
    doing more onsite monitoring. We probably will end up doing
    this in the next filing season when we satisfy ourselves that
    it can be handled with the appropriate disclosure discussion
    with taxpayers before we do it. They had recommended that step.
    The Taxpayer Advocate felt that it was not an appropriate step.
    The volunteer organizations themselves, who do the bulk of this
    work, have told me that they think it is good idea. AARP, which
    does about half of this work, they told me they were fine with
    having IRS people there to watch what was going on. So I think
    we want to do that down the road, having organized it
    correctly. So we have a lot more to do here. To strengthen this
    area, I think what they're doing is helpful to us. And they're
    refining what they do and we're refining what we do. And we've
    got to do better.
        Senator Bond. IRS estimates that 740,000 people have set up
    offshore financial accounts, concealing taxable income at a
    loss of $20 to $40 billion a year. When you had a voluntary
    compliance initiative, only 1,300 of them came forward. How can
    you shut down this abusive practice? And what realistically can
    you do about it to go after the other 738,000-some-odd
    taxpayers who are non-taxpayers?

                    OFFSHORE VOLUNTARY COMPLIANCE INITIATIVE

        Mr. Everson. I think that this offshore area is
    particularly troublesome and difficult. Basically augmenting
    those resources going back in to the offshore compliance and
    audit rate, that helps sweep in more of these taxpayers. We do
    look at returns. We have access to other information; we see
    how people are spending their money. If we see things that are
    out of line maybe we can get after this in other ways. But the
    other thing is we're getting better cooperation from other
    countries. We've had some issues with getting all of the
    information we need from credit card providers and others. But
    we're working through those. It is a big, big continuing
    challenge, internationalization and sending money offshore. It
    goes beyond what Senator Dorgan was saying on corporations. It
    really does go into individuals too. And what we have is a very
    aggressive program with the Justice Department to get
    injunctions against promoters if we see schemes that are being
    sold to people. We attack them and try to leverage our findings
    from the promoters as well.
        Senator Bond. Many of the questions we raised really deal
    with the complexity of the IRS code. With 54,000 pages of tax
    law regulation and related advisory material, I think we all
    agree it is too complex, confusing, and costly. What can be
    done administratively to simplify it? And does the
    administration have specific legislative changes to reduce the
    complexity, to assist taxpayers and assist in enforcement?

                                 TAX COMPLEXITY

        Mr. Everson. I've testified before the Tax Panel that has
    been formed, as you know, with your former colleagues Senators
    Mack and Breaux. And I've said that the simplification is
    terribly important. Our view is that complexity obscures
    understanding. People either make inadvertent errors or they
    throw up their hands and say ``Why bother?'' at a certain
    point. On the other hand the complexity provides an opportunity
    for those who would skirt the tax laws to hide and to avoid
    detection by the IRS. So I agree with your sentiment 100
    percent. I've said to the tax panel that compliance is
    something that they need to watch for when they come forward
    with proposals that you will ultimately see. We need to look at
    compliance. A couple of quick points: no system is immune to
    compliance issues. So you've got to consider its
    administerability. Look at a VAT as an example. We were in
    Britain a few months ago and they've got an 11 or 12 percent
    compliance problem with the VAT system, so you have to be
    cognizant of these problems, no matter what system you chose.
    And the administration is, I think, well aware of that, as is
    the tax panel as they go through these discussions.
        Senator Bond. A final question. Some small business tax
    preparers are concerned and I wonder whether the IRS has any
    plans to charge fees for those who can afford them for some of
    IRS's services, especially where there are competing services
    provided by the private sector. Is it feasible to consider
    charging fees where it is obvious that the taxpayers, if not
    for getting IRS service, would be using private sector tax
    preparers?

                                FEES FOR SERVICE

        Mr. Everson. We have something like 1.2 million tax
    practitioners out there that we're highly relying on. The IRS
    doesn't do all the work and it doesn't do all the contacts with
    the individuals. We rely on professionals, good professionals
    in lots of small firms to help us guide people through the
    process. I'm unaware at this time of any new fee proposals
    along the lines of what you've suggested. And I'll check to see
    what the status is and let you know. But we think the vitality
    of small practitioners is very central to what we're doing.
        Senator Bond. Mr. George, any closing comments?
        Mr. George. Senator, again thank you for the opportunity.
    This being my first hearing in my new capacity as IG. There is
    no question of the vital role that the Internal Revenue Service
    plays to our Nation's security. And I have known of Mark
    Everson and have worked with him in his capacity as managing
    official at OMB.
        Mr. Everson. That's why he's skeptical.
        Mr. George. Not at all, not at all. So I believe that he is
    committed to helping ensure that this important organization
    fulfills its mandate. And I can assure you that I'm committed
    to assisting in terms of tax administration and ensuring that
    that organization does what it's supposed to do. And if it
    engages in activity that's inappropriate, that we bring that to
    both your attention and to the attention of the Secretary of
    the Treasury.
        Senator Bond. Thank you, Mr. George. Commissioner, any
    closing comments?
        Mr. Everson. No. I appreciate your interest. We're in tough
    territory here; you've got some other needy clients. I ask you
    to bear in mind that we feel we've constructed a balanced
    proposal. But that getting this enforcement funding does help
    the government's top line. And that's obviously of some very
    real importance in this time of deficits.

                        ADDITIONAL SUBMITTED STATEMENTS

        Senator Bond. Additional prepared statements have been
    submitted, and they will also be included in the record.
        [The statements follow:]

     Prepared Statement of James R. White, Director, Strategic Issues, and
     David A. Powner, Director, Information Technology Management Issues,
                        Government Accountability Office

      INTERNAL REVENUE SERVICE--ASSESSMENT OF THE FISCAL YEAR 2006 BUDGET
                                    REQUEST

                                 GAO HIGHLIGHTS

        Highlights of GAO-05-566, a statement for the record for the
    Subcommittee on Transportation, Treasury, the Judiciary, Housing and
    Urban Development, and Related Agencies, Committee on Appropriations.

                             WHY GAO DID THIS STUDY

        The Internal Revenue Service (IRS) has been shifting its priorities
    from taxpayer service to enforcement and its management of Business
    Systems Modernization (BSM) from contractors to IRS staff. Although
    there are sound reasons for these adjustments, they also involve risks.
        With respect to the fiscal year 2006 budget request, GAO assessed
    (1) how IRS proposes to balance its resources between taxpayer service
    and enforcement programs and the potential impact on taxpayers, (2)
    status of IRS's efforts to develop and implement the BSM program, and
    (3) the progress IRS has made in implementing best practices in
    developing its Information Technology (IT) operations and maintenance
    budget.

                              WHAT GAO RECOMMENDS

        In a related statement (GAO-05-416T), GAO recommended that the
    Commissioner of Internal Revenue supplement the 2006 budget request
    with more detailed information on how proposed service reductions would
    impact taxpayers. GAO has recommendations still outstanding related to
    BSM management controls and IT budget justification.

                                 WHAT GAO FOUND

        IRS's fiscal year 2006 budget request of $10.9 billion is an
    increase of 3.7 percent over last year's enacted levels. This includes
    an 8 percent increase for enforcement, and a 1 percent and 2 percent
    decrease for taxpayer service and BSM. However, the potential impact of
    these changes on taxpayers in either the short- or long-term is
    unclear, because IRS has not provided details of proposed taxpayer
    service reductions, and although it is developing long-term goals, they
    are not yet finalized. Because of the proposed reductions and new and
    improved taxpayer services in recent years, this is an opportune time
    to examine the menu of services IRS provides. It may be possible to
    maintain the overall level of service to taxpayers by offsetting
    reductions in some areas with new and improved service in other areas
    such as on IRS's Web site.
        Taxpayers and IRS are seeing some payoff from the BSM program, with
    the deployment of initial phases of several modernized systems in 2004.
    Nevertheless, the BSM program continues to be high-risk, in part,
    because projects have incurred significant cost increases and schedule
    delays and the program faces major challenges in areas such as human
    capital and requirements management. As a result of budget reductions
    and other factors, IRS has made major adjustments. It is too early to
    tell what effect these adjustments will have on the program, but they
    are not without risk and could potentially impact future budgets.
    Further, the BSM program is based on strategies developed years ago,
    which, coupled with the delays and changes brought on by budget
    reductions, indicates that it is time for IRS to revisit its long-term
    goals, strategy, and plans for BSM. Because of these challenges, IRS is
    redefining and refocusing the BSM program.
        Likewise, IRS has made progress in implementing best practices that
    would improve its budget development and support for its IT operations
    and maintenance request. In particular, the recent release of a
    modernized financial management system included a cost module. However,
    at this time, historical data is not yet available for IRS to use this
    module in formulating its IT operations and maintenance request.

                              IRS BUDGET SUMMARY FOR KEY ACTIVITIES, FISCAL YEARS 2004-2006
                                                  [Dollars in millions]
    ----------------------------------------------------------------------------------------------------------------
                                                Fiscal     Fiscal     Fiscal
                                              Year 2004  Year 2005  Year 2006    Percent      Percent      Percent
                                                                                  Change       Change       Change
                                              (Enacted)  (Enacted)  (Request)  (2004-2005)  (2005-2006)  (2004-2006)
    ----------------------------------------------------------------------------------------------------------------
    Taxpayer service........................     $3,710     $3,606     $3,567        -2.8         -1.1         -3.8
    Enforcement.............................      6,052      6,392      6,893         5.6          7.8         13.9
    BSM.....................................        388        203        199       -47.6         -2.0        -48.7
    ----------------------------------------------------------------------------------------------------------------
    Source.--GAO analysis of IRS data.
    Note.--Numbers may not add due to rounding.

        Mr. Chairman and members of the subcommittee, we are pleased to
    present this statement for the record regarding the Internal Revenue
    Service's (IRS) fiscal year 2006 budget request and in support of your
    April 7, 2005 hearing on IRS's appropriations.
        IRS is in the midst of making significant adjustments to its
    modernization strategy to better serve taxpayers and ensure their
    compliance with the Nation's tax laws. It is now 7 years since the
    passage of the Internal Revenue Service Restructuring and Reform Act of
    1998 (RRA 98) \1\ and IRS is shifting its priorities from improving
    taxpayer service to strengthening tax law enforcement efforts. IRS is
    also adjusting its strategy for managing its Business Systems
    Modernization (BSM) effort by shifting significant program management
    responsibilities from contractor to IRS staff. Although there are sound
    reasons for these adjustments, they also involve risk.
    ---------------------------------------------------------------------------
        \1\ Public Law No. 105-206 (1998).
    ---------------------------------------------------------------------------
        We have reported that IRS has made progress improving taxpayer
    service since the passage of RRA 98.\2\ For example, IRS's telephone
    assistance is now more accessible and accurate. Further, IRS is more
    efficient at processing tax returns, in part, because of the growth of
    electronic filing, and has cut processing staff. IRS has also
    implemented some modernized information systems and increased its
    capacity to manage large systems acquisition and development programs.
    However, progress has not been uniform. We have reported on large and
    pervasive declines in IRS's tax law enforcement programs after 1998. We
    have also reported that a number of systems modernization projects were
    over budget and behind schedule.\3\
    ---------------------------------------------------------------------------
        \2\ See for example, GAO-05-67, Tax Administration: IRS Improved
    Performance in the 2004 Filing Season, But Better Data on the Quality
    of Some Services Are Needed (Washington, DC: Nov. 15, 2004).
        \3\ GAO, Internal Revenue Service: Assessment of Fiscal Year 2005
    Budget Request and 2004 Filing Season Performance, GAO-04-560T
    (Washington, DC: Mar. 30, 2004).
    ---------------------------------------------------------------------------
        As noted, IRS is shifting its priorities to better address these
    problems. The risk, as IRS shifts its priorities towards enforcement,
    is that some of the gains in the quality of taxpayer service could be
    surrendered. There are analogous risks associated with moving more of
    the management of BSM in-house.
        With these risks in mind, our statement for the record discusses
    IRS's fiscal year 2006 budget request. To address your request to
    provide this statement, we assessed (1) how IRS proposes to balance its
    resources between taxpayer service and enforcement programs and the
    potential impact on taxpayers, (2) the status of IRS's efforts to
    develop and implement the BSM program, and (3) the progress IRS has
    made in implementing best practices for developing its information
    technology (IT) operations and maintenance budget.
        Our assessment of the budget request and BSM is based on a
    comparative analysis of IRS's fiscal year 2002 through 2006 budget
    requests, funding, expenditures, other documentation, and interviews
    with IRS officials. For this assessment, we used historical budget and
    performance data from reports and budget requests used by IRS,
    Department of Treasury, and Office of Management and Budget (OMB). In
    past work, we assessed IRS's budget and performance data.\4\ Since the
    data sources and procedures for producing this year's budget data have
    not significantly changed from prior years, we determined that the data
    were sufficiently reliable for the purposes of this report although for
    fiscal years 2005 and 2006 subject to change. Regarding our analysis of
    IRS's BSM program, we primarily used the agency's BSM expenditure plans
    to determine the status of the program. To assess the reliability of
    the cost and schedule information contained in these plans, we
    interviewed applicable IRS officials to gain an understanding of the
    data and discuss our use of that data. In addition, we checked that
    information in the plans was consistent with information contained in
    IRS internal briefings. Accordingly, we determined that the data in the
    plans were sufficiently reliable for purposes of this statement. We
    performed our work in Washington, DC and Atlanta, Georgia from December
    2004 through March 2005, in accordance with generally accepted
    government auditing standards.
    ---------------------------------------------------------------------------
        \4\ GAO, Tax Administration: IRS Needs to Further Refine Its Tax
    Filing Season Performance Measures, GAO-03-143 (Washington, DC: Nov.
    22, 2002) and GAO, Financial Audit: IRS's Fiscal Years 2004 and 2003
    Financial Statements, GAO-05-103 (Washington, DC: Nov. 10, 2004).
    ---------------------------------------------------------------------------
        In summary, our assessment shows that:
      --IRS's 2006 fiscal year budget request reflects a continuing shift
            in priorities from improving taxpayer service to strengthening
            enforcement efforts, but the potential impact of these changes
            on taxpayers in both the short- and long-term is unclear. IRS
            is requesting $10.9 billion, an increase of 3.7 percent over
            fiscal year 2005 enacted levels. This includes an 8 percent
            increase for enforcement, and a 1 percent and 2 percent
            decrease for taxpayer service and BSM, respectively. IRS has
            not finalized the details on where reductions in taxpayer
            service would occur. In addition, IRS is developing, but
            currently lacks, long-term goals that can help IRS inform
            stakeholders, including the Congress, and aid them in assessing
            performance and making budget decisions. In light of the
            current budget environment and IRS's improvements in taxpayer
            service over the last several years, this is an opportune time
            to reconsider the menu of services it provides. It may be
            possible to maintain the overall level of assistance to
            taxpayers by changing the menu of services offered, offsetting
            reductions in some areas with new and improved service in other
            areas such as on IRS's Web site.
      --IRS has taken important steps forward towards implementing the BSM
            program by delivering the initial phases of several modernized
            systems in 2004 and early 2005. Nevertheless, BSM continues to
            be high risk because, in part, its projects have incurred
            significant cost increases and schedule delays, and the program
            continues to face major challenges. As a result of funding
            reductions and other factors, IRS has made major adjustments to
            the BSM program, including reducing the management reserve and
            changing the mix and roles of contractor versus Federal staff
            used to manage the program. It is too early to tell what effect
            these adjustments will ultimately have on the BSM program, but
            they are not without risk, could potentially impact future
            budget requests, and will delay the implementation of certain
            functionality that was intended to provide benefit to IRS
            operations and taxpayers. Finally, the BSM program is based on
            visions and strategies developed years ago, which, coupled with
            the already significant delays the program has experienced and
            the changes brought on by the budget reductions, indicates that
            it is time for IRS to revisit its long-term goals, strategy,
            and plans for BSM, including an assessment of when significant
            future BSM functionality would be delivered. According to the
            Associate Chief Information Officer (CIO) for BSM, IRS is
            redefining and refocusing this program.
      --IRS has made progress toward implementing investment management
            best practices that would improve its budget development and
            support for its IT operations and maintenance funding requests.
            For example, the recent release of a new accounting system
            included an activity-based cost module, which IRS considered to
            be a necessary action to implement these best practices.
            However, Office of the Chief Financial Officer officials stated
            that IRS needs 3 years of actual costs to have the historical
            data necessary to provide a basis for future budget estimates.
            Accordingly, they expect that IRS will begin using the
            activity-based cost module in formulating the fiscal year 2008
            budget and will have the requisite 3 years of historical data
            in time to develop the fiscal year 2010 budget.

    IRS'S BUDGET REQUEST CONTINUES TO SHIFT PRIORITY FROM TAXPAYER SERVICE
     TO ENFORCEMENT, BUT THE SHORT- AND LONG-TERM IMPACTS ON TAXPAYERS ARE
                                    UNCLEAR

        IRS's fiscal year 2006 budget request reflects a continuing shift
    in priorities by proposing reductions in taxpayer service and increases
    in enforcement activities. The request does not provide details about
    how the reductions will impact taxpayers in the short-term. Nor does
    IRS have long-term goals; thus the contribution of the fiscal year 2006
    budget request to achieving IRS's mission in the long-term is unclear.
    Because of budget constraints and the progress IRS has made improving
    the quality of taxpayer services, this is an opportune time to
    reconsider the menu of services IRS offers.

    IRS Is Proposing Reductions in Taxpayer Service and BSM and Increases
            in Enforcement
        IRS is requesting $10.9 billion, which includes just over a 1
    percent decrease for taxpayer service, a 2 percent decrease for BSM,
    and nearly an 8 percent increase for enforcement, as shown in table
    1.\5\ As table 1 further shows, the changes proposed in the 2006 budget
    request continue a trend from 2004. In comparison to the fiscal year
    2004 enacted budget, the 2006 budget request proposes almost 4 percent
    less for service, almost 49 percent less for BSM, and nearly 14 percent
    more for enforcement.\6\
    ---------------------------------------------------------------------------
        \5\ IRS is proposing a new budget structure beginning in fiscal
    year 2006. The proposal would integrate support costs and the IT
    appropriation into taxpayer assistance and operations appropriation
    with eight program areas involving both taxpayer service and
    enforcement. See appendix I for information on the new budget
    structure.
        \6\ The administration proposes to fully fund enforcement efforts
    and costs as contingent appropriations. This would be achieved by using
    one of two budgetary mechanisms that would allow for an adjustment to
    total discretionary spending for fiscal year 2006 of not more than $446
    million for IRS tax enforcement.

                         TABLE 1.--IRS BUDGET SUMMARY FOR KEY ACTIVITIES, FISCAL YEARS 2004-2006
                                                  [Dollars in millions]
    ----------------------------------------------------------------------------------------------------------------
                                                Fiscal     Fiscal     Fiscal
                                              Year 2004  Year 2005  Year 2006    Percent      Percent      Percent
                                                                                  Change       Change       Change
                                              (Enacted)  (Enacted)  (Request)  (2004-2005)  (2005-2006)  (2004-2006)
    ----------------------------------------------------------------------------------------------------------------
    Taxpayer service........................     $3,710     $3,606     $3,567        -2.8         -1.1         -3.8
    Enforcement.............................      6,052      6,392      6,893         5.6          7.8         13.9
    BSM.....................................        388        203        199       -47.6         -2.0        -48.7
    ----------------------------------------------------------------------------------------------------------------
    Source.--GAO analysis of IRS data.
    Note.--Numbers may not add due to rounding.

        As table 1 also shows, taxpayer service sustained a reduction of
    $104 million or 2.8 percent between fiscal years 2004 and 2005.
    According to IRS officials, the majority of this reduction was the
    result of consolidating paper-processing operations, shifting resources
    from service to enforcement, and reducing some services. IRS officials
    said that this reduction is not expected to adversely impact the
    services they provide to taxpayers but added that the agency cannot
    continue to absorb reductions in taxpayer service without beginning to
    compromise some services.
        For fiscal years 2005 and 2006, table 2 shows some details of
    changes in both dollars and full-time equivalents (FTE).\7\ Both are
    shown because funding changes do not translate into proportional
    changes in FTEs due to cost increases for salaries, rent, and other
    items. For example, the $39 million or 1.1 percent reduction in
    taxpayer service translates into a reduction of 1,385 FTEs or 3.6
    percent. Similarly, the over $500 million or 7.8 percent increase in
    enforcement spending translates into an increase of 1,961 FTEs or 3.4
    percent.
    ---------------------------------------------------------------------------
        \7\ According to IRS, an FTE is the equivalent of one person
    working full time for 1 year without overtime.

       TABLE 2.--IRS REQUESTED CHANGES IN FUNDING FOR TAXPAYER SERVICE AND ENFORCEMENT, FISCAL YEARS 2005 AND 2006
                                                       (REQUESTED)
                                                  [Dollars in millions]
    ----------------------------------------------------------------------------------------------------------------
                                                 Fiscal Year 2005        Fiscal Year 2006       Change Fiscal Year
                                                    (Estimated)             (Requested)        2005-Fiscal Year 2006
               Program Activities            -----------------------------------------------------------------------
                                                          Full-time               Full-time               Full-time
                                               Dollars   Equivalents   Dollars   Equivalents   Dollars   Equivalents
    ----------------------------------------------------------------------------------------------------------------
    Assistance..............................     $1,829      20,798      $1,806      20,160        -$23        -638
    Outreach................................       $500       2,473        $466       1,905        -$34        -568
    Processing..............................     $1,276      15,695      $1,295      15,516         $19        -179
                                             -----------------------------------------------------------------------
          Taxpayer service subtotal.........     $3,606      38,966      $3,567      37,581        -$39      -1,385
                                             =======================================================================
    Research................................       $154       1,119        $158       1,119          $4           0
    Examination.............................     $3,478      31,498      $3,712      32,284        $234         786
    Collection..............................     $1,826      18,023      $1,991      18,815        $165         792
    Investigation...........................       $682       4,899        $767       5,250         $85         351
    Regulatory..............................       $253       1,912        $265       1,944         $12          32
                                             -----------------------------------------------------------------------
          Enforcement subtotal..............     $6,392      57,451      $6,893      59,412        $500       1,961
                                             =======================================================================
          Taxpayer service and enforcement       $9,998      96,417     $10,460      96,993        $462         576
           total............................
    ----------------------------------------------------------------------------------------------------------------
    Source.--GAO analysis of IRS data.
    Note.--Numbers may not add due to rounding.

        The difference between changes in dollars and FTEs could be even
    larger because of unbudgeted expenses. Unbudgeted expenses have
    consumed some of IRS's budget increases and internal savings increases
    over the last few years. Unbudgeted expenses include unfunded portions
    of annual salary increases, which can be substantial given IRS's large
    workforce, and other costs such as higher-than-budgeted rent increases.
    According to IRS officials, these unbudgeted expenses accounted for
    over $150 million in each of the last 4 years.
        An IRS official also told us they anticipate having to cover
    unbudgeted expenses in 2006. As of March 2005, IRS officials were
    projecting unbudgeted salary increases of at least $40 million. This
    projection could change since potential Federal salary increases for
    2006 have not been determined.

    IRS Is Proposing $39 Million Less for Taxpayer Service, but the Impact
            on Taxpayers Is Unclear
        The budget request provides some detail on how IRS plans to absorb
    cost increases in the taxpayer service budget. IRS is proposing a gross
    reduction of over $134 million in taxpayer service from reexamining the
    budget's base and plans to use more than $95 million of it to cover
    annual increases such as salaries. This leaves a net reduction of
    nearly $39 million or 1.1 percent in the taxpayer service budget. The
    extent to which IRS is able to achieve the gross reductions will impact
    its ability to use the funds as anticipated.
        Decisions on how the $134 million gross reduction would be absorbed
    were not finalized prior to releasing the budget. According to IRS
    officials, some of the reductions would result from efficiency gains
    such as reducing printing and postage costs; however, others would
    result from reductions in the services provided to taxpayers such as
    shortening the hours of toll-free telephone service operations. The
    officials also said most decisions have now been made about general
    areas for reduction and most changes will not be readily apparent to
    taxpayers.
        Although IRS has made general decisions about the reductions, many
    of the details have yet to be determined. Therefore, the extent of the
    impact on taxpayers in the short term is unclear. For example, IRS
    plans to reduce dependence on field assistance, including walk-in
    sites, but has not reached a final decision on how to reduce services.
    Table 3 provides further detail on how IRS is proposing to reduce
    funding and resources for taxpayer service.

    TABLE 3.--IRS REQUESTED CHANGES IN FUNDING AND FULL-TIME EQUIVALENTS FOR TAXPAYER SERVICE, FISCAL YEARS 2005 AND
                                                          2006
                                                  [Dollars in millions]
    ----------------------------------------------------------------------------------------------------------------
                                                 Fiscal Year 2005        Fiscal Year 2006       Change Fiscal Year
                                                     (Actual)               (Requested)              2005-2006
               Program Activities            -----------------------------------------------------------------------
                                                          Full-time               Full-time               Full-time
                                               Dollars   Equivalents   Dollars   Equivalents   Dollars   Equivalents
    ----------------------------------------------------------------------------------------------------------------
    Assistance:
        Electronic..........................     $1,536      17,745      $1,557      17,721         $21         -24
        Field...............................       $274       2,796        $230       2,181        -$44        -615
        EITC assistance.....................        $19         258         $19         258         <$1  ...........
                                             -----------------------------------------------------------------------
          Assistance total..................     $1,829      20,798      $1,806      20,160        -$23        -638
                                             =======================================================================
    Outreach:
        Publication & Media.................       $291         821        $276         520        -$15        -301
        Taxpayer Education & Communication..       $203       1,592        $184       1,326        -$19        -266
        EITC Outreach.......................         $7          60          $7          60         <$1  ...........
                                             -----------------------------------------------------------------------
          Outreach total....................       $500       2,473        $466       1,905        -$34        -568
                                             =======================================================================
    Processing..............................     $1,276      15,695      $1,295      15,516         $19        -179
                                             =======================================================================
          Taxpayer service total............     $3,606      38,966      $3,568      37,581        -$39      -1,385
    ----------------------------------------------------------------------------------------------------------------
    Source.--GAO analysis of IRS data.
    Note.--Numbers may not add due to rounding.

    IRS Continues to Request Significant Increases for Enforcement to Build
            on Recent Hiring Gains
        IRS's fiscal year 2006 budget request is the sixth consecutive year
    the agency has requested additional staffing for enforcement. However,
    up until last year, IRS was unable to increase enforcement staffing;
    unbudgeted costs and other priorities consumed the budget increase.
        IRS's proposal for fiscal year 2006, if implemented as planned,
    would return enforcement staffing in these occupations to their highest
    levels since 1999. Of the more than $500 million increase requested for
    2006, about $265 million would fund enforcement initiatives, over $182
    million would be used in part for salary increases, and over $55
    million is a proposal to transfer funding authority from the Department
    of Justice's Interagency Crime and Drug Enforcement. The $500 million
    increase would be supplemented by internal enforcement savings of $88
    million. As is the case with taxpayer service savings, the extent to
    which IRS achieves enforcement savings will affect its ability to fund
    the new enforcement initiatives.
        The $265 million for new enforcement initiatives consist of:
      --$149.7 million and 920 FTEs to attack corrosive non-compliance
            activity driving the tax gap such as abusive trusts and
            shelters, including offshore credit cards and organized tax
            resistance;
      --$51.8 million and 236 FTEs to detect and deter corrosive corporate
            non-compliance to attack complex abusive tax avoidance
            transactions on a global basis and challenge those who promote
            their use;
      --$37.9 million and 417 FTEs to increase individual taxpayer
            compliance by identifying and implementing actions to address
            non-compliance with filing requirements; increasing Automated
            Underreporter resources to address the reporting compliance tax
            gap; increasing audit coverage; and expanding collection work
            in walk-in sites;
      --$14.5 million and 77 FTEs to combat abusive transactions by
            entities with special tax status by initiating examinations
            more promptly, safeguarding compliant customers from
            unscrupulous promoters, and increasing vigilance to ensure that
            the assets of tax-exempt organizations are put to their
            intended tax-preferred purpose and not misdirected to fund
            terrorism or for private gain; and
      --$10.8 million and 22 FTEs to curtail fraudulent refund crimes.
        The $88 million in internal savings would be reinvested to perform
    the following activities:
      --$66.7 million and 585 FTEs to devote resources to front-line
            enforcement activities;
      --$14.9 million and 156 FTEs to, in part, address bankruptcy-related
            taxpayer questions; and
      --$6.7 million and 52 FTEs to address complex, high-risk issues such
            as compliance among tax professionals.
        In the past, IRS has had trouble achieving enforcement staffing
    increases because other priorities, including unbudgeted expenses, have
    absorbed additional funds. IRS achieved some gains in 2004 and expects
    modest gains in 2005. Figure 1 shows that the number of revenue agents
    (those who audit complex returns), revenue officers (those who do field
    collection work), and special agents (those who perform criminal
    investigations) decreased over 21 percent between 1998 and 2003, but
    increased almost 6 percent from 2003 to 2004.

        IRS's recent gains in enforcement staffing are encouraging, as tax
    law enforcement continues to remain an area of high risk for the
    Federal Government because the resources IRS has dedicated to enforcing
    the tax laws have declined, while IRS's enforcement workload--measured
    by the number of taxpayer returns filed--has continually increased.\8\
    Figure 2 shows the trend in field, correspondence, and total audit
    rates since 1995. Field audits involve face-to-face audits and
    correspondence audits are typically less complex involving
    communication through notices. IRS experienced steep declines in audit
    rates from 1995 to 1999, but the audit rate--the proportion of tax
    returns that IRS audits each year--has slowly increased since 2000. The
    figure shows that the increase in total audit rates of individual
    filers has been driven mostly by correspondence audits, while more
    complex field audits, continue to decline.
    ---------------------------------------------------------------------------
        \8\ GAO, High Risk Series: An Update, GAO-05-207 (Washington, DC:
    January 2005).

        The link between the decline in enforcement staff and the decline
    in enforcement actions, such as audits, is complicated, and the real
    impact on taxpayers' rate of voluntary compliance is not known. This
    leaves open the question of whether the declines in IRS's enforcement
    programs are eroding taxpayers' incentives to voluntarily comply. IRS's
    National Research Program (NRP) recently completed a study on
    compliance by individual tax filers based on tax data provided on 2001
    tax returns. The study estimated that the tax gap--the difference
    between what taxpayers owe and what they pay--is at least $312 billion
    per year as of 2001 and could be as large as $353 billion. This study
    is important for several reasons beyond measuring compliance. It is
    intended to help IRS better target its enforcement actions, such as
    audits, on non-compliant taxpayers, and minimize audits of compliant
    taxpayers. It should also help IRS better understand the impact of
    taxpayer service on compliance.

    IRS Is Developing Long-term Goals That Can Be Used to Assess
            Performance and Make Budget Decisions
        IRS is developing but currently lacks long-term goals that can be
    used to assess performance and make budget decisions.\9\ Long-term
    goals and results measurement are a component of the statutory
    strategic planning and management framework that the Congress adopted
    in the Government Performance and Results Act of 1993.\10\ As a part of
    this comprehensive framework, long-term goals that are linked to annual
    performance measures can help guide agencies when considering
    organizational changes and making resource decisions.
    ---------------------------------------------------------------------------
        \9\ IRS has one long-term goal set by the Congress in RRA 98 for
    IRS to have 80 percent of all individual income tax returns filed
    electronically.
        \10\ Public Law No. 103-62 (1993). The Government Performance and
    Results Act of 1993 seeks to improve the management of Federal
    programs, as well as their effectiveness and efficiency, by requiring
    executive agencies to prepare multiyear strategic plans, annual
    performance plans, and annual performance reports. Under the Act,
    strategic plans are the starting point for setting goals and measuring
    progress towards them. The Act requires executive agencies to develop
    strategic plans that include an agency's mission statement, long-term
    general goals, and the strategies that the agency will use to achieve
    these goals. The plans should also explain the key external factors
    that could significantly affect achievement of these goals, and
    describe how long-term goals will be related to annual performance
    goals.
    ---------------------------------------------------------------------------
        A recent Program Assessment Rating Tool (PART) review conducted by
    OMB reported that IRS lacks long-term goals.\11\ As a result, IRS has
    been working to identify and establish long-term goals for all aspects
    of its operations for over a year. IRS officials said these goals will
    be finalized and provided publicly as an update to the agency's
    strategic plan before May 2005.
    ---------------------------------------------------------------------------
        \11\ The PART was applied during the fiscal year 2004 budget cycle
    to ``programs'' selected by OMB. The PART includes general questions in
    each of four broad topics to which all programs are subjected: (1)
    program purpose and design; (2) strategic planning; (3) program
    management; and (4) program results (i.e., whether a program is meeting
    its long-term and annual goals). OMB also makes an overall assessment
    on program effectiveness.
    ---------------------------------------------------------------------------
        For IRS and its stakeholders, such as the Congress, long-term goals
    can be used to assess performance and progress towards these goals, and
    determine whether budget decisions contribute to achieving those goals.
        Without long-term goals, the Congress and other stakeholders are
    hampered in evaluating whether IRS is making satisfactory long-term
    progress. Further, without such goals, the extent to which IRS's 2006
    budget request would help IRS achieve its mission over the long-term is
    unclear.

    This Is an Opportune Time to Review IRS's Menu of Taxpayer Services
        For at least two reasons, this is an opportune time to review the
    menu of taxpayer services that IRS provides. First, IRS's budget for
    taxpayer services was reduced in 2005 and an additional reduction is
    proposed for 2006. As already discussed, these reductions have forced
    IRS to propose scaling back some services. Second, as we have reported,
    IRS has made significant progress in improving the quality of its
    taxpayer services. For example, IRS now provides many Internet services
    that did not exist a few years ago and has noticeably improved the
    quality of telephone services. This opens up the possibility of
    maintaining the overall level of taxpayer service but with a different
    menu of service choices. Cuts in selected services could be offset by
    the new and improved services.
        Generally, as indicated in the budget, the menu of taxpayer
    services that IRS provides covers assistance, outreach, and processing.
    Assistance includes answering taxpayer questions via telephone,
    correspondence, and face-to-face at its walk-in sites. Outreach
    includes educational programs and the development of partnerships.
    Processing includes issuing millions of tax refunds.
        When considering program reductions, we support a targeted approach
    rather than across-the-board cuts.\12\ A targeted approach helps reduce
    the risk that effective programs are reduced or eliminated while
    ineffective or lower priority programs are maintained.
    ---------------------------------------------------------------------------
        \12\ GAO, 21st Century Challenges: Reexamining the Base of the
    Federal Government, GAO-05-325SP (Washington, DC: February 2005).
    ---------------------------------------------------------------------------
        With the above reasons in mind for reconsidering IRS's menu of
    services, we have compiled a list of options for targeted reductions in
    taxpayer service. The options on this list are not recommendations but
    are intended to contribute to a dialogue about the tradeoffs faced when
    setting IRS's budget. The options presented meet at least one of the
    following criteria that we generally use to evaluate programs or budget
    requests.\13\ These criteria include that the activity:
    ---------------------------------------------------------------------------
        \13\ We selected these criteria from a variety of sources based on
    generally accepted government auditing standards.
    ---------------------------------------------------------------------------
      --duplicates other efforts that may be more effective and/or
            efficient;
      --historically does not meet performance goals or provide intended
            results as reported by GAO, the Treasury Inspector General for
            Tax Administration (TIGTA), IRS, or others;
      --experiences a continued decrease in demand;
      --lacks adequate oversight, implementation and management plans, or
            structures and systems to be implemented effectively;
      --has been the subject of actual or requested funding increases that
            cannot be adequately justified; or
      --has the potential to make an agency more self-sustaining by
            charging user fees for services provided.
        We recognize that the options listed below involve tradeoffs. In
    each case, some taxpayers would lose a service they use. However, the
    savings could be used to help maintain the quality of other services.
    We also want to give IRS credit for identifying savings, including some
    on this list. The options include:
      --closing walk-in sites. Taxpayer demand for walk-in services has
            continued to decrease and staff answer a more limited number of
            tax law questions in person than staff answer via telephone.
      --limiting the type of telephone questions answered by IRS assistors.
            IRS assistors still answer some refund status questions even
            though IRS provides automated answers via telephone and its Web
            site.
      --mandating electronic filing for some filers such as paid preparers
            or businesses. As noted, efficiency gains from electronic
            filing have enabled IRS to consolidate paper processing
            operations.
      --charging for services. For example, IRS provides paid preparers
            with information on Federal debts owed by taxpayers seeking
            refund anticipation loans.
     progress in bsm implementation, but the program remains high risk and
           budget reductions have resulted in significant adjustments
        Although IRS has implemented important elements of the BSM program,
    much work remains. In particular, the BSM program remains at high risk
    and has a long history of significant cost overruns and schedule
    delays. Furthermore, budget reductions have resulted in significant
    adjustments to the BSM program, although it is too early to determine
    their ultimate effect.

    IRS Has Made Progress in Implementing BSM, but Much Work Remains
        IRS has long relied on obsolete automated systems for key
    operational and financial management functions, and its attempts to
    modernize these aging computer systems span several decades. IRS's
    current modernization program, BSM, is a highly complex, multibillion-
    dollar program that is the agency's latest attempt to modernize its
    systems. BSM is critical to supporting IRS's taxpayer service and
    enforcement goals. For example, BSM includes projects to allow
    taxpayers to file and retrieve information electronically and to
    provide technology solutions to help reduce the backlog of collections
    cases. BSM is important for another reason. It allows IRS to provide
    the reliable and timely financial management information needed to
    account for the Nation's largest revenue stream and better enable the
    agency to justify its resource allocation decisions and congressional
    budgetary requests.
        Since our testimony before this subcommittee on last year's budget
    request, IRS has deployed initial phases of several modernized systems
    under its BSM program. The following provides examples of the systems
    and functionality that IRS implemented in 2004 and the beginning of
    2005.
      --Modernized e-File (MeF).--This project is intended to provide
            electronic filing for large corporations, small businesses, and
            tax-exempt organizations. The initial releases of this project
            were implemented in June and December 2004, and allowed for the
            electronic filing of forms and schedules for the form 1120
            (corporate tax return) and form 990 (tax-exempt organizations'
            tax return). IRS reported that, during the 2004 filing season,
            it accepted over 53,000 of these forms and schedules using MeF.
      --e-Services.--This project created a Web portal and provided other
            electronic services to promote the goal of conducting most IRS
            transactions with taxpayers and tax practitioners
            electronically. IRS implemented e-Services in May 2004.
            According to IRS, as of late March 2005, over 84,000 users have
            registered with this Web portal.
      --Customer Account Data Engine (CADE).--CADE is intended to replace
            IRS's antiquated system that contains the agency's repository
            of taxpayer information and, therefore, is the BSM program's
            linchpin and highest priority project. In July 2004 and January
            2005, IRS implemented the initial releases of CADE, which have
            been used to process filing year 2004 and 2005 1040EZ returns,
            respectively, for single taxpayers with refund or even-balance
            returns. According to IRS, as of March 16, 2005, CADE had
            processed over 842,000 tax returns so far this filing season.
      --Integrated Financial System (IFS).--This system replaces aspects of
            IRS's core financial systems and is ultimately intended to
            operate as its new accounting system of record. The first
            release of this system became fully operational in January
            2005.
        Although IRS is to be applauded for delivering such important
    functionality, the BSM program is far from complete. Future deliveries
    of additional functionality of deployed systems and the implementation
    of other BSM projects are expected to have a significant impact on
    IRS's taxpayer services and enforcement capability. For example, IRS
    has projected that CADE will process about 2 million returns in the
    2005 filing season. However, the returns being processed in CADE are
    the most basic and constitute less than 1 percent of the total tax
    returns expected to be processed during the current filing season. IRS
    expects the full implementation of CADE to take several more years.
    Another BSM project--the Filing and Payment Compliance (F&PC) project--
    is expected to increase (1) IRS's capacity to treat and resolve the
    backlog of delinquent taxpayer cases, (2) the closure of collection
    cases by 10 million annually by 2014, and (3) voluntary taxpayer
    compliance. As part of this project, IRS plans to implement an initial
    limited private debt collection capability in January 2006, with full
    implementation of this aspect of the F&PC project to be delivered by
    January 2008 and additional functionality to follow in later years.

    BSM Program Has History of Cost Increases and Schedule Delays and Is
            High Risk
        The BSM program has a long history of significant cost increases
    and schedule delays, which, in part, has led us to report this program
    as high-risk since 1995.\14\ Appendix II provides the history of the
    BSM life-cycle cost and schedule variances. In January 2005 letters to
    congressional appropriation committees, IRS stated that it had showed a
    marked improvement in significantly reducing its cost variances. In
    particular, IRS claimed that it reduced the variance between estimated
    and actual costs from 33 percent in fiscal year 2002 to 4 percent in
    fiscal year 2004. However, we do not agree with the methodology used in
    the analysis supporting this claim. Specifically, (1) the analysis did
    not reflect actual costs, instead it reflected changes in cost
    estimates (i.e., budget allocations) for various BSM projects; (2) IRS
    aggregated all of the changes in the estimates associated with the
    major activities for some projects, such as CADE, which masked that
    monies were shifted from future activities to cover increased costs of
    current activities; and (3) the calculations were based on a percentage
    of specific fiscal year appropriations, which does not reflect that
    these are multiyear projects.
    ---------------------------------------------------------------------------
        \14\ For our latest high-risk report, please see GAO, High-Risk
    Series: An Update, GAO-05-207 (Washington, DC, January 2005).
    ---------------------------------------------------------------------------
        In February 2002 we expressed concern over IRS's cost and schedule
    estimating and made a recommendation for improvement.\15\ IRS and its
    prime systems integration support (PRIME) contractor have taken action
    to improve their estimating practices, such as developing a cost and
    schedule estimation guidebook and developing a risk-adjustment model to
    include an analysis of uncertainty. These actions may ultimately result
    in more realistic cost and schedule estimates, but our analysis of
    IRS's expenditure plans \16\ over the last few years shows continued
    increases in estimated project life-cycle costs (see fig. 3).
    ---------------------------------------------------------------------------
        \15\ GAO, Business Systems Modernization: IRS Needs to Better
    Balance Management Capacity with Systems Acquisition Workload, GAO-02-
    356 (Washington, DC: Feb. 28, 2002).
        \16\ BSM funds are unavailable until the IRS submits to
    congressional appropriations committees for approval a modernization
    expenditure plan that (1) meets the OMB capital planning and investment
    control review requirements; (2) complies with IRS's enterprise
    architecture; (3) conforms with IRS's enterprise life-cycle
    methodology; (4) is approved by IRS, the Department of the Treasury,
    and OMB; (5) is reviewed by GAO; and (6) complies with acquisition
    rules, requirements, guidelines, and systems acquisition management
    practices.

        The Associate CIO for BSM stated that he believes that IRS's cost
    and schedule estimating has improved in the past year. In particular,
    he pointed out that IRS met its cost and schedule goals for the
    implementation of the latest release of CADE, which allowed the agency
    to use this system to process certain 1040EZ forms in the 2005 filing
    season. It is too early to tell whether this signals a fundamental
    improvement in IRS's ability to accurately forecast project costs and
    schedules.
        The reasons for IRS's cost increases and schedule delays vary.
    However, we have previously reported that they are due, in part, to
    weaknesses in management controls and capabilities. We have previously
    made recommendations to improve BSM management controls, and IRS has
    implemented or begun to implement these recommendations. For example,
    in February 2002, we reported that IRS had not yet defined or
    implemented an IT human capital strategy, and recommended that IRS
    develop plans for obtaining, developing, and retaining requisite human
    capital resources.\17\ In September 2003, TIGTA reported that IRS had
    made significant progress in developing a human capital strategy but
    that it needed further development. In August 2004, the current
    Associate CIO for BSM identified the completion of a human capital
    strategy as a high priority. Among the activities that IRS is
    implementing are prioritizing its BSM staffing needs and developing a
    recruiting plan. IRS has also identified, and is addressing, other
    major management challenges in areas such as requirements, contract,
    and program management. For example, poorly defined requirements have
    been among the significant weaknesses that have been identified as
    contributing to project cost overruns and schedule delays. As part of
    addressing this problem, in March 2005, the IRS BSM office established
    a requirements management office, although a leader has not yet been
    hired.
    ---------------------------------------------------------------------------
        \17\ GAO-02-356.
    ---------------------------------------------------------------------------
    IRS Is Adjusting the BSM Program in Response to Budget Reductions
        The BSM program is undergoing significant changes as it adjusts to
    reductions in its budget. Figure 4 illustrates the BSM program's
    requested and enacted budgets for fiscal years 2004 through 2006.\18\
    For fiscal year 2005, IRS received about 29 percent less funding than
    it requested (from $285 million to $203.4 million). According to the
    Senate report for the fiscal year 2005 Transportation, Treasury, and
    General Government appropriations bill, in making its recommendation to
    reduce BSM funding, the Senate Appropriations Committee was concerned
    about the program's cost overruns and schedule delays. In addition, the
    committee emphasized that in providing fewer funds, it wanted IRS to
    focus on its highest priority projects, particularly CADE.\19\ In
    addition, IRS's fiscal year 2006 budget request reflects an additional
    reduction of about 2 percent, or about $4.4 million, from the fiscal
    year 2005 appropriation.
    ---------------------------------------------------------------------------
        \18\ IRS uses the appropriated funds to cover contractor costs
    related to the BSM program. IRS funds internal costs for managing BSM
    with another appropriation. These costs are not tracked separately for
    BSM-related activities.
        \19\ U.S. Senate, Senate Report 108-342 (2004).

        It is too early to tell what effect the budget reductions will
    ultimately have on the BSM program. However, the significant
    adjustments that IRS is making to the program to address these
    reductions are not without risk, could potentially impact future budget
    requests, and will delay the implementation of certain functionality
    that was intended to provide benefit to IRS operations and the
    taxpayer. For example:
      --Reductions in Management reserve/project risk adjustments.--In
            response to the fiscal year 2005 budget reduction, IRS reduced
            the amount that it had allotted to program management reserve
            and project risk adjustments by about 62 percent (from about
            $49.1 million to about $18.6 million).\20\ If BSM projects have
            future cost overruns that cannot be covered by the depleted
            reserve, this reduction could result in (1) increased budget
            requests in future years or (2) delays in planned future
            activities (e.g., delays in delivering promised functionality)
            to use those allocated funds to cover the overruns.
    ---------------------------------------------------------------------------
        \20\ We did not include in our calculations, reductions to specific
    project risk adjustment amounts that were made for reasons other than
    the fiscal year 2005 budget reduction.
    ---------------------------------------------------------------------------
      --Shifts of BSM management responsibility from the PRIME contractor
            to IRS.--Due to budget reductions and IRS's assessment of the
            PRIME contractor's performance, IRS decided to shift
            significant BSM responsibilities for program management,
            systems engineering, and business integration from the PRIME
            contractor to IRS staff. For example, IRS staff are assuming
            responsibility for cost and schedule estimation and
            measurement, risk management, integration test and deployment,
            and transition management. There are risks associated with this
            decision. To successfully accomplish this transfer, IRS must
            have the management capability to perform this role. Although
            the BSM program office has been attempting to improve this
            capability through, for example, implementation of a new
            governance structure and hiring staff with specific technical
            and management expertise, IRS has had significant problems in
            the past managing this and other large development projects,
            and acknowledges that it has major challenges to overcome in
            this area.
      --Suspension of the Custodial Accounting Project (CAP).--Although the
            initial release of CAP went into production in September 2004,
            IRS has decided not to use this system and to stop work on
            planned improvements due to budget constraints. According to
            IRS, it made this decision after it evaluated the business
            benefits and costs to develop and maintain CAP versus the
            benefits expected to be provided by other projects, such as
            CADE. Among the functionality that the initial releases of CAP
            were expected to provide were (1) critical control and
            reporting capabilities mandated by federal financial management
            laws; (2) a traceable audit trail to support financial
            reporting; and (3) a subsidiary ledger to accurately and
            promptly identify, classify, track, and report custodial
            revenue transactions and unpaid assessments. With the
            suspension of CAP, it is now unclear how IRS plans to replace
            the functionality this system was expected to provide, which
            was intended to allow the agency to make meaningful progress
            toward addressing long-standing financial management
            weaknesses. IRS is currently evaluating alternative approaches
            to addressing these weaknesses.
      --Reductions in planned functionality.--According to IRS, the fiscal
            year 2006 funding reduction will result in delays in planned
            functionality for some of its BSM projects. For example, IRS no
            longer plans to include Form 1041 (the income tax return for
            estates and trusts) in the fourth release of Modernized e-File,
            which is expected to be implemented in fiscal year 2007.
        The BSM program is based on visions and strategies developed in
    2000 and 2001. The age of these plans, in conjunction with the
    significant delays already experienced by the program and the
    substantive changes brought on by budget reductions, indicate that it
    is time for IRS to revisit its long-term goals, strategy, and plans for
    BSM. Such an assessment would include an evaluation of when significant
    future BSM functionality would be delivered. IRS's Associate CIO for
    BSM has recognized that it is time to recast the agency's BSM strategy
    because of changes that have occurred subsequent to the development of
    the program's initial plans. According to this official, IRS is
    redefining and refocusing the BSM program, and he expects this effort
    to be completed by the end of this fiscal year.

     ADDITIONAL ACTIONS NEEDED TO IMPROVE BUDGETING FOR IT OPERATIONS AND
                                  MAINTENANCE

        IRS has requested about $1.62 billion for IT operations and
    maintenance in fiscal year 2006, within its proposed new Tax
    Administration and Operations account. Under the prior years' budget
    structure, these funds were included in a separate account, for which
    IRS received an appropriation of about $1.59 billion in fiscal year
    2005. The $1.62 billion requested in fiscal year 2006 is intended to
    fund the personnel costs for IT staff (including staff supporting the
    BSM program) and activities such as IT security, enterprise networks,
    and the operations and maintenance costs of its current systems. We
    have previously expressed concern that IRS does not employ best
    practices in the development of its IT operations and maintenance
    budget request.\21\ Although IRS has made progress in addressing our
    concern, more work remains.
    ---------------------------------------------------------------------------
        \21\ GAO, Internal Revenue Service: Improving Adequacy of
    Information Systems Budget Justification, GAO-02-704 (Washington, DC,
    June 28, 2002).
    ---------------------------------------------------------------------------
        The Paperwork Reduction Act (PRA) of 1995 \22\ requires Federal
    agencies to be accountable for their IT investments and responsible for
    maximizing the value and managing the risks of their major information
    systems initiatives. The Clinger-Cohen Act of 1996 \23\ establishes a
    more definitive framework for implementing the PRA's requirements for
    IT investment management. It requires Federal agencies to focus more on
    the results they have achieved and introduces more rigor and structure
    into how agencies are to select and manage IT projects. In addition,
    leading private- and public-sector organizations have taken a project-
    or system-centric approach to managing not only new investments but
    also operations and maintenance of existing systems. As such, these
    organizations:
    ---------------------------------------------------------------------------
        \22\ Public Law No. 104-13 (1995).
        \23\ Public Law No. 104-106 section 5001 et. seq. (1996).
    ---------------------------------------------------------------------------
      --identify operations and maintenance projects and systems for
            inclusion in budget requests;
      --assess these projects or systems on the basis of expected costs,
            benefits, and risks to the organization;
      --analyze these projects as a portfolio of competing funding options;
            and
      --use this information to develop and support budget requests.
        This focus on projects, their outcomes, and risks as the basic
    elements of analysis and decision making is incorporated in the IT
    investment management approach that is recommended by OMB and GAO. By
    using these proven investment management approaches for budget
    formulation, agencies have a systematic method, on the basis of risk
    and return on investment, to justify what are typically substantial
    information systems operations and maintenance budget requests.
        In our assessment of IRS's fiscal year 2003 budget request, we
    reported that the agency did not develop its information systems
    operations and maintenance request in accordance with the investment
    management approach used by leading organizations. We recommended that
    IRS prepare its future budget requests in accordance with these best
    practices.\24\ To address our recommendation, IRS agreed to take a
    variety of actions, which it has made progress in implementing. For
    example, IRS stated that it planned to develop an activity-based cost
    model to plan, project, and report costs for business tasks/activities
    funded by the information systems budget. The recent release of IFS
    included an activity-based cost module, but IRS does not currently have
    historical cost data to populate this module. According to officials in
    the Office of the Chief Financial Officer, IRS is in the process of
    accumulating these data. These officials stated that IRS needs 3 years
    of actual costs to have the historical data that would provide a basis
    for future budget estimates. Accordingly, these officials expected that
    IRS would begin using the IFS activity-based cost module in formulating
    the fiscal year 2008 budget request and would have the requisite 3
    years' of historical data in time to develop the fiscal year 2010
    budget request. In addition, IRS planned to develop a capital planning
    guide to implement processes for capital planning and investment
    control, budget formulation and execution, business case development,
    and project prioritization. IRS has developed a draft guide, which is
    currently under review by IRS executives, and IRS expects it to become
    policy on October 1, 2005. Although progress has been made in
    implementing best practices in the development of the IT operations and
    maintenance budget, until these actions are completely implemented IRS
    will not be able to ensure that its request is adequately supported.
    ---------------------------------------------------------------------------
        \24\ GAO-02-704.
    ---------------------------------------------------------------------------
                                  CONCLUSIONS

        As IRS shifts its priorities to enforcement and faces tight budgets
    for service, the agency will be challenged to maintain the gains it has
    made in taxpayer service. In order to avoid a ``swinging pendulum,''
    where enforcement gains are achieved at the cost of taxpayer service
    and vice versa, IRS and the Congress would benefit from a set of
    agreed-upon long-term goals. Long-term goals would provide a framework
    for assessing budgetary tradeoffs between taxpayer service and
    enforcement and whether IRS is making satisfactory progress towards
    achieving those goals. Similarly, long-term goals could help identify
    priorities within the taxpayer service and enforcement functions. For
    example, if the budget for taxpayer service were to be cut and
    efficiency gains did not offset the cut, long-term goals could help
    guide decisions about whether to make service cuts across the board or
    target selected services. To its credit, IRS has been developing a set
    of long-term goals, so we are not making a recommendation on goals.
    However, we want to underscore the importance of making the goals
    public in a timely fashion, as IRS has planned. The Congress would then
    have an opportunity to review the goals and start using them as a tool
    for holding IRS accountable for performance.
        In addition, the Congress would benefit from more information about
    the short-term impacts of the 2006 budget request on taxpayers. The
    2006 budget request cites a need for reducing the hours of telephone
    service and scaling back walk-in assistance but provides little
    additional detail. Without more detail about how taxpayers will be
    affected, it is difficult to assess whether the 2006 proposed budget
    would allow IRS to achieve its stated intent of both maintaining a high
    level of taxpayer service and increasing enforcement.
        BSM and related initiatives such as electronic filing hold the
    promise of delivering further efficiency gains that could offset the
    need for larger budget increases to fund taxpayer service and
    enforcement. Today, taxpayers have seen payoffs from BSM; however, the
    program is still high risk and budget reductions have caused
    substantive program changes. IRS has recognized it is time to revisit
    its long-term BSM strategy and is currently refocusing the program. As
    we did with long-term goals above, we want to underscore the importance
    of timely completion of the revision of the BSM strategy.

                                 RECOMMENDATION

        In a related statement (GAO-05-416T), GAO recommended that the
    Commissioner of Internal Revenue supplement the 2006 budget request
    with more detailed information on how proposed service reductions would
    impact taxpayers.

          Appendix I.--Description of IRS's Proposed Budget Structure

        IRS's proposed new budget structure as depicted in figure 5
    combines the three major appropriations that the agency has had in the
    past--Processing, Assistance, and Management; Tax Law Enforcement; and
    Information Systems into one appropriation called Tax Administration
    and Operations. The Business Systems Modernization and Health Insurance
    Tax Credit Administration appropriations accounts remain unchanged. The
    Tax Administration and Operations appropriation is divided among eight
    critical program areas. These budget activities focus on Assistance,
    Outreach, Processing, Examination, Collection, Investigations,
    Regulatory Compliance, and Research. According to IRS, as it continues
    to move forward with developing and implementing this new structure,
    these program areas and the associated resource distributions will be
    refined to provide more accurate costing.
        IRS reported that the new budget structure has a more direct
    relationship to its major program areas and strategic plan. We did not
    evaluate IRS's proposed budget structure as part of this engagement
    because it was not within the scope of our review. However, we have
    recently completed a study on the administration's broader budget
    restructuring effort. In that study we say that, going forward,
    infusing a performance perspective into budget decisions may only be
    achieved when the underlying information becomes more credible and used
    by all major decision makers. Thus, the Congress must be considered a
    partner. In due course, once the goals and underlying data become more
    compelling and used by the Congress, budget restructuring may become a
    better tool to advance budget and performance integration.\25\
    ---------------------------------------------------------------------------
        \25\ For a more detailed discussion, see GAO, Performance
    Budgeting: Efforts to Restructure Budgets to Better Align Resources
    with Performance, GAO-05-117SP (Washington, DC: February 2005).

        Appendix II.--BSM Project Life Cycle Cost/Schedule Variance and
                                Benefits Summary

        The table below shows the life-cycle variance in cost and schedule
    estimates for completed and ongoing Business Systems Modernization
    (BSM) projects, based on data contained in IRS's expenditure plans.
    These variances are based on a comparison of IRS's initial and revised
    (as of July 2004) cost and schedule estimates to complete initial
    operation \26\ or full deployment \27\ of the projects.
    ---------------------------------------------------------------------------
        \26\ Initial operation refers to the point at which a project is
    authorized to begin enterprise-wide deployment.
        \27\ Full deployment refers to the point at which enterprise-wide
    deployment has been completed and a project is transitioned to
    operations and support.

                      TABLE 4.--BSM PROJECT LIFE CYCLE COST/SCHEDULE VARIANCE AND BENEFITS SUMMARY
                                                 [Dollars in thousands]
    ----------------------------------------------------------------------------------------------------------------
                                                                    Schedule
                                                      Reported/     Variance  Reported/Revised      Reported IRS/
               Project              Cost Variance      Revised        (In         Estimated       Taxpayer Benefits
                                                   Estimated Cost   Months)    Completion Date
    ----------------------------------------------------------------------------------------------------------------
    Completed projects:
        Security and Technology           +$8,450         $45,401         +5  1/31/02 (initial  Provides
         Infrastructure Release 1.                                             operation) \1\.   infrastructure for
                                                                                                 secure telephony
                                                                                                 and electronic
                                                                                                 interaction among
                                                                                                 IRS employees, tax
                                                                                                 practitioners, and
                                                                                                 taxpayers.
        Customer Communications          +$14,562         $60,762         +9  2/26/02 (full     Improves
         2001.                                                                 deployment).      telecommunications
                                                                                                 infrastructure,
                                                                                                 including telephone
                                                                                                 call management,
                                                                                                 call routing, and
                                                                                                 customer self-
                                                                                                 service
                                                                                                 applications.
        Customer Relationship               -$721          $9,245         +3  9/30/02 (full     Provides commercial,
         Management Exam.                                                      deployment).      off-the-shelf
                                                                                                 software to IRS
                                                                                                 revenue agents to
                                                                                                 allow them to
                                                                                                 accurately compute
                                                                                                 complex corporate
                                                                                                 transactions.
        Human Resources Connect             +$200         $10,200  .........  12/31/02          Allows IRS employees
         Release 1.                                                            (initial          to access and
                                                                               operation) \1\.   manage their human
                                                                                                 resources
                                                                                                 information online.
        Internet Refund/Fact of          +$12,923         $26,432        +14  9/26/03 (full     Provides instant
         Filing.                                                               deployment).      refund status
                                                                                                 information and
                                                                                                 instructions for
                                                                                                 resolving refund
                                                                                                 problems to
                                                                                                 taxpayers with
                                                                                                 Internet access.
        Modernized e-File Release        +$21,057         $50,303       +6.5  5/31/04 (initial  Provides initial
         1.                                                                    operation) \1\.   electronic filing
                                                                                                 capability for
                                                                                                 large corporations,
                                                                                                 small business, and
                                                                                                 tax-exempt
                                                                                                 organizations.
    Ongoing projects:
        Modernized e-File Release  ..............         $16,325  .........  9/30/04 (initial  Provides additional
         2.                                                                    operation).       functionality to
                                                                                                 support corporate
                                                                                                 electronic filing
                                                                                                 and other
                                                                                                 capabilities,
                                                                                                 including required
                                                                                                 public access to
                                                                                                 filed returns for
                                                                                                 tax-exempt
                                                                                                 organizations.
        Modernized e-File Release         +$5,300         $27,175  .........  3/31/05 (initial  Provides additional
         3.                                                                    operation).       functionality to
                                                                                                 support electronic
                                                                                                 filing for tax-
                                                                                                 exempt
                                                                                                 organizations and
                                                                                                 other capabilities,
                                                                                                 including the
                                                                                                 interface with
                                                                                                 state retrieval
                                                                                                 systems.
        e-Services...............       +$102,271        $148,820        +18  4/30/05 (full     Provides a Web
                                                                               deployment).      portal and other e-
                                                                                                 Services to promote
                                                                                                 the goal of
                                                                                                 conducting most IRS
                                                                                                 transactions with
                                                                                                 taxpayers and tax
                                                                                                 practitioners
                                                                                                 electronically.
        Customer Account Data           +$118,129        $182,774        +30  6/30/05 (full     Provides the
         Engine--Individual                                                    deployment).      modernized database
         Master File Release 1.                                                                  foundation to
                                                                                                 replace the
                                                                                                 existing individual
                                                                                                 master file
                                                                                                 processing systems.
                                                                                                 Facilitates faster
                                                                                                 refund processing
                                                                                                 and more timely
                                                                                                 response to
                                                                                                 taxpayer inquiries
                                                                                                 for Form 1040EZ
                                                                                                 filers.
        Integrated Financial             +$73,710        $173,580        +15  6/30/05 (full     Provides a single
         System Release 1.                                                     deployment).      general ledger for
                                                                                                 custodial and
                                                                                                 financial data and
                                                                                                 a platform to
                                                                                                 integrate core
                                                                                                 financial data with
                                                                                                 budget,
                                                                                                 performance, and
                                                                                                 cost-accounting
                                                                                                 data.
        Custodial Accounting             +$91,789        $138,950        +33  11/01/05 (full    Provides integrated
         Project Release 1.                                                    deployment).      tax operations and
                                                                                                 internal management
                                                                                                 information to
                                                                                                 support evolving
                                                                                                 decision analytics,
                                                                                                 performance
                                                                                                 measurement, and
                                                                                                 management
                                                                                                 information needs.
    ----------------------------------------------------------------------------------------------------------------
    \1\ Information on the costs and schedule for the full-deployment stage of these projects was not available in
      the BSM expenditure plans.

    Source.--GAO analysis of IRS data.

     Appendix III.--How IRS Allocated Expenditures FTEs in Fiscal Year 2004
        Figures 6 and 7 illustrate how the Internal Revenue Service (IRS)
    allocated expenditures and full-time equivalents (FTEs) in fiscal year
    2004. Figure 8 shows total expenditures. The percentage of expenditures
    devoted to contracts decreased from 9 percent in 2002 to 5 percent in
    2004, because of fewer private contracts. The percentage of
    expenditures devoted to other non-labor costs increased from 8 percent
    in 2002 to 12 percent in 2004, according to IRS officials, due to of
    increases in miscellaneous costs.

        Figure 7 shows IRS's total FTEs. Since 2002, FTEs have decreased
    slightly from 99,180 in 2002 to 99,055 in 2004. We previously reported
    that processing FTEs declined 1 percentage point between 2002 and 2003.
    Between 2003 and 2004, IRS's allocation of FTEs remained similar but
    with a 1 percent increase in enforcement activities in conducting
    examinations, and in management and other services.

                                     ______

        Prepared Statement of Nina E. Olson, National Taxpayer Advocate

        Mr. Chairman and distinguished members of the subcommittee, thank
    you for inviting me to submit a statement in connection with your
    hearing on the proposed budget of the Internal Revenue Service for
    fiscal year 2006.
        The IRS is at a critical juncture in its history. In the 6+ years
    since the enactment of the Internal Revenue Service Restructuring and
    Reform Act of 1998, the IRS has successfully incorporated valuable
    customer service practices into its daily activities at all levels of
    the organization. It is now trying to increase its enforcement activity
    without eroding these taxpayer service gains. I strongly support a
    robust and research-driven IRS that undertakes well-designed
    examination and collection activities and criminal investigations. I
    believe that the IRS is capable of conducting these activities in an
    environment of superior taxpayer service. Given the size of the tax
    gap, I believe that the IRS needs additional resources to apply to both
    of these areas.
        I also support increased funding for IRS Business Systems
    Modernization, providing the funds are spent wisely. Systems
    modernization is a critical component not only for the examination and
    collection aspects of IRS work but also for the taxpayer service
    component. Without sufficient funding, we are left continually
    apologizing to taxpayers because our systems aren't functioning; we
    create work for ourselves, fixing errors manually because systems
    create taxpayer problems rather than avoid them.
        The role of taxpayer service in an environment of increasing
    enforcement activity is of great import to taxpayers, tax
    administrators, and Congress alike. I identified several areas of
    concern for taxpayer service in my 2004 Annual Report to Congress.
    Before I discuss some of these issues, I will comment generally about
    the balance between taxpayer service and enforcement.

                            THE COMPLIANCE EQUATION

        In the IRS Strategic Plan for 2005-2009 and elsewhere, the IRS has
    emphasized that its guiding principle is
    ``Service+Enforcement=Compliance.'' The proposed IRS budget for fiscal
    year 2006 would revamp existing budget categories to fit this guiding
    principle, placing 33 percent of the IRS budget into a ``taxpayer
    service'' account and 65 percent of the IRS budget into an
    ``enforcement'' account. (The remaining 2 percent of the proposed
    budget is allocated to Business Systems Modernization and Health
    Insurance Tax Credit Administration.)
        At a conceptual level, the ``Service+Enforcement=Compliance''
    principle is indisputably correct. Compliance represents the sum total
    of IRS's success in helping taxpayers file tax returns and pay tax, and
    IRS's success at enforcing the law when taxpayers fail to do what is
    required. What is less clear is the appropriate balance between service
    and enforcement, particularly in a resource-constrained budget
    environment. ``Service+Enforcement=Compliance'' does not in and of
    itself define a specific level of compliance. That is, each of the
    equation's elements is a variable. Thus, if we reduce service, there is
    no guarantee--no matter how much we increase our enforcement efforts--
    that compliance will increase overall. It is entirely possible that an
    increase in enforcement initiatives, offset by a decrease in taxpayer
    service, would result in less compliance.
        How can that be? The answer is that our estimated 84 percent
    voluntary compliance rate is driven primarily by the fact that most
    income is subject to income and payroll tax withholding or to third-
    party income reporting. If we do not provide adequate taxpayer service
    to these taxpayers and their employers or payors--who are either
    compliant or trying to be compliant--then compliance by these taxpayers
    will decline. The IRS would then be forced to divert its enforcement
    resources, in part, to address this new source of noncompliance.
        Last week, the IRS released a preliminary estimate of the tax gap
    based on the recent National Research Program study. This study
    estimates the net tax gap (i.e., the gross gap reduced by late payments
    and enforced payments) in the range of $257-$298 billion annually and a
    voluntary compliance rate of approximately 84 percent. That rate is
    generally consistent with the results of prior studies.
        Today, there are approximately 130 million individual taxpayers.
    Each individual taxpayer is paying, on average, a ``surtax'' of at
    least $2,000 a year to subsidize noncompliance. That's the bad news.
    The ``good'' news, if you can call it that, is that notwithstanding
    claims that the decline in IRS enforcement activity in the aftermath of
    the IRS Restructuring and Reform Act of 1998 led to rampant cheating,
    the estimate of the compliance rate in the recent tax gap study is
    approximately the same as the compliance rate when the prior study was
    conducted in the late 1980's.
        Even so, a principal function of the IRS is to collect all tax due,
    so the big question is what do we do now to increase the compliance
    rate? The proposed IRS budget reflects the view that enforcement
    activity should be increased while taxpayer service is reduced. Is that
    the right answer?
        If I were developing a budget from scratch, I would argue that both
    enforcement and taxpayer service funding should be increased. The IRS
    is the accounts receivable department of the Federal Government, and it
    is clear to me that additional funding for both enforcement and
    taxpayer service--if spent wisely--would bring in significantly more
    dollars.
        Given the budget realities, however, I am concerned that the IRS
    does not have better research to show where its dollars could be most
    effectively spent. Indeed, the one function I am certain requires more
    resources is the IRS research function. The IRS is able to track
    revenue collected as a direct result of its enforcement activities.
    While that is useful information, it is the indirect effects of IRS
    activities--on both the taxpayer service side and the enforcement
    side--that generate a far greater amount of revenue. Even if the IRS
    only audits about 1 percent of tax returns, for example, much larger
    numbers of taxpayers will choose to comply because of the possibility
    that they could be audited. Thus, a single audit has a ``ripple''
    effect or, in economic terms, a ``multiplier'' effect.
        Not all audits are created equal, however: $1 spent on auditing
    industries with historically high rates of noncompliance, such as the
    construction industry, may have a very different multiplier than an
    audit of a corporate tax shelter. Similarly, $1 spent on making it
    easier for taxpayers to comply with their tax obligations--e.g.,
    publishing forms, advertising e-file, answering tax law questions--
    almost certainly has a multiplier effect as well. We simply don't have
    adequate research to show where the next dollar is best spent.
        Moreover, in terms of improving overall tax compliance, we don't
    have data that show whether the ``multiplier effect'' is generally
    greater at this time for enforcement or for taxpayer service. Thus, a
    decision to increase enforcement and reduce taxpayer service is, to a
    large degree, based more on instinct than solid research. To be sure,
    this is not easy research to do, and in any event, it is a long-term
    project that will not assist in fiscal year 2006 budget decisions. But
    in the absence of better research, it is important to emphasize that
    the decision about how much to increase or decrease certain activities
    represents merely a policy call based on educated guessing.
        If the proposed budget categories are enacted, we still face the
    challenge of allocating IRS costs among them. Many, if not most, IRS
    expenses cannot be unambiguously placed under either the
    ``enforcement'' or the ``taxpayer service'' umbrella. For example, the
    proposed budget lists the $1.3 billion cost of submission processing as
    a ``taxpayer service.'' In reality, I view this cost more as a core
    business function. Processing tax returns provides service to the
    extent that it is necessary to enable the IRS to issue tax refunds. On
    the other hand, return processing is central to the IRS's ability to
    classify returns for audits and determine balances due on returns.
        The proposed division of the budget into two categories has also
    triggered internal budget competition. Since the overall budget
    proposes to increase the enforcement category by 8 percent and reduce
    the taxpayer service category by 1 percent, operating divisions and
    functions clearly benefit from placing as much of their programming as
    possible into the enforcement category. Although final decisions have
    not been made, this budget approach seems to be leading to some
    questionable results.
        For example, we have been told that more than 90 percent of the
    funding for the Office of Appeals and the Office of Chief Counsel will
    be allocated to enforcement. By contrast, we have been told that none
    of the funding for the Taxpayer Advocate Service (TAS) will be
    allocated to enforcement--indeed, that TAS will be the only function in
    the IRS allocated entirely to taxpayer service. Considering that 85
    percent of TAS's funding is currently allocated to the Tax Law
    Enforcement (TLE) account and that fully two-thirds of TAS's cases are
    enforcement-related (i.e., cases where taxpayers seek help from TAS due
    to actual or perceived mistakes made by IRS examination or collection
    personnel), there is little principled basis for this difference in
    treatment. The practical effect of allocating TAS entirely to taxpayer
    service is that it increases the likelihood that the TAS budget will
    sustain significant cuts.
        Among the many measures the IRS is considering to reduce taxpayer
    service costs, I discuss my concerns about two below.

                      ELECTRONIC TAX LAW ASSISTANCE (ETLA)

        Electronic Tax Law Assistance (ETLA) is a service provided through
    a link on the official IRS website that allows taxpayers or
    practitioners to send tax law questions electronically to the IRS. The
    system is designed to allow employees to pull responses from the
    database of pre-written answers and thus save time researching and
    responding to frequently asked questions. As originally conceived, ETLA
    was the first stage in a multi-level approach to tax law assistance,
    using artificial intelligence technology to recognize and answer the
    easiest questions and reserving valuable IRS employees for the more
    complex questions. In a recent customer survey, over 90 percent of
    taxpayers using ETLA stated that they would use the service again.
        We understand that the IRS is considering a proposal to discontinue
    providing tax law assistance over the Internet. I think this would be a
    mistake. The benefits of providing answers to taxpayer questions by
    Internet are significant. Most taxpayers now have Internet access, and
    many taxpayers prefer to write up their questions precisely and submit
    them electronically to avoid waiting on hold to speak with telephone
    assisters. In fact, in other areas of tax administration, the IRS is
    justifying the reduction of face-to-face service due to the
    availability of Internet applications. Although Internet-based
    assistance should not be the sole or even primary means of providing
    tax law assistance, ETLA is still very useful, and I understand the
    savings from eliminating it would be only about $1.5 million.

                       TAXPAYER ASSISTANCE CENTERS (TACS)

        The IRS is planning to close a significant number of its
    approximately 400 walk-in sites (also called ``Taxpayer Assistance
    Centers'' or ``TACs''). Here, the estimated savings are larger--
    approximately $50 million. To date, the IRS has not identified
    alternative means to assist taxpayers who require face-to-face
    assistance. This is unfortunate since taxpayers will continue to seek
    the assistance they require. The Taxpayer Advocate Service and other
    IRS offices co-located with TACs subject to closure are particularly
    likely to see an upsurge in taxpayer requests for assistance.
        In a tax system with 130 million individual taxpayers, there is no
    one-size-fits-all solution to any problem. Some taxpayers strongly
    prefer--or, depending on personal limitations, may even require--face-
    to-face contacts, some need telephone contacts, and some prefer to
    interact with the IRS electronically. A significant study released last
    year by the Pew Internet and American Life Project examined how
    Americans communicate with the government. Generally, the study found
    that most Americans prefer to communicate with the government orally
    (either by phone or in person), rather than by letter or over the
    Internet. Notably, fully 20 percent of Americans reported that their
    most recent contact with the government was in person. In a few States,
    the IRS has experimented with using mobile vans to cover a greater
    number of areas. For example, the van might move weekly among five
    locations in a State. It could show up at a local library in a town
    every Monday, for example, and visit other cities on other days of the
    week. A mobile van would not be as convenient as having a fully staffed
    office that is open daily, but if the IRS is planning to close a
    significant number of offices, it should at a minimum consider whether
    an approach like this might allow the IRS to remain accessible at a
    much lower cost.
        The IRS has developed a model incorporating many factors to help it
    determine which TACs to close. I applaud the serious effort that went
    into creating this model over a very short period of time--a matter of
    months. Built using demographic and other taxpayer data, the model
    provides an excellent first stage for an analysis of TAC closures. In
    my view, however, the IRS should supplement this model with a
    comprehensive survey of taxpayers' need for face-to-face service. The
    model's reliance on TAC usage over the last few years, as a proxy for
    taxpayer need, is inadequate since the IRS has reduced the services
    provided in TACs over that period due to resource concerns.
        The speed with which the IRS is making decisions of such momentous
    import to taxpayer service, and the lack of stakeholder engagement, is
    of great concern to me. I was briefed on this model on March 22 of this
    year, too late to have any but the most trivial influence on its
    development. It is my understanding that the IRS consulted the Internal
    Revenue Service Advisory Committee (IRSAC) with respect to the
    weighting of factors used to determine closings. However, the IRS did
    not consult the Taxpayer Advocacy Panel (TAP), a Treasury panel of
    volunteer taxpayers specifically chartered under the Federal Advisory
    Committee Act to advise the IRS on matters pertaining to customer
    service. Nor did the IRS seek comments or suggestions from the Low
    Income Taxpayer Clinics funded by the IRS under IRC  7526, which
    presumably represent the interests of a portion of the taxpayer
    population affected by these closings.
        In light of the lack of any taxpayer-centric assessment of the need
    for face-to-face service, or any accurate measure of the impact of TAC
    closings on compliance, or any significant engagement with
    stakeholders, or any identification of alternative methods for
    providing face-to-face service, I believe that closing Taxpayer
    Assistance Centers at this time will irrevocably harm taxpayers.

                                   CONCLUSION

        The IRS faces significant challenges in the next few years as it
    attempts to increase taxpayer compliance. To achieve this goal, the IRS
    needs to do a better job of identifying and balancing both taxpayer
    needs and enforcement efforts. Rather than making resource-driven
    decisions that are based on inadequate research and that fail to
    identify equivalent alternatives, the IRS must develop a world-class
    research function that is the foundation for all of its customer
    service and enforcement activities. Research--and truly strategic
    planning--should inform the IRS's allocation of resources so that we
    achieve the maximum compliance possible by obtaining the optimal
    balance between service and enforcement.

                         ADDITIONAL COMMITTEE QUESTIONS

        Senator Bond. As I've indicated earlier in my statement, it
    would help us a lot if we could get some funding credit in the
    badly out-of-date scoring systems for the money that comes in
    for the IRS activities that we fund. This would help Congress
    and the IRS to assist more taxpayers and, more importantly,
    bring in more revenue.
        We will leave the record open until next week for my
    colleagues to submit questions. And we would appreciate your
    prompt attention to and response to these. And I thank our
    witnesses and those who've come to hear us.
        [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 Pete V. Domenici

       CAPITAL GAINS TAX RATE FOR ART AND COLLECTIBLES AND FUEL TAX FRAUD

        Question. Commissioner Everson, I am a long-time advocate of
    equitable treatment for all capital gains, and I plan to introduce a
    bill to correct the tax code's disparate treatment of various capital
    gains to ensure fairness for all types of investors.
        My legislation would reduce the capital gains tax rate for sales of
    art and collectibles to 15 percent--the same rate of taxation for most
    capital gains relating to stock and bond sales. In addition to being
    fair to individuals who choose to invest in art or other collectibles,
    I believe that this legislation would raise revenue for the U.S.
    Treasury because lowering the capital gains rate would encourage people
    to buy and sell art and collectibles, which would increase the number
    of people paying tax on art and collectibles.
        Would you anticipate an increase in art and collectibles sales if
    the capital gains tax rate were lowered for such sales?
        Answer. Generally, a reduction in tax may result in an increase in
    affected sales. However, the Department of the Treasury has not
    prepared a revenue estimate that would chart the effects of this
    particular proposal.
        Question. Will you provide me with the amount of revenue generated
    last year by the capital gains tax on the sale of stocks and bonds and
    the amount of revenue generated last year by the capital gains tax on
    the sale of art and collectibles?
        Answer. For 2002, the most recent year for which tax data are
    available, total tax revenue on capital gains from stocks, bonds, and
    other assets subject to preferential capital gains rates was $49
    billion. Separate data are not available for capital gains on sales of
    artworks and collectibles. This category is likely well below 1 percent
    of capital gains realizations and revenues, and too small to be
    measured meaningfully with existing sales of capital assets tax data
    samples.
        Question. What was the administration's reasoning for lowering the
    capital gains tax rate for some investments, but keeping a higher tax
    rate for art and collectibles?
        Answer. The Taxpayer Relief Act of 1997 generally reduced the
    maximum rate on adjusted net capital gain of an individual from 28 to
    20 percent. Although both the House and Senate versions of the Act
    generally reduced the maximum capital gains tax rate for individuals,
    both versions maintained the then-current law maximum 28 percent rate
    for collectibles such as artwork, rugs, antiques, metals, gems, stamps
    or coins, and the conference report retained this rule for
    collectibles. The legislative history of the Act does not give a
    specific reason for this treatment. The Jobs and Growth Tax Relief
    Reconciliation Act of 2003 generally reduced the maximum rates on
    adjusted net capital gain of an individual from 10 and 20 percent to 5
    and 15 percent. It did not modify the category of 28 percent rate gain
    including collectibles.
        Question. Has the administration considered expanding the new,
    lower capital gains tax rate to apply to art and collectibles?
        Answer. The administration's Budget does not include any proposed
    modifications to the taxation of sales or exchanges of collectibles.
    The President has appointed an Advisory Panel on Federal Tax Reform to
    consider fundamental changes throughout the tax Code. The Panel's
    report is due by July 31, 2005.

                CAPITAL GAINS TAX RATE FOR ART AND COLLECTIBLES

        Question. The legislation I mentioned would also correct the
    inequity afforded to artists who donate their work to charity. Under
    current law, if a collector donates a painting to a museum, he or she
    is entitled to a tax deduction equal to the fair market value of the
    artwork. However, if the artist who created the work were to donate the
    same painting, he or she is only entitled to a deduction for the paint,
    the canvas, and any other art supplies involved in creating the work.
        This provision of the Tax Code creates a tremendous disincentive
    for artists to donate their work and negatively impacts museums,
    libraries, and schools, which depend on such donations to grow their
    collections. My legislation would remedy this unfairness by allowing
    artists to deduct the full market value of artwork they donate.
        Would you expect more artists to donate their works to charity if
    they were subject to the same charitable contribution rules as art
    collectors?
        Answer. Yes. We would anticipate a significant increase. The IRS
    anticipates a significant increase because the proposal would allow
    artists to claim a deduction for amounts that are not included in
    income. Current law does not allow a deduction for the value of donated
    services. This current-law rule generally produces the same tax results
    for individuals who assist charities by providing volunteer services as
    for individuals who make charitable contributions of cash.
        Question. Can you tell me how many artists sought deductions for
    charitable contributions of their art work in 2004?
        Answer. This information is not available.

                                 FUEL TAX FRAUD

        Question. Commissioner Everson, over the last several months we
    have been working very hard to identify ways of shoring up the highway
    trust fund without raising taxes. Recently a lot of attention has
    focused on the revenue lost to fuel tax fraud, and in this case, the
    ability of criminals to remove red dye from untaxed diesel fuel using
    straightforward techniques. I have heard from your office that the IRS
    is looking at various technologies to address this issue, but it is
    being held up because there is no field test. It certainly seems we
    could be simultaneously implementing more effective technology while
    exploring options for a more effective field test.
        Why is a field test critical to the success of this program?
        Answer. Each year U.S. consumers buy more then 61 billion gallons
    of diesel fuel and over 26 billion gallons of aviation grade kerosene.
    Both of these products can be and are used in highway vehicles.
    Currently, the IRS uses the red dye field test to monitor compliance
    with the payment of fuel excise taxes. When the IRS takes a sample of
    fuel from a motor vehicle, the results are immediate. If the sample
    does not show any traces of red dye, the IRS releases the vehicle and
    discards the sample. If the field sample shows traces of red dye, the
    IRS forwards the sample to its laboratory for a complete analysis, and
    the Fuel Compliance Officers (FCOs) gather information from the owner
    of the truck, which the IRS uses to assess a penalty for improper use
    of dyed fuel. Without such a field detection device, the IRS would have
    to randomly select fuel from millions of highway vehicles and tens of
    thousands of retail stations, and gather identifying information from
    them as well, in order to monitor compliance with the payment of fuel
    excise taxes. The IRS would have to analyze each sample at a laboratory
    and then would have to follow up with those individuals or businesses
    that failed the test.
        The principal drawback to the current testing is the inability to
    determine immediately if the red dye has been removed from red dye
    diesel fuel. If this removal has been done effectively, there is no
    visible trace left to detect, and the fuel looks just the same as taxed
    fuel that has never been dyed. While the IRS agrees some type of
    invisible marker (such as the recently promoted molecular marker) would
    enable the IRS to detect dye removal, it would have to send all fuel
    samples to a lab for analysis to determine the presence of the marker
    in the fuel. Such an approach is not operationally or economically
    feasible. Hence, the IRS needs some type of field device by which IRS
    FCOs can readily detect the existence of a marker. To date, the IRS has
    not been shown a practical field device.
        Question. It certainly appears that the Red Dye has failed as a
    field test, so why are we allowing perfect to be the enemy of the good
    and losing hundreds of millions of dollars by not implementing another
    method to detect fraudulent fuel?
        Answer. The IRS does not believe that the red dye field test regime
    has been a failure. In the vast majority of cases, the red dye
    provisions have been successful in keeping non-taxable fuel off the
    highways. Upon its initial implementation, the red dye regime yielded
    significant tax increases and continues to be an effective deterrent
    today. It is only recently that the IRS has begun to see products that
    appear to have had the red dye removed. The extent of the removals is
    unknown, but the IRS does not believe that it is widespread. The IRS is
    not aware, nor has it stated, that it is losing hundreds of millions of
    dollars due to the removal of the red dye. As requested in the
    Appropriations bill, the IRS is continuing to look at the possibility
    of using the molecular marking regime and has discussed the potential
    usage with the American Petroleum Institute (API). They have raised
    significant issues regarding the blending, product quality, company
    indemnification and reliability of the sampling. The IRS is continuing
    to work with the promoter of the field screening device to reach an
    acceptable field performance level.
                                     ______

                  Questions Submitted by Senator Patty Murray

                          PRIVATE COLLECTION AGENCIES

        Question. In January of 2005, the IRS briefed my staff on the
    schedule for implementing private debt collection over the next few
    years, including the number of agencies involved, and how much the IRS
    plans to spend in fiscal year 2005 and successive years. Please provide
    a detailed update of this information.
        Answer. The IRS has made significant progress toward the initial
    implementation of the private debt collection initiative. Since the
    briefing in January 2005, the IRS has developed a release schedule that
    will provide for limited implementation in January 2006. The IRS will
    develop additional systemic functionality for January 2007. Full
    implementation of the private debt collection program is scheduled for
    January 2008 with enhanced reporting, monitoring and control
    capabilities. This schedule will allow for a controlled ramp-up of
    additional volumes of delinquent account placements with private
    collection agencies.
        In March 2005, the IRS selected a software vendor to provide
    inventory management support of the private debt collection accounts.
    The vendor is a proven leader in collection inventory management
    applications with over 19 State deployments of their software. The
    inventory management vendor is on board and has been working with IRS
    staff to ensure successful deployment of the supporting software
    applications in time for placement of delinquent accounts with private
    collection agencies.
        The IRS has prepared the statement of work to secure the services
    of private collection agencies, and the contracting officer provided it
    to potential vendors on April 27, 2005. The IRS expects to award
    contracts in July 2005 with initial account placements in late January
    2006. The IRS has identified the initial workload for placement with
    private collection agencies and anticipates placing approximately
    40,000 accounts within the first 9 months of operation.
        The IRS has developed support structures and roles and
    responsibilities. The IRS has identified operational sites and is
    making progress on securing facilities. The IRS has identified a number
    of key policy concerns and successfully worked them to resolution. The
    IRS is drafting internal and external policies and procedures, with
    anticipated completion scheduled for late summer.
        The IRS has developed and approved a project schedule for the
    limited implementation. The IRS has also developed a project budget and
    secured funding for the current fiscal year. Additional funding is
    included in the BSM spend plan requests for fiscal year 2006. The IRS
    has established a project governance structure and its members meet
    regularly with the project leadership to review progress against
    scheduled activities and to provide guidance to the team. With the
    current strong leadership in place, the IRS anticipates a successful
    implementation of the private debt collection efforts.
        The current information technology projected costs and budget for
    fiscal year 2005 totals $15.5 million. This funding amount reflects the
    full costs of the ``limited implementation'' for January 2006 of $9.5
    million and an additional $6 million to begin the activities that
    support the January 2007 implementation.

                         BUSINESS SYSTEMS MODERNIZATION

        Question. Once finalized, the Custodial Accounting Project is
    supposed to be a single, integrated data repository of taxpayer account
    information and accessible for management analysis and reporting.
    However, costs for the Custodial Accounting Project have continued to
    increase, with the cost for the first phase in the neighborhood of $98
    million. But this project is now on hold and may never go forward. What
    is the latest on this project's cost and do you expect it to ever come
    to fruition?
        Answer. The BSM office designed CAP to provide integrated, reliable
    tax operations and internal management information to support decision
    analytics, performance measurement, and management information needs.
    CAP also provided a data warehouse loaded with detailed taxpayer
    account and collections information to be used for analysis and
    financial reporting to oversight organizations. The IRS conceived CAP
    as a multi-release solution, and BSM delivered the first two releases
    into production in September 2004 and November 2004. However, for CAP
    to have sustainable value to the IRS, it required two additional
    releases--for business master file taxpayers and for collections data.
    Collectively, these releases would take at least 3 years to complete
    and cost more than $100 million. In addition, maintenance and support
    for fielded CAP releases will cost more than $10 million annually.
    Within the current budget context, the IRS evaluated benefits and costs
    of continued CAP investment against the value to taxpayers and IRS
    employees, competing priorities such as CADE, MeF, F&PC, and
    maintaining core infrastructure. The IRS determined in January 2005
    continued CAP investment is no longer a viable or sound business
    decision; however, the IRS will leverage CAP work products and
    knowledge gained in other BSM initiatives (e.g., BSM will use CAP data
    models on CADE; the IRS now performs data segmentation and analysis in
    a more modernized way, etc.). The CFO's office is pursuing a current
    production environment (CPE) upgrade alternative that meets their
    needs. There are no plans to revive CAP at this time.
        Question. The contractor for Business Systems Modernization
    developed a system for the IRS known as the Security Audit and Analysis
    System to gather information for use in audits. Specifically, the
    system would enable users to detect unauthorized activities and
    facilitate the reconstruction of events if unauthorized activities
    occurred. However, problems have prevented users from accessing the
    data once it has been collected. When the contractor delivered the
    system to the IRS in 2002, the IRS was aware that the system did not
    meet IRS requirements but accepted the system with the understanding
    that it would be fixed. Have these problems with the system been
    resolved?
        Answer. Since the initial delivery of the system in 2002, the IRS
    has successfully resolved several requirements issues and is pleased
    the Security Audit and Analysis System (SAAS) is effectively managing
    audit trail data for modernization systems. Security Managers and
    Modernization System Managers can generate Modernization Managers
    Security Reports (MMSR) of employee access to taxpayer data from the
    SAAS system. The Treasury Inspector General for Tax Administration
    (TIGTA) should be able to begin their pilot use of SAAS in the summer
    2005. The use of the SAAS reports by TIGTA is delayed until they
    complete the testing of the current system audit trails. Final data
    updates for this capability are underway and the TIGTA should complete
    testing in the summer 2005. Activities continue to plan the transition
    of current production systems audit trail analysis capabilities to the
    SAAS system for TIGTA use. Mission Assurance and Security Services,
    TIGTA, Modernization, Information Technology Services (ITS) and the
    PRIME Contractor are working together to define and prioritize the
    implementation of additional requirements and enhancements to the SAAS
    system, which will be implemented in 2005 and 2006.
        When IRS fully deploys SAAS, it will process two sources of ``audit
    trail'' data. One source is audit trails for modernized systems (e.g.
    IFS, Modernized E-file, E-services, IRFOF, etc.) and another is audit
    trail historic data from the legacy Integrated Data Retrieval System
    (IDRS) and Corporate Files on Line (CFOL) production systems. A current
    production system called ATLAS, which continues to function while the
    IRS transitions its capabilities to SAAS, currently captures this
    legacy system audit trail data and processes it. The TIGTA will
    continue to utilize ATLAS to review potential Unauthorized Access
    (UNAX) violations until the IRS fully tests the SAAS system in a
    production environment using production data. The IRS moved the ATLAS
    data to SAAS to provide more modern technology support to the TIGTA
    users, provide a single system for TIGTA to access their data instead
    of their accessing both ATLAS and SAAS, and to allow the retirement of
    the ATLAS system. The IRS previously processed and loaded the ATLAS
    data into a data mart containing 60 months of historic data, but the
    IRS is currently updating it to contain data from the last 4 months of
    2004 audit trail information into SAAS, and then it will load the IDRS/
    CFOL data from 2005.
        Once the IRS loads the remaining 2004 historic IDRS data into SAAS,
    the IRS needs to complete testing of multi-year report functionality.
    At that point, TIGTA will begin to conduct a formal customer acceptance
    test in the SAAS Production system. After the TIGTA completes the
    customer acceptance test results, the IRS will make any necessary
    systems changes and TIGTA will begin a 3-month parallel test of both
    ATLAS and SAAS in Production prior to making any decisions about
    retiring the current CPE system. TIGTA may determine that a second 3-
    month parallel test of both ATLAS and SAAS is required based on the
    results of the CAT testing and the initial parallel test. The current
    completion dates are in the SAAS Production schedule (05/31/2005
    schedule) as follows:
      --Final Data Checkout on the loading of the 60 months of historic
            data into the SAAS DataMart.--7/19/05;
      --Complete initial TIGTA CAT in Production.--8/22/05.
        The IRS is still working with TIGTA to reach agreement on a plan
    and schedule for conducting the parallel test between SAAS and ATLAS in
    Production. The IRS based the current schedule, which calls for this
    test to begin in November 2006, upon the current estimates for loading
    all historical audit trail data for 2005 into the SAAS data mart.
    Delays in loading the most current 60 months of historic audit trail
    data into the SAAS Production system have caused schedule delays, and
    the IRS is looking at options (e.g., performance enhancements, capacity
    upgrades) that may accelerate the current schedule estimates. The
    current projected completion dates in the SAAS Production schedule as
    of 05/31/2005 are:
      --Final Datamart load of the 2005 data.--9/12/06;
      --Execute 3 month parallel ATLAS/SAAS Production testing.--12/08/06;
      --Execute 2nd 3 month parallel testing.--3/31/07--dependent on
            TIGTA's satisfaction following the first 3 months parallel
            testing;
      --Retire ATLAS.--3/31/07 following 6-month ATLAS/SAAS parallel
            testing.

                   TELEFILE--FILING TAX RETURNS BY TELEPHONE

        Question. The IRS is reducing submissions processing activities
    because taxpayers are filing fewer paper returns. In 2004, almost 4
    million taxpayers filed by telephone--57 percent of whom had income of
    $20,000 or less and 97 percent had income of $50,000 or less.
    Additionally, nearly 1 million businesses used the TeleFile technology
    to file their employment tax forms. The IRS's own survey reveals that
    nearly 40 percent of the individual TeleFilers will go back to paper
    filing. Further, there is currently no electronic alternative for the
    businesses that use TeleFile. Nonetheless, the IRS is proposing to
    eliminate TeleFile because the IRS says use has declined somewhat and
    it is a bit more expensive to maintain than paper or electronic filing.
    Why was the decision made to eliminate TeleFile without first providing
    a viable, easy-to-access means of filing for these individuals and
    businesses that ensured an electronic filing rather than forcing them
    back to paper filing? Did the IRS look at ways to achieve efficiencies
    in the operation of the current TeleFile system? If so, what were they?
    Were these pursued?
        Answer. The TeleFile program has certain requirements, such as
    telecom, printing and postage cost that cannot be restructured or
    reduced; therefore, the IRS could not develop efficiencies within the
    current TeleFile program.
        In making the decision to sunset TeleFile, the IRS considered the
    declining use of TeleFile, the discontinuation of several State
    TeleFile programs, including California's decision to cease TeleFile in
    2005, and the growth of other electronic filing alternatives, such as
    Free File. In fact, Free File volumes grew from 3.5 million returns in
    2004 to 5.0 million returns in 2005, a 46.6 percent increase. At least
    60 percent of individual filers qualify for Free File services and all
    TeleFile-eligible filers with access to the Internet can use Free File.
    Additionally, in their decision, the IRS considered the June 2004
    Electronic Tax Administration Advisory Commission (ETAAC) report
    recommendation to discontinue TeleFile. By sunsetting TeleFile, the IRS
    will eliminate growing information systems operational costs of $3
    million-$5 million annually and printing and postage costs of $4
    million-$5 million annually.
        The IRS has not developed a similar alternative for employment tax
    returns. The same cost and infrastructure issues that the IRS faced
    with Forms 1040 still persist. However, there are low cost alternatives
    currently available to electronically file the Form 941.
        TeleFilers may initially revert to paper filing (37 percent
    according to a customer satisfaction survey), but research shows they
    rebound to electronic filing at a higher rate than the general
    population. Sixty-two percent of TeleFilers said they would try another
    e-file option if TeleFile was no longer available.

                               TAXPAYER SERVICES

        Question. The IRS is reducing its face-to-face service providing
    taxpayers with information and filing assistance. Instead, the IRS
    wants to direct taxpayers to the IRS website and to volunteer tax
    return preparers. In particular, the IRS plans to decrease the level of
    pre-filing services offered by Taxpayer Assistance Centers. The problem
    with this is that some taxpayers rely on the face-to-face service. The
    IRS notes, in its Strategic Plan, that it must ``continue to use a
    comprehensive range of products and services to reach [their]
    customers, including those who do not use electronic services.'' Mr.
    Everson, how does the IRS's plan to reduce face-to-face services
    adequately provide for these taxpayers who won't use electronic
    services?
        Answer. In recent years, the IRS has seen a significant shift in
    the ways Americans interact with the Service. Compared to the past,
    fewer taxpayers are choosing to write or call the IRS; even fewer
    taxpayers are using walk-in TACs. Instead, more and more Americans are
    turning to volunteers for return preparation and they are obtaining
    forms and tax information from the IRS's Internet site. In addition,
    most TAC services are available through the IRS's Toll-Free telephone
    system at a greatly reduced cost and with higher quality. In a report
    issued last year, the Government Accountability Office (GAO) stated,
    ``improvement in phone service, increased web site use and the
    availability of volunteer sites raises a question about whether the IRS
    should continue to operate as many walk-in sites.''
        In making the business decision regarding the TACs, the IRS
    considered the long-standing concept of operations for Field Assistance
    that emphasizes accounts and collection work, with customers who need
    assistance increasingly served through self-service mechanisms, and
    reliance on community-based volunteer partners for return preparation
    assistance. The IRS anticipated that as these partnerships grew and
    increasingly met the needs of community members, the customer traffic
    in IRS TACs would be reduced. In making this decision, the IRS also
    considered changing taxpayer behavior, the availability of new and
    improved alternative services, and the cost benefits of these
    alternatives compared to walk-in service.
        When taxpayers have tax law questions or questions about their
    accounts, the IRS's Toll-Free service will route them to the assistor
    who has the expertise to answer their particular question. If a
    taxpayer needs a form, the IRS website has every form available for
    download, and paper forms are available at 32,000 local libraries,
    banks, post offices and other outlets. When taxpayers need help
    preparing their returns, they can visit one of the 14,000 VITA and TCE
    sites available throughout the country. If a taxpayer still needs face-
    to-face service with an IRS representative, more than 300 TACs will
    still be available across the country to provide that service as well.

                          ACCURACY OF TAX INFORMATION

        Question. Mr. Everson, if you succeed in reducing the number of
    Taxpayer Assistance Centers, it will become even more important that
    the remaining avenues available to taxpayers seeking information be
    accurate. Recently, the Treasury Inspector General for Tax
    Administration (TIGTA) found that taxpayers have alerted the IRS of
    possible errors on the IRS.gov website but these concerns were not
    always addressed. TIGTA also found that the IRS could not verify
    whether correct changes had been made to the website. Mr. Everson, if
    compliance is an utmost priority to the IRS, how can you expect
    taxpayers to comply if the information they receive from the IRS isn't
    accurate or reliable?
        Answer. After the Treasury Inspector General for Tax Administration
    (TIGTA) review on the accuracy of IRS.gov, the IRS implemented several
    controls to ensure taxpayer concerns regarding the web site are
    directed to the appropriate IRS.gov Point of Contact (POC). The IRS
    also issued more specific procedures to the IRS.gov Helpdesk vendor
    regarding the handling of IRS.gov inquiries (comments, questions and
    problems) from web users, to ensure the vendor is forwarding those
    inquiries for resolution. Inquiries from web users regarding the
    accuracy of the web site or inquiries that indicate that information on
    the web site is different from other web documents are immediately
    forwarded to the IRS.gov POCs for resolution.
        The IRS has also added a staff member dedicated to monitoring the
    resolution of inquiries forwarded to the IRS.gov POCs to ensure that
    these inquiries are addressed. The IRS has also implemented the use of
    Unresolved Escalation Reports to follow-up on unresolved inquires with
    the Content Area Administrators and, when necessary, management. If
    IRS.gov POCs do not respond to inquiries within designated timeframes,
    a follow-up is scheduled to ensure issues are resolved.
        In addition, the IRS has updated its procedural document
    ``Guidelines for Responding to IRS.gov Escalations'' to provide
    specific responsibilities for IRS.gov POCs. On January 11, 2005, the
    IRS held a meeting with the IRS Content Area Administrators and
    explained the changes in procedures. Since January 2005, the new
    procedures have been effectively implemented.

                       PROPOSED CUTS TO TAXPAYER OUTREACH

        Question. Funding for taxpayer outreach has steadily decreased in
    the past few years. Outreach activities include proactive programs for
    taxpayers, businesses, tax practitioners, and others to understand
    their tax obligations and have the information and materials necessary
    to do so. For fiscal year 2006, a 7 percent cut is proposed, which is
    almost the same as the increase proposed for enforcement. Doesn't
    cutting outreach directly conflict with your Strategic Plan to improve
    taxpayer service by making it easier for people to participate in the
    tax system? Have you been able to identify a decline in the need for
    outreach? Do you have data--has a study been completed to demonstrate
    this? If yes, please provide a copy. If there has been no decline in
    the need for outreach, how are you going to meet this need, if you are
    cutting outreach?
        Answer. The change in the level of resources requested for the
    Outreach activity in fiscal year 2006 reflects the IRS's commitment to
    providing high-quality services to taxpayers in the most efficient and
    effective manner possible. However, the reduction in Outreach is not
    comparable to the increase in Enforcement resources. Outreach is a
    single budget activity with a relatively small budget, while the term
    ``Enforcement'' encompasses five budget activities with a substantially
    larger budget. A more appropriate comparison would be between the
    reduction in ``Taxpayer Service'' resources--encompassing several
    budget activities--and the increase in ``Enforcement'' resources. As
    proposed for fiscal year 2006, ``Taxpayer Service'' resources decline
    by 1 percent, while ``Enforcement'' resources reflect a 7.8 percent
    increase.
        The IRS must provide strong customer service to taxpayers, but the
    way taxpayers pay their taxes and access IRS information is changing.
    In recent years, the use of IRS.gov and e-filing has increased rapidly
    while paper filing and visits to walk-in Taxpayer Assistance Centers
    (TACs) have declined. In fact, this filing season individuals filed
    more returns electronically than on paper, marking the first time in
    history that e-filing has outpaced paper returns. The closure of TAC
    sites and corresponding reduction in Outreach resources has been
    carefully evaluated to minimize the impact on taxpayers while
    simultaneously making additional resources available for other
    essential functions.
        The number of taxpayers walking into a Taxpayer Assistance Center
    (TAC) for assistance has decreased from a high of nearly 10 million
    contacts in fiscal year 2000 to about 7.7 million contacts in fiscal
    year 2004. To date this filing season, traffic is down again by over 9
    percent. This trend reflects the increased availability and quality of
    services that do not require travel or waiting in line. Examples
    include improved access to IRS telephone service, the increasing
    availability of volunteer assistance, and the many services now
    available through IRS.gov, such as access to all forms and
    publications, ``Free File,'' and ``Where's My Refund?''
        These shifts present an opportunity to adjust the way the IRS
    serves taxpayers and to focus on the most efficient services. Changing
    the way the IRS provides customer service to meet the new ways people
    are dealing with their taxes in the 21st century allows the IRS to meet
    the needs of taxpayers while spending their tax dollars more
    efficiently and responsibly.
        With respect to quality, Toll-Free telephone service is the best
    option for most customers to get a correct and complete answer to their
    tax law or account questions. Unlike the walk-in environment, the
    sophisticated capabilities of our Joint Operations Center allow Toll-
    Free customers to be routed to an IRS employee specifically trained to
    address their particular issues. This filing season, Toll-Free tax law
    and account accuracy are at 88 percent and 91.5 percent respectively.
    Treasury Inspector General for Tax Administration (TIGTA) audits
    assessed the walk-in level of tax law accuracy at 75 percent for the
    same time period; however, the IRS notes the TIGTA does not base its
    results on a statistically valid sample. The IRS is developing a new
    Field Assistance Embedded Quality Review System (EQRS) to determine the
    true accuracy rate, but it is still too early in development to yield
    measures of which the IRS is confident.
        The Wage and Investment Division Stakeholder Partnerships,
    Education and Communication (SPEC) business model focuses upon the
    delivery of education and tax preparation services solely through
    community-based partners such as non-profit, social services,
    educational, financial, governmental, faith-based, and corporate
    organizations. Since inception in 2001, this collaborative partnership
    has increased the volume of volunteer tax return preparation from 1.1
    million returns to over 2 million returns in 2005.
        The IRS also believes it can streamline certain other outreach
    programs while meeting or exceeding the service expectations. In
    particular, the ongoing effort to realign and refocus communications,
    outreach, and liaison efforts within the Small Business/Self-Employed
    (SB/SE) Division will enable the IRS to enhance the level of service
    and the quality of its interactions with small business taxpayers in
    support of its strategic plan. The core mission of this merged
    organization will focus efforts in three areas--practitioner liaison;
    stakeholder engagement; and, support of strategic compliance
    initiatives--and will result in the following benefits for small
    businesses and practitioners:
      --Centralized organization and delivery of key messages to ensure
            national stakeholders and partners in tax administration at the
            local level receive consistent, accurate and up-to-date
            information.
      --Targeted communications with practitioner groups to provide
            consistent information on changes to the IRS's policies and
            procedures and keep our stakeholders apprised of the many
            services we offer--such as E-services for those who file
            electronically on behalf of their clients.
      --An enhanced Issue Resolution program to encourage and address the
            feedback received from small business and practitioner
            stakeholders and enable the IRS to continually make
            improvements in examination, collection, and campus operations
            that benefit small businesses and practitioners.
      --Continued educational outreach to meet the needs of small
            businesses through comprehensive curriculum, which the IRS
            updates for all tax code changes. The website, which is
            dedicated to small businesses, contains about 10,000 pages of
            content arranged by major industry groups and by major tax
            areas, such as employment taxes and depreciation. Response to
            this site has been overwhelming. For example, in January 2005,
            the site had 1.7 million visitors--more than double the number
            from January 2004.
        Finally, the IRS believes it can achieve greater efficiencies in
    distributing tax products by leveraging on the continuing growth in e-
    filing and taxpayers' increased use of Internet. For example,
    consolidating the IRS's forms distribution operations from three sites
    to one site not only will be more efficient, but also will save staff,
    printing and postage resources. Other savings will accrue as increased
    e-filing results in the need to mail fewer tax packages, and Internet
    downloads allow the IRS to reduce excess quantities of tax forms,
    publications and other tax products.
        Question. Congress created the Taxpayer Advocate so that taxpayers
    could receive assistance in solving their problems with the IRS.
    However, taxpayers aren't able to take advantage of this service if
    they don't know about it. Research indicates that only a small
    percentage of taxpayers eligible for Taxpayer Advocate Services have
    ever even heard of the Taxpayer Advocate. To what degree will the cuts
    you are proposing affect the Taxpayer Advocate? Won't these cuts
    further erode the public's awareness of the Taxpayer Advocate?
        Answer. The IRS will continue to make taxpayers aware the Taxpayer
    Advocate Service is available to help them solve their problems with
    the IRS. The proposed changes to taxpayer service--reduced outreach
    spending and fewer Taxpayer Assistance Centers--may minimally reduce
    taxpayer awareness of the availability of the Taxpayer Advocate Service
    (TAS). However, outreach activities that publicize TAS should continue.
    The reduced outreach spending will be possible due to savings in
    printing and postage caused by shifts to electronic filing and by
    providing publications on-line, rather than through the mail. Reduced
    IRS face-to-face assistance may increase the TAS workload as taxpayers
    seek such service from TAS, especially in cases where TAS is collocated
    with a TAC that's been closed. However, the IRS expects these impacts
    to be minimal because of the overall trend toward alternate forms of
    assistance via the Internet and the telephone. Further, VITA assistance
    and SPEC and TEC outreach programs will supplement IRS reductions to
    face-to-face service and will maintain significant support for the
    awareness of TAS's services.
                                     ______

                    Question Submitted by Senator Harry Reid

        Question. The National Research Program (NRP) estimates that
    underreporting of tax attributable to individual income tax filers is
    the largest component of the tax gap. The shortfall of taxes paid to
    taxes owed has been estimated by the IRS at being in the range of $200
    billion-$235 billion annually. Of this amount, the Service estimates
    that as much as $9 billion of this underpayment relates to errors in
    calculating taxable gains on the sale of equity assets. I understand
    that the NRP program used, on a limited basis, a computer program to
    help derive this underpayment estimate. Would an expansion of the use
    of this program assist the Service in reducing the underpayment of tax
    in this area?
        Answer. The National Research Program (NRP) analyzed about 46,000
    individual income tax returns for Tax Year 2001 and the Office of
    Research used the data collected in its update of the Tax Gap figures
    released in late March. NRP examiners and classifiers tested computer-
    based tools to determine if the calculated amount of capital gains
    reported by the taxpayer could easily be checked. The test was
    inconclusive, with some examiners and classifiers saying the tool was
    somewhat useful and others saying it was not helpful. In large part
    these results reflect the fact that taxpayers do not always list the
    exact purchase date for assets (such as shares of stock) they sell in a
    particular tax year. Often, the acquisition date is given as
    ``various,'' reflecting purchases of more than one block of shares or
    the ongoing acquisition of shares through dividend reinvestment.
    Moreover, even where there is a specific acquisition date, the share
    price may fluctuate on that day by 10 percent or more, and it is
    unclear whether the taxpayer purchased the shares at the top of the
    range, at the bottom, or somewhere in between. Given the current level
    of information reporting for capital gains transactions (e.g., only
    gross sales proceeds are reported by brokerage firms, not the basis of
    the publicly-traded assets that were sold), it is not clear that the
    benefits generated by using a computer-based tool to help calculate
    basis of capital assets would exceed the costs.

        Senator Bond. The hearing is recessed.
        [Whereupon, at 10:50 a.m., Thursday, April 7, 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
                                      2006

                                  ----------

                            THURSDAY, APRIL 14, 2005

                                           U.S. Senate,
               Subcommittee of the Committee on Appropriations,
                                                        Washington, DC.
        The subcommittee met at 9:30 a.m., in room SD-138, Dirksen
    Senate Office Building, Hon. Christopher S. Bond (chairman)
    presiding.
        Present: Senators Bond, Stevens, Murray, and Leahy.

                  DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

    STATEMENT OF ALPHONSO JACKSON, SECRETARY
    ACCOMPANIED BY:
            KENNETH M. DONOHUE, INSPECTOR GENERAL
            JOHN C. WEICHER, ASSISTANT SECRETARY FOR HOUSING

                OPENING STATEMENT OF SENATOR CHRISTOPHER S. BOND

        Senator Bond. The Senate Appropriations Subcommittee on
    Transportation, Treasury, the Judiciary, HUD, and Related
    Agencies will come to order.
        We welcome Secretary Alphonso Jackson for appearing before
    us today to testify on the Department of Housing and Urban
    Development's fiscal year 2006 budget request.
        Last year, we did not have the benefit of a complete
    statement from you, having been newly confirmed as Secretary
    the night before the hearing. This year, I look forward to your
    comments after a year on the job.
        I think I may have cautioned you about taking the job, but
    you do it so well, and we appreciate very much your expertise
    and commitment to the program.
        The budget request proposes some $28.5 billion, a decrease
    of some $3.38 billion or almost 11 percent from the 2005
    funding level of $31.9 billion.
        Unfortunately, the overall 2006 funding level does not
    accurately reflect the requested overall spending for HUD's
    many programs. The budget numbers are distorted through a
    budget rescission request of $2.5 billion as well as by how FHA
    receipts are treated for purposes of the 2006 budget. In fact,
    the overall funding for HUD programs is far worse than OMB has
    indicated.
        Proposed reductions to individual HUD programs include,
    among others, some $4.67 billion from CDBG funding, $118
    million from Housing for Persons with Disabilities, $14 million
    from Housing for Persons with AIDS, $24 million from Rural
    Housing and Economic Development, $24 million from Brownfields,
    almost $286 million from HOPE VI, $226 million from Section 8
    Project-Based Assistance, and $252 million from the Public
    Housing Capital Fund.
        In addition, the Lead Hazard Reduction Program that Senator
    Mikulski and I started has been totally eliminated. This
    program is one of the most important things we can do to stop
    the lead poisoning of our children in low-income housing in
    many major cities.

                              PROPOSED RESCISSIONS

        I also am especially troubled by a proposed $2.5 billion
    rescission for which neither HUD nor OMB has been able to or
    willing to identify the source of funding. I sincerely doubt
    there is adequate money to rescind from HUD programs without
    jeopardizing their mission.
        These program cuts are even more disturbing because of
    reductions and shortfalls in other programs within the
    jurisdiction of the subcommittee.
        Mr. Secretary, I know you have an obligation to defend the
    administration's budget and policy decisions no matter how
    problematic. I also understand and support the need for the
    administration to make difficult funding decisions in order to
    contain and reduce the Federal budget deficit.
        Unfortunately, I believe that the President has been
    getting some very bad advice from OMB about the housing and
    community development needs of the Nation. The HUD budget as
    well as a number of other proposed legislative and policy
    initiatives reflect this bad advice.
        Unfortunately, these problems go beyond HUD, leaving the
    subcommittee to confront huge challenges in trying to balance
    funding decisions among the many programs and priorities within
    the entire THUD fiscal year 2006 Appropriations Bill.
        As always, HUD represents one of our largest challenges.
    Unfortunately, the administration's overall budget for domestic
    discretionary spending will make reversing many of these
    recommendations impossible or compel Congress to eliminate
    funding from other important and necessary programs.
        There is a little bit of good news, Mr. Secretary. I
    applaud you for fighting the good fight in attempting to
    preserve Section 8 tenant-based vouchers at a level that will
    sustain current voucher use. And while I am disappointed over
    public housing capital and operating funding levels, I know you
    also staved off much larger reductions as proposed by OMB. In
    addition, home ownership is at its highest level in history
    with some 73.7 million homeowners.

                               PREDATORY LENDING

        I also applaud your efforts to stem the abuses of predatory
    lending, something that this subcommittee, with Senator
    Mikulski leading, has been championing by banning flipping, by
    increasing home ownership counseling, and by putting in place
    more stringent appraisal requirements. Unfortunately, this is
    the good news, but the list is too short for an agency as
    important as HUD.

                                      SACI

        For the bad news, I am very disappointed that the
    administration has proposed to dismantle the CDBG program along
    with some 17 or more other programs and replace these programs
    with a new block grant in the Department of Commerce called
    Strengthening America's Community Initiative.
        The administration also is proposing to fund this
    initiative at $3.7 billion, which is an overall reduction of
    almost $2 billion or 34 percent from the 2005 level for all
    these programs. The proposed elimination of CDBG is a tragedy,
    but the reduction in funding makes this proposal a double
    tragedy.
        Communities across the Nation rely on CDBG to fund critical
    housing and community development programs. This program works.
    However, without these funds, many local programs will falter
    and even fail. Equally important, CDBG is a critical component
    of HUD's mission. CDBG helps to make HUD's housing mission
    successful. Without CDBG, it is the Department of Housing. And
    with all of the changes proposed, HUD would just be about home
    ownership and a few rental housing block grants. HUD would no
    longer merit cabinet status.
        Moreover, the use of CDBG consolidated plans helps to
    ensure that communities tie together CDBG, housing funds, and
    other Federal and State resources into a comprehensive approval
    to local housing and community authorities. As history tell us,
    successful community development programs rely on a
    comprehensive approach to housing and community development.
    Without CDBG, HUD is like a one-armed pitcher trying to field a
    bunt.
        I know CDBG has problems. CDBG funds are not always used
    well or effectively. Even Kansas City, Missouri, with a vibrant
    and progressive nonprofit community, recently identified
    significant abuses within the CDBG program. However, these
    problems are being addressed and resolved. The key is to fix
    the problems in good programs, not dismantle the programs.
        Moreover, HUD, OMB, and certain interested parties recently
    ratified a consensus document to address weaknesses in the CDBG
    program by creating an Outcome Measurement System to establish
    new benchmarks and better oversight. Since the document
    addresses many of OMB's concerns, I am puzzled by the
    administration's effort to dismantle a program that has been
    redesigned to become more effective according to administration
    requirements.

                                    HOPE VI

        I am also very much concerned about the administration's
    approach to public housing. The administration is seeking to
    eliminate HOPE VI as well as rescind the HOPE VI fiscal year
    2005 funding of $143 million.
        As an alternative, the administration has issued a proposed
    regulation that will authorize PHAs to demolish the remaining
    obsolete public housing.
        As you may know, I set the stage for HOPE VI by including a
    demonstration project in the 1990 National Affordable Housing
    Act that allowed the demolition and replacement of the Pruitt-
    Igoe public housing in St. Louis with vouchers and new housing.
        Before this demonstration, PHAs could not be demolished
    without a one-for-one hard unit replacement. Because of the
    cost of this policy, public housing programs were limited to
    the warehousing of the poor in obsolete and deteriorating PHA
    high-rises.
        HOPE VI provided for the demolition of this obsolete
    housing along with the creation of mixed-income, private and
    public housing. This program also leveraged private investment
    and promoted the revitalization of entire communities.
        While HOPE VI is not a perfect solution to all the woes of
    obsolete public housing, it has transformed many PHAs and
    communities, including many in Missouri, which is now, I
    believe, a shining example of how it can work, by replacing
    obsolete public housing with mixed-income, public and private
    housing. In many cases, HOPE VI housing has leveraged new
    investment in communities. This means new business, an
    increased tax base, better schools, and safer communities. It
    is unfortunate that the budget rules do not recognize these
    very tangible economic and social benefits. However, I think
    you and I know from personal experience that these benefits are
    real and significant.

                             NEGOTIATED RULE-MAKING

        The administration has also broken a promise to develop a
    new operating fund formula by negotiated rule-making. Over the
    last 5 or more years, HUD has worked with PHAs through
    negotiated rule-making to develop a new budget-based operating
    plan formula to ensure a more equitable system of allocating
    operating subsidies to PHAs. Millions of dollars have been
    spent on the process. Nevertheless, a negotiated rule went into
    OMB's rule-making review process and came out a much different
    flavor of sausage.
        One expects OMB to make modest changes to a regulation
    under review but one does not expect wholesale revisions in
    violation of the spirit of legislation that required the
    negotiated rule-making. I have not yet had an opportunity to
    review the rule. But to highlight my concerns, I am advised
    that under the negotiated rule, 62 Missouri PHAs would have
    gained operating subsidies while 41 PHAs would have lost
    subsidies. Under OMB's changes, only 13 Missouri agencies would
    gain and 91 would lose funding. There is something wrong here.

                          PUBLIC HOUSING CAPITAL FUND

        Equally troubling, HUD's 2006 budget request includes a
    $252 million reduction in the Public Housing Capital Fund
    despite an estimated $20 billion backlog in modernization
    needs.

         BLOCK GRANT SECTION 8 VOUCHER ASSISTANCE AND HOMELESS FUNDING

        HUD also is proposing new legislation to block grant both
    Section 8 voucher assistance and homeless funding. I have not
    yet seen the proposal to block grant homeless assistance
    funding. I support the approach assuming it is adequately
    funded and includes meaningful oversight. Nevertheless, the
    process needs sunshine.
        I have seen the Section 8 voucher block grant proposal and
    it fails on a number of levels. First, the proposal fails to
    allow jurisdictions with real flexibility to use these funds
    for project-based assistance even in areas of the Nation where
    vouchers do not work because of tight rental markets. This
    means the administration only wants to provide flexibility on
    its own terms and not based on local needs and conditions.
        More disturbing, the Section 8 proposal would eliminate the
    requirement that 75 percent of all vouchers go to extremely
    low-income families, those at or below 30 percent of median
    income. This is a critical requirement that ensures those with
    worst case housing needs receive priority in the award of
    scarce Section 8 housing assistance. Without the requirement,
    the number of homeless will continue to grow without real
    housing alternatives. This runs counter in my view to the
    administration's promise to end chronic homelessness within 10
    years. This will promote homelessness rather than end it.

                      ZERO DOWNPAYMENT HOME OWNERSHIP PLAN

        Finally, I am very troubled by the proposed FHA Zero
    Downpayment Home Ownership plan. As with last year, the
    proposal continues to pose substantial financial risks over
    time to the FHA Single Family Mortgage Insurance program, the
    Mutual Mortgage Insurance Fund. Without downpayments, new home
    buyers will have no stake in their new homes and will have
    limited ability to pay for any substantial repairs like a
    failed furnace or a leaky roof. As we discussed last year, FHA
    was close to bankruptcy in the late 1980's due to defaults from
    assisting families to purchase homes with high loan-to-value
    ratios. These houses were often in marginal neighborhoods. And
    once the homeowners defaulted, the housing would often remain
    unsold and thus drive down the housing values throughout a
    neighborhood. Some of the neighborhoods are still trying to
    recover from the foreclosures. Also, families in default have
    their credit ruined.
        According to HUD's IG audit of FHA's financial statements
    for 2004 and 2003, the Mortgage Insurance Program suffers
    increasing default rates and claims. Over the last 5 years,
    defaults have increased from 3 percent in fiscal year 2000 to
    almost 7 percent in 2004. Claims have risen from $5.5 billion
    in 2000 to $8.5 billion in 2004.
        Clearly, FHA has effectively become the lender of last
    resort, taking on the most risky mortgages with greatest risk
    of default. A new zero downpayment program will only enhance
    that risk.
        I have been working on housing and community development
    since I was governor of Missouri. And despite my continuing
    efforts to reform HUD and support housing and community
    developments, HUD continues to remain in decline, characterized
    by failed programs and policy. I still believe this trajectory
    of failure can be stopped, but I am dismayed at the lack of
    support from OMB.
        And I know, Mr. Secretary, you face an uphill battle with
    an administration that seems to have little interest or
    commitment to HUD's programs and seems to be committed to
    dismantling the modest success that HUD has achieved.
        I do not understand. When housing and community development
    investments work well, everyone benefits through more jobs, an
    increased tax base, better schools, and improved communities.
    Where we fail to create the right programs or fail to invest in
    these programs, neighborhoods deteriorate and the quality of
    peoples' lives suffer. It is that simple.
        I am not looking for big increases in HUD programs. I
    believe that we need to preserve existing programs and try to
    build on successes where possible. We may not agree on
    everything, but I know you believe in the importance of HUD's
    mission and the need for HUD to be a leader and partner in
    housing and community development across the Nation.

                               PREPARED STATEMENT

        I look forward to continuing to work with you. However, we
    need to revitalize and rebuild the public's confidence in HUD,
    and I look forward to hearing your vision for the department's
    future.
        Now, with apologies for the length of the statement, I had
    to get it off my chest, and 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
    Secretary Alphonso Jackson for appearing before us today to testify on
    the Department of Housing and Urban Development's fiscal year 2006
    budget request. Last year we did not have the benefit of a complete
    statement from you, having been newly confirmed as Secretary the night
    before the hearing. This year I especially look forward to your
    comments after a year on the job.
        The administration's budget request for HUD for fiscal year 2006
    proposes some $28.5 billion, a decrease of some $3.38 billion, or
    almost 11 percent, from the fiscal year 2005 funding level of $31.9
    billion. Unfortunately, the overall fiscal year 2006 funding level does
    not accurately reflect the actual requested overall spending for HUD's
    many programs. Instead, the overall budget numbers are distorted
    through a budget rescission request of $2.5 billion as well as by how
    FHA receipts are treated for purposes of the fiscal year 2006 budget.
    In fact, the overall funding for HUD programs is far worse than the
    administration has indicated.
        Proposed reductions to individual HUD programs include, among
    others, some $4.67 billion from CDBG funding, $118 million from Housing
    for Persons with Disabilities, $14 million from Housing for Persons
    with AIDS, $24 million from Rural Housing and Economic Development, $24
    million from Brownfields, almost $286 million from HOPE VI, $226
    million from Section 8 Project-Based Assistance, and $252 million from
    the Public Housing Capital Fund. I also am especially troubled by a
    proposed $2.5 billion rescission for which neither HUD nor OMB has been
    able or willing to identify the source of funding.
        These program cuts are even more disturbing because of proposed
    reductions and shortfalls in other programs within the jurisdiction of
    this subcommittee. Mr. Secretary, I know you have an obligation to
    defend the administration's budget and policy decisions no matter how
    problematic. I also understand and support the need for the
    administration to make difficult funding decisions in order to contain
    and reduce the Federal budget deficit. Unfortunately, I believe that
    the President has been getting some very bad advice about the housing
    and community development needs of the Nation.
        The HUD budget as well as a number of newly proposed HUD
    legislative and policy initiatives reflect this bad advice.
    Unfortunately, these problems go beyond just HUD, leaving this
    subcommittee to confront huge challenges in trying to balance funding
    decisions among the many programs and priorities within the entire
    TTHUD fiscal year 2006 Appropriations bill in an extraordinary tight
    funding year. As always, HUD represents one of the largest challenges.
    Unfortunately, the administration's overall budget for domestic
    discretionary spending will make reversing many of these administration
    recommendations impossible or compel the Congress to eliminate funding
    from other important and necessary programs.
        To start with the good news, Mr. Secretary, I applaud you for
    fighting the good fight in attempting to preserve section 8 tenant-
    based vouchers at a level that will sustain current voucher use. And
    while I am disappointed over the public housing capital and operating
    fund levels, I know you also staved off much larger reductions, as
    proposed by OMB. In addition, home ownership is at its highest level in
    history with some 73.7 million homeowners. I also applaud your efforts
    to stem the abuses of predatory lending by banning flipping, increasing
    home ownership counseling and putting in place more stringent appraisal
    requirements. Unfortunately, this is the good news but the list is much
    too short for an agency as important as HUD.
        Now for the bad news. First, I am very disappointed that the
    administration has proposed to dismantle the CDBG program along with
    some 17 or more other programs and replace these programs with a new
    block grant in the Department of Commerce called the Strengthening
    America's Communities initiative. The administration also is proposing
    to fund this initiative at $3.7 billion which is an overall reduction
    for all these programs from the fiscal year 2005 level of almost $2
    billion or 34 percent.
        The proposed elimination of CDBG is a tragedy, but the reduction in
    funding makes this proposal a double tragedy. Communities across the
    Nation rely on CDBG to fund critical housing and community development
    programs. Without these funds, many local programs will falter and even
    fail. Equally important, CDBG is a critical component of HUD's mission;
    CDBG helps to make HUD's housing mission successful. Moreover, the use
    of CDBG consolidated plans helps to ensure that communities tie
    together CDBG, housing funds and other Federal and State resources into
    a comprehensive approach to local housing and community development
    needs. Without CDBG, HUD's mission will be reduced to almost solely
    housing. As history tells us, successful community development relies
    on a comprehensive approach to housing and community development.
    Without CDBG, HUD will be like a one-armed pitcher trying to field a
    bunt.
        I know CDBG has problems; CDBG funds are not always used well or
    effectively. Even Kansas City, Missouri, with a vibrant and progressive
    nonprofit community, recently identified some significant abuses within
    its CDBG program. However, these problems are being addressed and
    resolved. The key is to fix problems in good programs, not dismantle
    the programs.
        Moreover, recently, HUD, OMB and certain interested parties
    recently ratified a consensus document to address weaknesses in the
    CDBG program by creating an Outcome Measurement System to establish new
    benchmarks and better oversight. Since this document addresses many of
    OMB's concerns, I am puzzled by the administration's efforts to
    dismantle a program that has been redesigned to become more effective
    and successful according to administration requirements.
        I also am very concerned over the administration's approach to
    public housing. The administration is seeking to eliminate HOPE VI as
    well as rescind the HOPE VI fiscal year 2005 funding of $143 million.
    As an alternative, the administration has issued a proposed regulation
    that will authorize PHAs to demolish the remaining obsolete public
    housing.
        As you may know, I set the stage for HOPE VI by including a
    demonstration project in the 1990 National Affordable Housing Act that
    allowed the demolition and replacement of Pruitt-Igoe Public Housing in
    St. Louis with vouchers and new housing. Before this demonstration,
    PHAs could not be demolished without a one-for-one hard unit
    replacement. Because of the cost of this policy, the public housing
    program dictated the warehousing of the poor in obsolete and
    deteriorating PHA high-rises. HOPE VI allowed for the demolition of
    this obsolete housing and the creation of mixed income private and
    public housing that anchored private investment and the revitalization
    of entire communities.
        While HOPE VI is not a perfect solution to all the woes of obsolete
    public housing, it has transformed many PHAs and communities, including
    many in Missouri, by replacing obsolete public housing with mixed
    income public and private housing. In many cases, HOPE VI housing has
    leveraged new investment in these communities. This means new
    businesses, an increased tax base, better schools and safer
    communities. It is unfortunate that the budget rules do not recognize
    these very tangible economic and social benefits.
        The administration also has broken a promise to develop a new
    operating fund formula by negotiated rulemaking. Over the last 5 or
    more years, HUD has worked with PHAs through negotiated rulemaking to
    develop a new budget-based operating plan formula to ensure a more
    equitable system of allocating operating subsidies to PHAs. Millions of
    dollars have been spent on this process. Nevertheless, a negotiated
    rule went into OMB's rulemaking review process and came out a much
    different flavor of sausage. One expects OMB to make changes to
    regulations under review; one does not expect wholesale revisions in
    violation of legislation that required negotiated rulemaking. I have
    not yet had an opportunity to review the rule. But to highlight my
    concerns, I am advised that, under the negotiated rule, 62 Missouri
    PHAs would have gained operating subsidies while 41 PHAs would have
    lost subsidies. Instead, under the OMB's changes, only 13 Missouri
    agencies would gain while 91 would lose funding. There is something
    wrong here. Equally troubling, HUD's fiscal year 2006 budget request
    includes a $252 million reduction in the Public Housing Capital Fund
    despite an estimated $20 billion backlog in modernization needs.
        HUD also is proposing new legislation to block grant both section 8
    voucher assistance and homeless funding. I have not yet seen the
    proposal to block grant homeless assistance funding but I support the
    approach assuming it is adequately funded and includes meaningful
    oversight.
        I have seen the section 8 voucher block grant proposal. Once again,
    the proposal fails on a number of levels. First, the proposal fails to
    allow jurisdictions with real flexibility to use these funds for
    project-based assistance even in areas of the Nation where vouchers do
    not work because of tight rental markets. This means the administration
    only wants to provide flexibility on its own terms.
        More disturbing, the section 8 proposal would eliminate the
    requirement that 75 percent of all vouchers go to extremely low-income
    families--those at or below 30 percent of median income. This is a
    critical requirement that ensures those with the worst case housing
    needs receive priority in the award of scarce section 8 housing
    assistance. Without this requirement, the number of homeless will
    continue to grow without real housing alternatives. This runs counter
    to the administration's promise to end chronic homelessness within 10
    years.
        Finally, I am very troubled by the proposed FHA Zero Downpayment
    Homeownership program. As with last year, this proposal continues to
    pose substantial financial risks over time to the FHA Single Family
    Mortgage Insurance program and the Mutual Mortgage Insurance Fund--
    without downpayments, new homebuyers will have no stake in their new
    homes and will have limited ability to pay for any substantial repairs
    such as a failed furnace or leaky roof.
        As we discussed last year, FHA was close to bankruptcy in the late
    1980's due to defaults from assisting families to purchase homes with
    high loan-to-value-ratios. These houses were often in marginal
    neighborhoods, and once these homeowners defaulted, the housing would
    often remain unsold and, thus, help drive down housing values
    throughout a neighborhood. Some of these neighborhoods are still trying
    to recover from those foreclosures, and the families in default often
    ruined their credit.
        According to the HUD IG's audit of the FHA's financial statements
    for fiscal years 2004 and 2003, the FHA mortgage insurance program
    continues to suffer increasing default rates and claims. Over the last
    5 years, defaults have increased from 2.99 percent in fiscal year 2000
    to 6.9 percent in fiscal year 2004. Moreover, claims have risen from
    some $5.5 billion in fiscal year 2000 to some $8.5 billion in fiscal
    year 2004, a 54 percent increase while insurance-in-force has decreased
    13 percent to $430 million during the same period. Clearly, FHA has
    effectively become the lender of last resort, taking on the most risky
    mortgages with the greatest risk of default. A new zero downpayment
    program will only enhance this risk.
        I have been working on housing and community development issues for
    most of my career from the governor's office in Missouri to my current
    position on the Appropriations Committee in the Senate. Unfortunately,
    despite my continuing efforts to reform HUD and support housing and
    community development initiatives, the Department of Housing and Urban
    Development remains in decline, characterized by failed programs and
    policies. I still believe that this trajectory of failure can be
    stopped, but I am dismayed by the lack of progress.
        Mr. Secretary, I know that you face an uphill battle with an
    administration that seems to have little interest or commitment to
    HUD's programs and instead seems committed to dismantling the modest
    successes that HUD has achieved. I do not understand--when housing and
    community development investments work well, everyone benefits, jobs
    are created, taxes are collected, and schools and communities improve.
    Where we fail to create the right programs or fail to invest in these
    programs, neighborhoods deteriorate and the quality of peoples' lives
    suffer. It is that simple.
        I am not looking for big increases in HUD programs. I do, however,
    believe that we need to preserve existing programs and try to build on
    these modest successes where possible. We may not agree on everything,
    but I know you believe in the importance of HUD's mission and the need
    for HUD to be a leader and partner in housing and community development
    initiatives throughout the Nation. I look forward to continuing to work
    with you on making the Department a strong leader and partner. However,
    we need to revitalize and rebuild the public's confidence in HUD, and I
    look forward to hearing your vision for the Department's future.
        Thank you. I turn now to my Ranking Member, Senator Murray.

                        STATEMENT OF SENATOR TED STEVENS

        Senator Stevens. Mr. Chairman and Senator Murray, I have to
    Chair the Commerce Committee markup, but would you permit me
    just 3 minutes.
        Senator Bond. Senator Stevens.
        Senator Stevens. I am here to ask you to meet me in Alaska
    this year before this bill is marked up, before this bill is
    reported to the floor.

                             IHBG FUNDING IN ALASKA

        There have been developments in your Department that affect
    our State that are staggering. Our field office is down in
    Stockton, California. Your Department has recognized now what I
    call rogue villages and taken away from a regional housing
    authority the jurisdiction over housing and given it to--in one
    instance to a group that calls themselves a village, but their
    traditional village is 200 miles from where they say they have
    the right to conduct housing.
        And they have taken some 55 villages away from the existing
    housing authority and turned it over to this rogue group and
    they are not building housing. They are just employing their
    own people.
        What is going up our way now is just staggering as far as
    the activities of your Department. And if we cannot get
    together on some understanding of what is going to happen, I am
    going to offer a series of amendments to this bill to mandate
    that these practices be changed.
        We cannot exist this way. Your people, who never come to
    Alaska, sit down in the field office in California and decide
    what is right in Alaska. Now, that just cannot go on.
        The relationships with the State are so strained that the
    people down there reduced the housing allowance for operations
    in Alaska, the highest in the Nation, a 53 percent cut in
    Alaska compared to an average 20 percent throughout the
    country.
        Now, we have some people who are really in need for housing
    in the villages. But people sitting down in California, I do
    not know what they are doing down there. But these decisions
    are--I did not know it till just recently, and they are
    staggering.

                               PREPARED STATEMENT

        I would urge you to come up and let us go out and look at
    these things and you meet the people that claim to be--that
    have the right to build these houses in an area they never
    lived in, they do not represent, and the people in the area
    oppose them. That is other than a few people that are off the
    reservation, so to speak.
        But I do think this has to be changed. And I ask that my
    statement appear in the record. I appreciate your courtesy.
        [The statement follows:]

                   Prepared Statement of Senator Ted Stevens

        Good morning Secretary Jackson--I am pleased to see you here this
    morning.
        I must leave this hearing shortly to chair a markup session of the
    Commerce Committee, but I would like to ask for your help on some
    matters within your agency that are causing problems for us in Alaska.
        The first is the matter of how HUD allocates its Indian Housing
    Block Grant funding. Within the State of Alaska, we now have some 231
    federally-recognized ``tribes,'' some with no or only a few members.
    This was a policy promulgated by the previous administration and is one
    with which I do not agree. In Alaska, our Native housing programs were
    traditionally operated by regional Native housing organizations which
    were large enough to bring economies of scale to housing programs
    across our vast State. Since the passage of the Native American Housing
    and Self Determination Act in 1996, and especially since the 2000
    census, HUD has been moving to transfer some of this funding away from
    regional housing authorities and put it into the hands of small
    villages and ``tribes'' in Alaska. The most egregious example of this
    misguided policy has occurred in the Cook Inlet Region, which includes
    Anchorage. The Cook Inlet Housing Authority has been stripped of a
    substantial portion of its Indian housing funds. Those funds have been
    awarded to a so-called tribe called Kanatak to cover the entire Mat-Su
    Valley part of the Cook Inlet region. However, Kanatak's traditional
    lands are located hundreds of miles away on the Western coast of
    Alaska, and have not been occupied since 1956. As a result, the Cook
    Inlet Housing Authority's funding now covers only 8 communities in the
    region, down from the 55 communities it has traditionally covered and
    should be covering right now.
        I hope you will agree to help resolve this situation in the near
    future--it is making it very difficult to provide economical housing
    for our Alaska Native population.
        On another matter, I have heard from our Alaska Housing Finance
    Authority that your department is proposing to cut the operating
    subsidy it receives to operate public housing across Alaska by 53
    percent the largest cut proposed for any housing authority in the
    Nation. I also understand that changes in the operating subsidies--the
    so-called ``Allowable Expense Levels'' are being proposed as a result
    of a study done by Harvard University. However, that study did not
    examine the particular conditions in Alaska, but still proposed a cut
    almost twice as large as the next largest cut. The AHFC has told my
    staff that they will not be able to continue to operate public housing
    in Alaska if a cut of this magnitude is allowed to go forward.
        I believe a number of these problems stem from the Department's
    senior management not being familiar with Alaska. We used to have a HUD
    Field Office in Alaska, but that was closed about 10 years ago, and now
    our field office is located in Santa Ana, California--a place that has
    little in common with Alaska. I hope you will give some consideration
    to establishing more of a presence in my State, which covers an area
    one-fifth the size of the entire lower 48.
        Mr. Secretary, I invite you to bring your senior staff and come to
    Alaska to see for yourself what our housing problems look like and how
    they differ from those in most lower-48 communities. I hope you will do
    that and will work with me to solve these and other problems.

        Senator Bond. Thank you, Senator Stevens.
        And, Mr. Secretary, you have only been in this position
    about a year, but I would suggest to you that those suggestions
    are ones which you should adopt.
        I will explain to you later if you have any questions.
        Now I turn to Senator Murray.

                       STATEMENT OF SENATOR PATTY MURRAY

        Senator Murray. Well, thank you very much, Mr. Chairman,
    and I will join with you welcoming Secretary Jackson to our
    subcommittee this morning.
        Mr. Secretary, you have had a distinguished career serving
    in the public housing field in Dallas, St. Louis, and
    Washington, DC. Your expertise and your commitment are needed
    as families throughout our country are really struggling with
    the high cost of housing.
        Unfortunately, Mr. Secretary, you have been handed a very
    difficult budget to defend. I have always said that a budget is
    a statement of priorities. In looking at this budget, it is
    hard to reach any other conclusion than that housing is not a
    priority for this administration.
        And we are not just talking about numbers. The cuts and
    problems in this budget will affect the lives of some of our
    most vulnerable neighbors.
        I wish the Bush Administration valued them more and was
    willing to give us a budget that does make housing a priority.
    But sadly this appears to not be the case.
        So we will do our best with the budget the administration
    has sent us. But I do want to note that the situation is
    actually worse than some of the figures we are going to be
    hearing today.
        In looking at the budget before us, some might see a 12
    percent cut from last year. But when you take a closer look at
    the numbers, you see the cuts are actually closer to 20
    percent. And that is because this budget calls for a large
    number of rescissions, $2.65 billion.
        I know last year before HUD came under the jurisdiction of
    our subcommittee, the administration sought approval to cut
    about $1.5 billion that were appropriated but never spent. Now
    the administration wants to go into the current year's budget
    and cut an additional $2.65 billion.
        So when you add in the rescissions on top of the regular
    budget cuts, the size of the administration's proposed cuts to
    HUD grows to almost $6.5 billion or a 20 percent cut from last
    year.
        That is a very dark picture for American families and for
    cities and for communities that are really trying to help and
    develop distressed areas.
        As I look at these rescissions, what I see is troubling.
    But what I do not see is even more troubling. I do not see a
    detailed explanation specifying where $2.5 billion of the
    proposed rescission is coming from.
        It is like the administration is asking us for a
    sledgehammer and then telling us not to worry about where they
    are going to use it. Well, I want you to know I am worried.
        Under these proposed rescissions, HUD is granted the
    blanket authority to take away the funding from any program in
    the agency. That means that additional cuts can come from
    programs serving the homeless or the disabled or individuals
    living with HIV and AIDS. They can eliminate housing vouchers
    for the working poor or cut back on locally based Meals on
    Wheels programs.
        All that is in addition to the administration's proposal to
    eliminate the Community Development Block Grant Program and the
    variety of support programs and services it funds.
        So the administration is saying not only are we going to
    cut funding for HUD programs, but we are asking to open up a
    previous appropriations act and cut another $2.5 billion
    however we see fit. That could have a very painful impact on
    many of our neighbors.

                                    HOPE VI

        The only part of the rescission that the administration has
    provided any information about concerns the HOPE VI program. So
    let us look at what the administration proposes.
        The HOPE VI program has the worthy goal of tearing down
    old, dilapidated public housing units and replacing them with
    affordable housing units for mixed-income populations. The
    President plans to eliminate that program for next year.
        But it gets worse. The administration also wants us to go
    back and rescind the $143 million that we already appropriated
    for this program for this current year.
        So it is not enough just to kill it for next year, they
    want us to gut it this year and undo Congress' work of the past
    year. Together these proposals represent the elimination of
    some $300 million in HOPE VI grants.
        This idea of unaccountable, undefined, blanket rescissions
    really concerns me deeply, Mr. Chairman. I have served on the
    Appropriations Committee for the great majority of my almost 13
    years in the Senate and I believe we have a responsibility when
    we appropriate taxpayer dollars to know where they are going.
        And by the same measure, when we are asked to take funds
    away from agencies that have already received them, I want to
    know precisely what projects or grants or services that we
    already funded will now be cut.
        So I hope to use a portion of the hearing this morning to
    get a clear and precise answer from Secretary Jackson as to the
    likely impacts of this budget proposal and what will result if
    he is required to cancel more than $4 billion in funding
    already appropriated to his agency over the course of this year
    and next.
        The challenges that are facing the Department of Housing
    and Urban Development are daunting and the administration's
    proposed budget cuts make it even worse.

                               PREPARED STATEMENT

        I cannot make the administration treat housing like a
    priority, but I can do everything possible to make sure we do
    not make things worse. I want to give the Secretary the
    resources he needs to protect and expand housing opportunities
    for the poor and community development programs for local
    communities.
        Thank you, Mr. Chairman.
        [The statement follows:]

                   Prepared Statement of Senator Patty Murray

        Thank you, Mr. Chairman.
        I want to welcome Secretary Jackson to the subcommittee this
    morning.
        Mr. Secretary--you have had a distinguished career serving in the
    public housing field in Dallas, St. Louis, and Washington, DC.
        Your expertise and your commitment are needed as families
    throughout the country struggle with the high cost of housing.
        Unfortunately, Mr. Secretary, you've been handed a very difficult
    budget to defend.
        I've always said that a budget is a statement of priorities, and
    looking at this budget it's hard to reach any other conclusion than
    that housing is not a priority for this administration.
        And we're not just talking about numbers. The cuts and problems in
    this budget will affect the lives of some of our most vulnerable
    neighbors.
        I wish the Bush Administration valued them more--and was willing to
    give us a budget that makes housing a priority.
        But sadly that is not the case, so we will do our best with the
    budget the administration has sent us.
        But I do want to note that the situation is actually worse than
    some of the figures we'll hear today.
        In looking at the budget before us, some might see a 12 percent cut
    from last year.
        But when you take a closer look at the numbers--you see that the
    cuts are actually closer to 20 percent.
        That's because this budget calls for large number of rescissions--
    $2.65 billion.
        I know that last year--before HUD came under the jurisdiction of
    this subcommittee--the administration sought approval to cut about $1.5
    billion dollars that were appropriated but never spent.
        Now the administration wants to go into the current year's budget
    and cut an additional $2.65 billion.
        So when you add in these rescissions--on top of the regular budget
    cuts--the size of the administration's proposed cuts to HUD grows to
    almost $6.5 billion, or a 20 percent cut from last year.
        That is a very dark picture for American families and for cities
    and communities that are trying to develop distressed areas.
        As I look at these rescissions, what I see is troubling--but what I
    don't see is even more troubling.
        I don't see a detailed explanation specifying where $2.5 billion of
    the proposed rescission is coming from.
        It's like the administration is asking us for a sledgehammer and
    then telling us not to worry about how they'll use it. Well I am
    worried.
        Under these proposed rescissions, HUD is granted the blanket
    authority to take the funding from any program in the agency.
        That means additional cuts can come from programs serving the
    homeless, the disabled, or individuals living with HIV/AIDS.
        They can eliminate housing vouchers for the working poor or cut
    back on locally-based meals-on-wheels programs.
        All that is in addition to the administration's proposal to
    eliminate the Community Development Block Grant program and the variety
    of support programs and services it funds.
        So the administration is saying not only are we going to cut
    funding for HUD Programs, but we're asking to open up a previous
    appropriations act and cut another $2.5 billion however we see fit.
        That could have a painful impact on many of our neighbors.
        The only part of the rescission that the administration has
    provided any information about concerns the HOPE VI program--so let's
    take a look at what the administration proposes.
        The HOPE VI program has the worthy goal of tearing down old,
    dilapidated public housing units and replacing them with affordable
    housing units for mixed income populations.
        The President plans to eliminate this program next year.
        But it gets worse.
        The administration also wants us to go back and rescind the $143
    million that we already appropriated for this program for the current
    year.
        So it's not enough to kill it next year--they want to gut it this
    year and undo Congress's work in this area.
        Together, these proposals represent the elimination of some $300
    million in HOPE VI grants.
        This idea of unaccountable, undefined blanket rescissions concerns
    me deeply.
        I have served on the Appropriations Committee for the great
    majority of my almost 13 years in the Senate.
        I believe we have responsibility when we appropriate taxpayer
    dollars to know where they are going.
        By the same measure, when we are asked to take funds away from
    agencies that have already received them, I want to know precisely what
    projects, grants or services--that we already funded--will now be cut.
        So, I hope to use a portion of our hearing this morning to get
    clear and precise answers from Secretary Jackson as to the likely
    impacts of this budget proposal and what will result if he is required
    to cancel more than $4 billion in funding already appropriated to his
    agency over the course of this year and next.
        The challenges facing the Department of Housing and Urban
    Development are daunting. And the administration's proposed budget cuts
    make it even worse.
        I can't make the administration treat housing like a priority, but
    I can do everything possible to make sure we don't make things worse.
        I want to give the Secretary the resources he needs to protect and
    expand housing opportunities for the poor and community development
    programs for local communities.
        Thank you, Mr. Chairman.

        Senator Bond. Thank you very much, Senator Murray. Senators
    Durbin and Leahy have submitted written statements which will
    also be made a part of the record.
        [The statements follow:]

                Prepared Statement of Senator Richard J. Durbin

        Mr. Jackson, thank you for testifying before this subcommittee
    today. I am very concerned about the housing cuts that have been
    proposed for HUD. These cuts could severely hinder HUD's ability to
    address community development needs in cities, towns, and communities
    across the country. They jeopardize housing for low-income individuals,
    families, the elderly, and the disabled.
        I remain troubled about the President's proposal to eliminate the
    Community Development Block Grant (CDBG) program and replace it with a
    new initiative within the Department of Commerce. CDBG has supported
    State and local governments' community development and neighborhood
    revitalization activities for over 30 years. It has provided more than
    just economic opportunities. The funds have been used to conserve and
    expand affordable housing, improve access to public water and sewer
    facilities, create jobs, and improve lives. These are the building
    blocks for our neighborhoods.
        Communities across Illinois, like Pekin, a town with approximately
    34,000 people, or Cooksville, a village with slightly over 200 people,
    received CDBG funds for revitalization efforts. In Chicago, a community
    group received a CDBG grant to start a ``Safe Passages'' program--a
    shuttle service for children in the neighborhood tutoring program. It
    provided students with free transportation--a safe passage--from
    tutoring programs, through some of the toughest gang territories in
    Chicago, to a Boys and Girls Club where the children can swim, play
    sports, and eat a snack or a meal. Before ``Safe Passages'' and the
    CDBG grant, kids in this neighborhood stayed home after school or hung
    out on the corner and were recruited by gangs. Today, they have a way
    out.
        I am also concerned about the President's request for $268 million
    for the Housing for Persons with AIDS (HOPWA) program, a cut in funding
    from the $282 million appropriated last year. Of the 15,000 people in
    Chicago who may be homeless on any given night, 8 percent have HIV.
    Nationwide, the Centers for Disease Control estimates that there are
    886,575 people living with HIV/AIDS, and approximately 50 percent need
    some form of housing assistance. HOPWA provides this vital assistance
    and creates access to medical care and support services. In 2005, HOPWA
    provided support for 122 jurisdictions eligible for formula
    allocations. HUD announced that two additional jurisdictions will be
    eligible for funds in 2006, but overall funding for the program
    continues to decrease. Senator Martinez and I are currently circulating
    a letter that will be sent to this committee urging $385 million for
    fiscal year 2006. I hope this committee will take the request into
    consideration.
        I have concerns about several other programs that are slated for
    cuts. For instance, this is the third consecutive year that the
    President has proposed eliminating HOPE VI. This funding has been
    crucial for several Illinois communities.
        In fiscal year 2002, the Winnebago County Housing Authority
    received a HOPE VI revitalization grant for $18.8 million. The funding
    was granted to demolish Champion Park Apartments, 61 subsidized low-
    rise apartments, and replace them over the next 2 years with 156 homes
    throughout the neighborhood.
        I was pleased to see an increase in the President's budget for
    Homeless Assistance Grants. Last year, 20 of my colleagues and I sent a
    letter to this committee urging funding for renewals of expiring grants
    to permanent supportive housing serving the homeless. Although our
    request was not granted, the committee and the administration have
    acknowledged the importance of permanent supportive housing in the
    fight against chronic homelessness.
        If the administration is going to continue to live up to its
    commitment to end chronic homelessness, we must also ensure that the
    proper infrastructure is in place. The Housing Choice Voucher Program
    has been a large part of that infrastructure. But, with formula changes
    and funding shortfalls, the wait lists are growing and families with
    vouchers are being told that they are losing their assistance. We must
    ensure that funding for vouchers is made available so that those in
    need of subsidized housing don't add to the number of people on the
    streets.
        Finally, Mr. Jackson, you have spoken about home ownership as part
    of the President's vision of an ``ownership society''--that it ``is the
    key to financial independence, the accumulation of wealth, and,
    stronger, healthier communities.'' I agree that home ownership is often
    a key to achieving the American dream. However, in light of the
    proposed HUD budget cuts, we must not lose sight of those who will be
    left alone--those who cannot achieve home ownership. We must continue
    to focus attention and funding on community development and on
    increasing our supply of decent, safe and affordable housing for all.
        I appreciate the opportunity to speak with you today. I look
    forward to hearing your testimony.
                                     ______

                 Prepared Statement of Senator Patrick J. Leahy

        Secretary Jackson, I would like to welcome you today in your first
    appearance before our newly reconstituted and renamed subcommittee.
    It's a new name, but I think you will see some familiar faces. Mr.
    Secretary, Senator Bond and Senator Murray--I look forward to working
    with you all as we tackle this new bill in the upcoming fiscal year.
        This is my first hearing as a member of the subcommittee and I have
    to say that I wish it could start on a more positive note.
    Unfortunately the President's proposed budget for the work of your
    department is one that again invites disappointment and even
    incredulity, not praise.
        For the fifth year in a row the President has sent up a budget 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.
        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 operating fund has been reduced by 10
    percent, funds for housing for persons with disabilities have been cut
    in half, HOME formula grants have been reduced, fair housing programs
    have been slashed and lead-based paint grants have been cut.
        Most egregious is the complete elimination of the Community
    Development Block Grant program--a proposal that has been met with what
    can be mildly described as skepticism by most members for the United
    States Senate. When all is said and done, the HUD budget is reduced by
    12 percent. One of the few programs to see an increase in this budget
    proposal is the Section 8 program, and even that increase will only be
    enough to restore half of the cuts that were made this year as a result
    of inadequate funding in fiscal year 2005.
        If a budget is a reflection of priorities, and of course it is, the
    message being sent here is that the people who struggle in our society
    and who need the helping hands offered by these programs to put decent
    shelter over their heads do not matter. Our Nation's core affordable
    housing and community development programs are being chipped away, year
    after year. 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 Bond. And now, Secretary Jackson, we welcome your
    statement. The full statement will be made a part of the record
    as always and we would appreciate your advising us orally of
    the things that you think should be especially highlighted.

                         STATEMENT OF ALPHONSO JACKSON

        Mr. Jackson. Thank you. Chairman Bond, Ranking Member
    Murray, and distinguished members of the subcommittee, thank
    you for inviting me here this morning.
        And I am honored to outline the 2006 budget proposed by
    President Bush for the United States Department of Housing and
    Urban Development. And I appreciate you letting me submit the
    whole record to the committee.

                                 HOME OWNERSHIP

        Over the past 4 years, HUD has expanded home ownership,
    increased access to affordable housing, fought housing
    discrimination, tackled homelessness, and renewed its
    commitment to those most in need.
        HUD's $28.5 billion budget for 2006 seeks to build on our
    success and lend a compassionate hand to individuals in need,
    while also using taxpayers' money more wisely.
        In June 2002, President Bush challenged the Nation to
    create 5.5 million new minority homeowners. In 2004, more
    Americans achieved the dream of home ownership than at any
    other time in our Nation's history. Today, nearly 70 percent of
    all American families own their homes, an all-time record.
        Since the President challenged us in August of 2002, 2.2
    million more minority families have become homeowners. This
    represents about 40 percent of the goal. As a result, for the
    first time in the history of minority home ownership, it is
    over 51 percent.
        Despite this progress, we have a long ways to go. For many
    families, high down payment and closing costs represents the
    greatest barrier of home ownership.
        Since President Bush signed the American Dream Downpayment
    Act into law in December of 2003, HUD has distributed $162
    million in funds to over 400 State and local governments.
        These funds have already helped thousands of families
    purchase their first home and more than 50 percent of the
    buyers were minorities.
        The 2006 budget requests $200 million to fully fund the
    program and help an estimated 40,000 homeowners. The budget
    also proposed $40 million for housing counseling to assist some
    700,000 families to become homeowners.

                                SECTION 8 REFORM

        The fiscal year 2006 budget will make government a better
    steward of the taxpayers' money. Reform of the Section 8
    Housing Choice Voucher Program is important.
        In fiscal year 2001, HUD's three Section 8 programs
    consumed 43 percent of the annual budget. That percentage has
    increased to 57 percent in 2005.
        The rate of increase combined with the extreme complex set
    of laws and regulations has resulted in a program that is
    difficult to sustain.
        In the past, funds were distributed to the public housing
    authority for a specific number of vouchers based upon the
    number of units leased. Congress recently converted the unit-
    based allocation system to a budget-based system.
        However, for the budget-based system to work, program
    requirements must be simplified and PHAs must have greater
    decision-making flexibility.
        Chairman Allard, who is on the Appropriations Committee,
    has introduced and authorized legislation to implement the
    Section 8 reform. Section 8 programs will fill an important
    component of HUD's mission and I am committed to it and its
    success.

                                  HOMELESSNESS

        Throughout the budget, we will strengthen the assistance to
    the most needy. That is children from low-income families, the
    elderly, those physically and mentally disabled, victims of
    predatory lending, and families living in housing contaminated
    by lead-based paint.
        The administration is committed to ending homelessness and
    has aggressively pursued the policy to move more homeless
    families and individuals to permanent housing.
        The budget provides a record-level resource of permanent
    and supported housing for the homeless. This budget provides
    $1.4 billion for homeless assistance grants. Twenty-five
    million will go to the present Re-entry Initiative.
        The budget also proposes $39 million in funds for HUD's
    Fair Housing Programs to ensure that everyone has access to
    suitable living conditions, and a suitable living environment
    that is free from unlawful discrimination.
        All of us share the goal of creating housing opportunities
    for America. And we have done a great job in the past 4 years.
    We should be proud of a lot of the things that we have done,
    but we should not be satisfied because there is an awful lot to
    be done.
        I look forward to the challenges ahead and will seek the
    open communications to new home ownership, affordable housing
    opportunities, economic growth, and prosperity.

                               PREPARED STATEMENT

        I would like to thank you, Mr. Chairman, and the ranking
    member of the subcommittee for your support and for your
    continued support in the future. And I will look forward to
    your guidance.
        [The statement follows:]

                     Prepared Statement of Alphonso Jackson

        Chairman Bond, Ranking Member Murray, distinguished members of the
    subcommittee, thank you for the invitation to join you this morning. I
    am honored to outline the fiscal year 2006 budget proposed by President
    Bush for the U.S. Department of Housing and Urban Development (HUD).
        Over the past 4 years, HUD has expanded home ownership, increased
    access to affordable housing, fought housing discrimination, tackled
    homelessness, and made a new commitment to serving society's most
    vulnerable. The Department has implemented innovative solutions to
    address our Nation's housing needs, and our results have been
    impressive and measurable.
        HUD's $28.5 billion in new net budget authority for fiscal year
    2006 seeks to build on our success and lend a compassionate hand to
    individuals in need, while also using taxpayer money more wisely and
    reforming programs in need of repair. The HUD budget proposed by the
    President reflects this intent through three broad, yet focused
    strategic goals: promoting economic opportunity and ownership, serving
    society's most vulnerable, and making government more effective.
        In his February 2 State of the Union Address, the President
    underscored the need to restrain spending in order to sustain our
    economic prosperity. As part of this restraint, it is important that
    total discretionary and non-security spending be held to levels
    proposed in the fiscal year 2006 budget. The budget savings and reforms
    in the budget are important components of achieving the President's
    goal of cutting the budget deficit in half by 2009 and we urge the
    Congress to support these reforms. The fiscal year 2006 budget includes
    more than 150 reductions, reforms, and terminations in non-defense
    discretionary programs, of which eight affect HUD programs. The
    Department wants to work with the Congress to achieve these savings.
        The funding reductions, reforms, and terminations contained within
    HUD's fiscal year 2006 budget represent difficult choices in an era of
    significantly diminished resources for all domestic discretionary
    programs. These decisions were made thoughtfully, following an analysis
    of each program's current funding levels and an assessment of future
    needs.

                  PROMOTING ECONOMIC OPPORTUNITY AND OWNERSHIP

        The President's vision of an ``ownership society'' has been a
    central theme of his administration. Ownership--and home ownership in
    particular--is the key to financial independence, the accumulation of
    wealth, and stronger, healthier communities.
        Home ownership creates community stakeholders who tend to be active
    in charities, churches, and neighborhood activities. Home ownership
    inspires civic responsibility, and homeowners are more likely to vote
    and get involved with local issues. Home ownership offers children a
    stable living environment, and it influences their personal development
    in many positive, measurable ways--at home and at school.
        Home ownership's potential to create wealth is impressive, too. For
    the vast majority of families, the purchase of a home represents the
    path to prosperity. A home is the largest purchase most Americans will
    ever make--a tangible asset that builds equity, good credit, borrowing
    power, and overall wealth.
        In 2004, more Americans achieved the dream of home ownership than
    at any time in our Nation's history. Today, nearly 70 percent of
    American families own their homes--an all-time record--and minority
    home ownership has surpassed 51 percent for the first time in history.
        That figure, however, points to a significant home ownership gap
    between non-Hispanic whites and minorities. In June 2002, the President
    challenged the Nation to create 5.5 million new minority homeowners by
    2010. Since the President's challenge, 2.2 million minority families
    have joined the ranks of homeowners, and we are on track to meet the
    5.5 million goal.
        The administration is working to make home ownership more
    affordable and more accessible. Government should do everything it can
    to help families find the security, dignity, and independence that come
    with owning a piece of the American Dream.
        For many Americans, high downpayments and closing costs represent
    the greatest barrier to home ownership. To help overcome this obstacle,
    the President proposed the American Dream Downpayment Initiative to
    provide low- and moderate-income families with the funds and support
    needed to purchase their first home. On December 16, 2003, President
    Bush signed the American Dream Downpayment Initiative into law, and
    since then, HUD has distributed $162 million in downpayment funds to
    over 400 State and local governments. These funds have already helped
    over 3,500 families purchase their first homes--of which more than 50
    percent were minorities. The 2006 budget requests $200 million to fully
    fund the Initiative.
        Helping families learn about the loan products and services
    available to them and how to identify and avoid predatory lending
    practices is critical to increasing home ownership. Housing counseling
    has proven to be an extremely important element in both the purchase of
    a home and in helping homeowners keep their homes in times of financial
    stress. The fiscal year 2006 budget proposes $40 million for Housing
    Counseling to assist over 700,000 families to become homeowners or
    avoid foreclosing on their homes. This effort will fully utilize faith-
    based and community organizations.
        To remove two of the largest barriers to home ownership--high
    downpayment costs and impaired credit--the budget proposes two mortgage
    programs. The Zero Downpayment Mortgage allows first-time buyers with a
    strong credit record to finance 100 percent of the home purchase price
    and closing costs. For borrowers with limited or weak credit histories,
    a second program, Payment Incentives, initially charges a higher
    insurance premium and reduces premiums after a period of on-time
    payments. In 2006, these new mortgage programs will assist more than
    250,000 families achieve home ownership.
        The President is also proposing a new Single Family Homeownership
    Tax Credit that could increase the supply of single-family affordable
    homes by an additional 50,000 homes annually. Under the President's
    plan, builders of affordable homes for moderate-income purchasers will
    receive a tax credit. State housing finance agencies will award tax
    credits to single-family developments located in a census tract with
    median income equal to 80 percent or less of area median income and
    will be limited to homebuyers in the same income range. The credits may
    not exceed 50 percent of the cost of constructing a new home or
    rehabilitating an existing property. Each State would have a home
    ownership credit ceiling adjusted for inflation each year and equal to
    the greater of 1.75 times the State population or $2 million. In total,
    the tax credit will provide $2.5 billion over 5 years.
        As you know, tax legislation is the responsibility of the Treasury
    Department, but we will be working with Treasury's Office of Tax Policy
    to ensure that the credit legislation addresses issues such as
    disclosures, so that the credit operates smoothly.
        The Homeownership Voucher program, while still new, has
    successfully paved a path for low-income Americans to become
    homeowners. Together with pre- and post-home ownership counseling,
    strong and committed collaboration among Public Housing Authorities
    (PHAs), local non-profits, and lenders has proven to be essential in
    making the program work for families across the country. The greatest
    challenge to the success of the program is finding lenders who are
    willing to participate.
        Government-sponsored enterprises were chartered to help low- and
    moderate-income families secure mortgages. HUD recently published a
    rule that requires Fannie Mae and Freddie Mac to increase their
    purchases of mortgages for low- and moderate-income households and
    underserved communities. These new goals will push the GSEs to
    genuinely lead the market in creating home ownership opportunities for
    those traditionally underserved by the mortgage markets, particularly
    first-time homebuyers.
        In addition to increasing the housing goals annually from 2005
    through 2008, HUD's rule establishes new home purchase subgoals in each
    of the three goal areas. This is intended to focus the GSEs' efforts on
    the purchase of home mortgages, not refinancings. HUD projects that
    over the next 4 years, GSEs will purchase an additional 400,000 home
    purchase loans that meet these new and more aggressive goals as a
    result of the new rule.
        As the primary Federal agency responsible for the administration of
    fair housing laws, HUD is committed to protecting the housing rights of
    all Americans, regardless of race, color, national origin, religion,
    sex, familial status, or disability. This commitment is reflected in
    HUD's budget request for fiscal year 2006.
        The goal of HUD's fair housing programs is to ensure that all
    families and individuals have access to a suitable living environment
    free from unlawful discrimination. HUD contributes to fair housing
    enforcement and education by directly enforcing the Federal fair
    housing laws and by funding State and local fair housing efforts
    through two programs: the Fair Housing Assistance Program (FHAP) and
    the Fair Housing Initiatives Program (FHIP).
        The fiscal year 2006 budget will provide $23 million through FHAP
    for State and local jurisdictions that administer laws substantially
    equivalent to the Federal Fair Housing Act. The budget also provides
    $16 million in grant funds for non-profit FHIP agencies nationwide to
    directly target discrimination through education, outreach, and
    enforcement.
        The fiscal year 2006 budget requests $583 million to fund Native
    American Block Grants (NABG). These grants are used by tribes and
    tribally designated housing entities to develop new housing units to
    meet critical shortages in housing. Although NABG funding has been
    reduced in fiscal year 2006, HUD expects that all program requirements
    will be met, including new housing development, housing assistance to
    modernize and maintain existing units; housing services, including
    direct tenant rental subsidy; guaranteed lending; crime prevention;
    administration of the units; and certain model activities.

                       SERVING SOCIETY'S MOST VULNERABLE

        Ending Chronic Homelessness.--The administration is committed to
    the goal of ending chronic homelessness, and has aggressively pursued
    policies to move more homeless families and individuals into permanent
    housing. A chronically homeless person suffers from a disabling
    developmental, physical, or mental condition or a substance abuse
    addiction. They have been homeless for a year or more, or they have had
    repeated periods of extended homelessness. They may occasionally get
    help and leave the streets, but they soon fall back to a life of
    sidewalks and shelters.
        Research indicates that although just 10 percent of the homeless
    population experiences chronic homelessness, these individuals consume
    over half of all emergency homeless resources. Housing this population
    will free Federal, State, and local emergency resources for families
    and individuals who need shorter-term assistance.
        In July 2002, the President reactivated the Interagency Council on
    Homelessness for the first time in 6 years, bringing together 20
    Federal entities involved in combating homelessness. Since its
    inception, the Interagency Council has helped State and local leaders
    across America draft plans to move chronically homeless individuals
    into permanent supportive housing, and to prevent individuals from
    becoming chronically homeless. Today, 47 States and more than 200
    county and city governments have joined the Federal effort.
        The budget provides a record level of resources for permanent
    supportive housing for homeless individuals who have been on the
    streets or in shelters for long periods. The 2006 budget provides $1.44
    billion for Homeless Assistance Grants ($25 million of which is for the
    Prisoner Re-Entry Initiative), $200 million more than in 2005.
    Altogether, the administration requests $4 billion in 2006 for Federal
    housing and social service programs for the homeless, an 8.5 percent
    increase.
        Housing for Special Populations.--Housing Opportunities for Persons
    with AIDS (HOPWA) provides formula grants to States and localities to
    provide housing to ensure persons with AIDS can continue to receive
    health care and other needed support. The program also provides
    competitive grants to nonprofit organizations. In fiscal year 2006,
    HOPWA will fund an estimated 25 competitive grants and will provide
    formula funding to an estimated 124 jurisdictions and in total will
    provide an estimated 67,000 households with housing assistance.
        The fiscal year 2006 HOPWA funding request represents a 5 percent
    decrease from the fiscal year 2005 funding level. The reduction was one
    of a number of difficult choices the administration made in formulating
    the fiscal year 2006 budget, but one which is in consistent with the
    goal of restraining spending in order to sustain economic prosperity.
    HUD is seeking changes in the HOPWA formula that will improve the
    targeting of the program, so that HOPWA better supports those whom it
    was created to serve--the most vulnerable persons, and individuals who
    are homeless or with very low incomes--ahead of other low-income
    households.
        The fiscal year 2006 budget proposes to fund grants of $119.9
    million for Supportive Housing for Persons with Disabilities (Section
    811). Section 811 provides assistance to expand the supply and the
    availability of affordable housing for persons with disabilities. The
    administration is proposing the elimination of the program's new
    construction component, resulting in a $118.2 million funding decrease
    from fiscal year 2005. The Section 811 program will continue to support
    all previously funded housing subsidies under the program and up to
    1,000 new housing vouchers. The administration intends to undertake a
    study of the Section 811 program to determine the most efficient use of
    the limited funding available for it.
        HUD's Office of Lead Hazard Control and its Healthy Homes
    Initiative work to eradicate childhood lead poisoning and prevent other
    housing-related childhood diseases and injuries. The fiscal year 2006
    budget proposes $119 million to fund these two programs, a net decrease
    of $47.6 million from the fiscal year 2005 appropriation. The Lead
    Demonstration Project accounts for $46.6 million of this decrease.
    Areas with high incidence of lead poisoning have now developed greater
    capacity, and therefore activities previously funded under the
    Demonstration program will be addressed through the regular grant
    program.

                        MAKING GOVERNMENT MORE EFFECTIVE

        Reforming Community and Economic Development Programs.--The budget
    proposes a new program within the Department of Commerce to support
    communities' efforts to meet the goals of improving their economic
    opportunity and ownership. This initiative will consolidate programs
    such as Community Development Block Grants into a more targeted,
    unified program that sets accountability standards in exchange for
    flexible use of the funds.
        Reforming Low-Income Housing Assistance.--Another way in which the
    fiscal year 2006 budget will make government a better steward of
    taxpayer money is through reform of the Section 8 Housing Choice
    Voucher Program.
        HUD has three major rental assistance programs that collectively
    provide rental subsidies to approximately 4.8 million households
    nationwide. The major vehicle for providing rental subsidies is the
    Section 8 program, which is authorized in Section 8 of the U.S. Housing
    Act of 1937. Under this program, HUD provides subsidies to individuals
    (tenant-based) who seek rental housing from qualified and approved
    owners, and also provides subsidies directly to private property owners
    who set aside some or all of their units for low-income families
    (project-based).
        The Housing Choice Voucher Program, the best known of the Section 8
    rental assistance programs, provides approximately 2 million low-income
    families with subsidies to afford decent rental housing in the private
    market. Generally, participants contribute up to 30 percent of their
    income towards rent, and the government pays the rest.
        In the past, funds have been appropriated for a specific number of
    vouchers each year. These funds were then given to PHAs based on the
    number of vouchers they awarded and at whatever costs were incurred.
        In 2001, the Housing Certificate Fund, under which both the
    project-based and tenant-based Section 8 programs are funded, consumed
    43 percent of HUD's annual budget. That had risen to 57 percent in
    fiscal year 2005, and the trend line continues to increase dramatically
    in the Department's fiscal year 2006 budget. This rate of increase,
    combined with an extremely complex set of laws and rules that govern
    the program, has resulted in a program that increasingly is difficult
    to sustain.
        In response to rapidly increasing costs, Congress recently
    converted this ``unit-based'' allocation system to a ``budget-based''
    system. This made sense, but for the budget-based system to work,
    program requirements need to be simplified and PHAs need to be provided
    with greater flexibility.
        The administration proposes to simplify Section 8 and give more
    flexibility to PHAs to administer the program to better address local
    needs. Building on changes in the 2005 Consolidated Appropriations Act,
    the administration will shortly submit authorizing legislation to this
    committee that expands the ``dollar-based'' approach. PHAs will
    continue to receive a set dollar amount as in 2005, but they would have
    the freedom to adjust the program to the unique and changing needs of
    their communities, including the ability to set their own subsidy
    levels based on local market conditions rather than Washington-
    determined rents. Local PHAs will be able to design their own tenant
    rent policies, and in turn, reduce the number of errors that are made
    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 reward PHAs for good management through
    performance-based incentives. These changes would provide a more
    efficient and effective program, which helps low-income families more
    easily obtain decent, safe, and affordable housing.
        Human Capital.--After many years of downsizing, HUD faces a large
    number of potential retirements and the loss of experienced staff.
    HUD's staff, or ``human capital,'' is its most important asset in the
    delivery and oversight of the Department's mission. HUD has taken
    significant steps to enhance and better use its existing staff
    capacity, and to obtain, develop, and maintain the staff capacity
    necessary to adequately support HUD's future program delivery. HUD has
    revamped its hiring practices, and now fills jobs in an average of only
    38 days, instead of the 96-day average originally cited by the
    Government Accountability Office. Moreover, HUD has synchronized the
    goals and performance plans of its managers with the overall aims of
    the agency, and is developing a new managerial framework through recent
    hiring and executive training programs.
        Competitive Sourcing.--In April, HUD announced its first public-
    private competition, focusing on the contract administration and
    compliance monitoring functions associated with its assisted
    multifamily housing properties. Through this competition and others
    that are being considered, HUD hopes to realize cost efficiencies and
    significantly improve performance.
        Improved Financial Performance.--HUD has striven to enhance and
    stabilize its existing financial management systems operating
    environment to better support the Department and produce auditable
    financial statements in a timely manner. While still suffering from
    internal control weaknesses, HUD met the accelerated timetables for
    producing its performance and accountability report, and improved the
    reliability, accuracy, and timeliness of financial systems. HUD is
    continuing efforts to reduce its internal control weaknesses from 10 to
    7 by next year.
        E-Government.--HUD completed security reviews for all of its
    information systems in calendar year 2004, and plans are in place to
    eliminate security defects by next year. HUD awarded its large contract
    for core IT infrastructure, successfully resolving a protest that
    lasted for 2 years.
        HUD Management and Performance.--Today, public and assisted housing
    residents live in better quality housing with fewer safety violations
    than 4 years ago. HUD increased the percentage of projects meeting its
    physical condition standards in public housing by 9 percentage points
    (from 83 percent in 2002 to 92 percent in 2004) and in subsidized
    private housing by 8 percentage points (from 87 percent in 2002 to 95
    percent in 2004). HUD now turns around at least 45 percent of public
    housing authorities classified as ``troubled'' within 12 months rather
    than the 2 years allowed by regulation. New rules and procedures have
    virtually eliminated property flipping fraud from the FHA insurance
    programs, and close monitoring will continue to prevent such abuses.
    New rules and procedures have forced out bad appraisers from the FHA
    program and our ``Credit Watch'' lender monitoring initiative will
    continue to bar other individuals who improperly raise the risk of loss
    in these programs. Since 2002, HUD has worked with stakeholders to
    streamline their Consolidated Planning process into an easy-to-use and
    helpful tool for communities.
        Faith-Based and Community Initiative.--HUD expanded its outreach to
    community organizations, including faith-based organizations,
    attempting to level the playing field for its formula and competitive
    grants. HUD has removed all discriminatory barriers to participation by
    such organizations. HUD's technical assistance has helped these
    organizations understand the application process as well as the
    responsibilities for implementation. These organizations are beginning
    to compete more widely and effectively as shown in their success in
    increasing the number of grants from 659 in 2002 to 765 in 2003, a 16
    percent improvement.
        Improper Payments Initiative.--At the beginning of the President's
    first term, HUD committed to working with its stakeholders to reduce
    the improper payment in rental subsidies by one-half by 2005. At that
    time, over 60 percent of rental subsidies were incorrectly calculated
    by program sponsors due to improper interviews, inadequate income
    verifications, misunderstood program rules, and computational errors.
    Other errors resulted from inadequate verification of tenants' self-
    reported incomes. Four years later, HUD has achieved exactly what it
    committed to do. There has been a 27 percent reduction in improper
    subsidy determinations by program sponsors over the past 4 years. More
    importantly, there has been a 50 percent reduction in improper payments
    amounting to $1.6 billion.
        Beginning in 2005, HUD will expand the verification of tenant self-
    reported incomes to include recent wage data. This has the dual benefit
    of both improving accuracy and providing more privacy because income
    data will be matched electronically whereas current procedures require
    a paper verification letter to the tenant's employer. These stewardship
    efforts improve confidence that the right person is getting the right
    benefit in a timely, dignified, and private manner as intended under
    law. Because this is the first quarter that agency efforts were rated,
    progress scores were not given.
        All of us share the goal of creating housing opportunities for more
    Americans. We have done great work over the past 4 years, and we should
    be proud of everything we have accomplished together. But we should not
    be satisfied, because our work is far from being finished.
        I look forward to the work ahead, as we seek to open the American
    Dream to more families and individuals, and open our communities to new
    opportunities for growth and prosperity.
        I would like to thank all the members of this subcommittee for your
    support of our efforts at HUD. We welcome your guidance as we continue
    our work together.
        Thank you.

        Senator Bond. Thank you very much, Mr. Secretary.

                          CDBG AUDIT OF PROGRAM ABUSE

        Mr. Secretary, you are probably well aware, as we are all
    too well aware in Missouri, of a recent audit conducted for the
    City of Kansas City that revealed that a not-for-profit agency
    has billed for some $1.1 million in Federal housing funds for
    just two homes on Tracy Avenue. The audit found the contracts
    may have violated Federal regulations.
        As you know, there is great concern in Kansas City over
    misuse of dollars. I have visited there. I have called on the
    IG to investigate. I visited the area with HUD officials
    because we understand that the abuse of taxpayer dollars cannot
    be tolerated.
        While I understand this is an ongoing investigation, I
    would like to know what you can tell me directly about it and
    what HUD is doing to prevent possible abuses from happening
    again as well as your assurance that there will be continued
    attention to this matter.
        Mr. Jackson. First, Mr. Chairman, I want to thank you for
    bringing the matter to our attention. We quickly began the
    process of evaluating exactly what has taken place.
        We are in the process of finding out and we will, when it
    is finished, make our findings to you. We will also take the
    appropriate action.
        As you know, we allocate the funds to the cities and the
    cities have the responsibility to make sure that there is
    checks and balances. But that does not in any way relieve us of
    our responsibility. I take that responsibility greatly.
        So I will tell you that, as you know, we sent a General
    Deputy Assistant Secretary out with you to make the finding----
        Senator Bond. Right. We appreciate that.
        Mr. Jackson [continuing]. We will continue to do that. We
    are going to make every effort to make sure that that does not
    happen again. I will report to you as soon as we have the final
    findings.
        Senator Bond. Thank you very much, Mr. Secretary.
        Is Mr. Ken Donohue, the HUD IG, available?
        Mr. Jackson. Yes.
        Senator Bond. Mr. Donohue, could you come up to the
    microphone. You know I asked you to review the use of CDBG
    funding as it pertains to the rehabilitation of the two houses
    on Tracy Avenue. I know that you have been reviewing the city's
    use and I would like to know what your views are or what you
    can tell us at this time.
        Mr. Donohue. Yes, Mr. Chairman. Thank you very much.
        As you know, we did conduct a series of audits with regard
    to the Kansas City housing programs. The most recent being the
    HEDFC Program.
        And I really do appreciate the chairman's interest with
    regard to the Tracy Avenue project. You agree an expensive
    amount of rehabilitation was spent on those two single-family
    homes.
        I want to assure you that we are continuing to review this
    matter and follow-up on your concerns. I can report out to you
    today that based on these audits, the Department has issued a
    limited denial of participation on the HEFDC and some of its
    officials.
        This will require the City of Kansas City to assume control
    of the $50 million to $80 million with regard to the portfolio
    administered by HEFDC. And I believe the city is currently in
    negotiations to award a contract.
        Senator Bond. We thank you and we look forward to your
    final report.
        When I was there with the representative of Secretary
    Jackson and the Mayor of Kansas City, the City Manager
    expressed a strong commitment to take over the administration
    of the program and to deal with those abuses.
        I know there are many more steps, but we appreciate your
    role in undertaking that.

                      REVIEW OF HOMELESS ASSISTANCE GRANTS

        Mr. Secretary, another, if you will permit me, another
    parochial interest, very important to the City of St. Louis. I
    recently sent a letter March 11 asking HUD to review the award
    of only $4.2 million in homeless assistance grants to the City
    of St. Louis.
        The City was eligible to receive $10.8 million if it scored
    82 points on a continuum of care application. It scored 81
    points and gets $4.2 million instead of $10.8 million.
        This funding is critically important. And I know that there
    are difficulties in reviewing and sometimes they are
    subjective.
        I would like to know the status and would also like to know
    what steps HUD takes to ensure the results in the reviews are
    just, especially when the loss of funds by the narrowest
    margins is such a large magnitude.
        Mr. Jackson. Mr. Chairman, thank you very much.
        We are totally evaluating the allocation. There was a
    technical mistake. And clearly from my perspective, it deserves
    us to look again at the process that we used.
        I think you said it well. In many cases, yes, we try to be
    objective, but sometimes it is very subjective.
        We hope to have an answer to you very quickly, as I have
    said, because it is important that St. Louis receive those
    monies.
        Senator Bond. Thank you very much, Mr. Secretary.
        Now I turn to Senator Murray.
        Senator Murray. Thank you, Mr. Chairman.

                 RESCIND UNOBLIGATED CASH AND CARRY-OVER FUNDS

        Mr. Secretary, your fiscal year 2006 budget seeks authority
    to rescind $2.5 billion in unobligated cash and carry-over
    funds from fiscal year 2005 and previous years.
        Your language allows you to take this funding from any
    account within HUD. I was not on the subcommittee that funded
    HUD last year and I am troubled by this practice where you kind
    of ``one hand giveth and the other hand taketh away''.
        Can you please tell us today precisely which programs you
    intend to cut in order to achieve your proposed rescission of
    $2.5 billion?
        Mr. Jackson. Ranking Member, I cannot. And what I will do
    is in all honesty go back and look at possibilities.
        Initially we had said the Section 8 program, but it
    permitted us to take it from other places within our budget.
        I can respond to you for the record and get that to you
    specifically.
        Senator Murray. Well, do you think you will be in a
    position to identify where these cuts are coming from before we
    mark up this appropriations bill probably in July?
        Mr. Jackson. We have the next 18 months to identify. And
    usually we will not start that process until June or July.
        Senator Murray. So when we are marking up the
    appropriations bill, we will have no idea where you are going
    to be taking those from?
        Mr. Jackson. I will tell you we will have to in all honesty
    look at the budget. It is a very, very tight budget that we are
    operating under and I do not want to give you specifics today
    and then find out that 6, 7 months from now those are not the
    specific areas where the rescission will come.
        And I am trying to be as straightforward as I can with you.
    I cannot today give you the specific areas.
        Senator Murray. Well, I think that makes it really hard for
    this subcommittee to write a bill when we do not know where you
    are going to be taking money away from.
        A similar rescission totaling $1.5 billion was imposed on
    this current year. And you do plan to accommodate that
    rescission, I understand, by recapturing unused voucher funds
    from Section 8?
        Mr. Jackson. That is correct.
        Senator Murray. Can you guarantee me that a rescission of
    $2.5 billion as recommended in your budget will not result in
    the loss of housing or other essential services to any of our
    low-income individuals or families served by HUD?
        Mr. Jackson. No, I cannot do that.
        Senator Murray. So it could possibly come from those?
        Mr. Jackson. Yes.
        Senator Murray. Well, I understand that many of your grants
    to actually eliminate homelessness remain unobligated because
    the grants are not transmitted to the housing agencies until
    late in the year.
        Can you guarantee that none of your proposed $2.5 billion
    will be derived by limiting available assistance to the
    homeless?
        Mr. Jackson. Homelessness is an extreme priority for us
    just like the Section 8 program. I will do everything within my
    power to make sure that those are not rescinded.
        Senator Murray. Well, Mr. Secretary, there are very few
    programs I know of that have such wide bi-partisan support by
    members of Congress, governors, mayors. We have been flooded by
    people supporting the Community Development Block Grant.
        The administration is planning to merge this program with
    17 others and then cut the available funding by more than a
    third. The rationale that has been presented in the President's
    budget for consolidating and cutting these programs is that the
    existing programs are cumbersome, duplicative, ineffective, and
    unaccountable.
        Do you feel that CDBG is unaccountable under your
    authority?
        Mr. Jackson. Absolutely not. And that is not the basis for
    the consolidation. What we are saying is to try to get all of
    the economic development programs in one place.
        And I think it would be very hypocritical on my part,
    having been chairman of two community development agencies, one
    in St. Louis and one in Washington, DC, and I have seen the
    effects of those programs which are very positive around the
    country, specifically in Washington. It has been extremely
    effective in Seattle and Spokane.
        So I think to say that the program has been ineffective--
    there are problems in the program. There is no question, as
    just the chairman just said.
        But you have to note that once those were brought to our
    attention by OMB, the thing that I did specifically was to
    compel people in the profession, the industry, and members of
    OMB staff to go out and make recommendations how we could
    better make the program work.
        And we came back with those specifics and we have submitted
    those to your committee and to the Senate and to the House as
    to how we can better make the program work.

                               CDBG CONSOLIDATION

        Senator Murray. Mr. Secretary, in the President's budget,
    he said that he is consolidating and cutting these existing
    programs because they are cumbersome, duplicative, ineffective,
    and unaccountable. Those are the administration's words.
        So you are telling me they are not unaccountable?
        Mr. Jackson. I am telling you the Community Development
    Program is not unaccountable. I am saying to you that the
    Economic Development Program for consolidation purposes, yes, a
    number of them exist around six or seven different agencies and
    they are encumbered because some, I do not think, should be----
        Senator Murray. Well, what is cumbersome or ineffective?
    Meals on Wheels, elderly and child day care? What programs that
    CDBG supports are cumbersome and unaccountable?
        Mr. Jackson. Well, I do not think they are not specifically
    talking about the Community Development Program. We are talking
    about the Economic Development Program. We are consolidating
    for the purpose of economic development.
        Senator Murray. Well, the administration is planning to
    merge CDBG with 17 others and then cut that funding by a third.
    And in the budget itself, the President said the reason he is
    merging CDBG is because it is unaccountable and duplicative and
    ineffective.
        And so I am just asking you which programs under CDBG? Is
    it Meals on Wheels? Is it child care? What is it that is
    cumbersome, unaccountable and ineffective?
        Mr. Jackson. I am saying to you, Ranking Member, that is
    not my perspective of what the bill says. We are talking about
    economic development programs, not the Community Development
    Program per se. And that to me is a very different perspective.
        You are asking me their ineffectiveness----
        Senator Murray. I am just reading the words of the
    President's budget.
        Mr. Jackson. I understand what you are saying. I am saying
    to you, are you asking me there is ineffectiveness in the
    Community Development Program? Yes. I think you have seen one
    example which the chairman gave. But I'm saying overall, there
    is a great deal of good that comes from the Community
    Development Program.
        Senator Murray. Thanks, Mr. Chairman.

                RESCISSION OF $2.5 BILLION FOR FISCAL YEAR 2006

        Senator Bond. Thank you, Senator Murray.
        Let me go back to this proposed rescission of $2.5 billion.
    My staff has asked HUD and OMB for justification of the
    rescission.
        Where did you come up with it? I hope that this was not a
    Professor Swag estimate of $2.5 billion. Is there some kind of
    analysis that is performed to justify the level of rescission
    in the budget? There has to be a rationale for a $2.5 billion
    cut. What is it or where is it or when are we going to get it?
        Mr. Jackson. As I said to the ranking member, Mr. Chairman,
    we will start the process probably in June or July looking at
    where the rescissions will occur. To tell you specifically
    where they will occur, I am not in that position to do that
    today.
        Senator Bond. Well, Mr. Secretary, we understand the House
    is going to act on all these bills in June. We are going to be
    acting on them in July. And we need to know what we are buying.
        Are we buying a pig in a poke or are we buying a rational
    plan? At this point, I lean towards the pig. I want to see the
    plan. And June or July, unfortunately I tell you, is not an
    adequate time for us to do our work. We have got to have it
    before we start trying to allocate the headaches that this
    budget causes us. So, please, we need this by the end of April.
        Mr. Jackson. I will make every effort to get it to you as
    quickly as possible.
        Senator Bond. Thank you. We need it by the end of April.

                       TRANSFER CDBG PROGRAMS TO COMMERCE

        Moving on to the CDBG, I got this wonderful November 20,
    2004, consensus document, where a joint HUD, OMB, grantee
    outcome measurement working group reached consensus on an
    outcome measurement system to implement the CDBG program. This
    group spent significant time to make CDBG more effective. I do
    not understand after we have gone through all this effort to
    make it work why the administration wants to eliminate CDBG and
    begin again at Commerce.
        But I have got some practical questions. How could a new
    block grant work even if enacted this year? Even if we were to
    pass it--and I am going to do my best to make sure we do not--
    how could the Department of Commerce or any department actually
    get a new program on track, create regulations, educate
    grantees, and get the money out the door?
        What is going to happen to existing projects? Where does
    all this go and how does some other agency get a handle on it?
        Mr. Jackson. I think, not passing the buck, Mr. Chairman, I
    think you are going to have to ask the Secretary of Commerce.
        We simply zeroed out $4.5 billion out of our budget for
    2006. How it is going to be implemented, what is going to
    occur, legislation now is being drafted by Commerce to that
    effect.
        And we will have input in that legislation. But that
    question I cannot answer at this point.

                                STAFFING REQUEST

        Senator Bond. Well, I would look at your staffing request,
    staffing and salaries. HUD is requesting an increase of $32.5
    million over the 2005 level, a total of $1.15 billion for
    salaries. At the same time, the administration is proposing
    elimination of CDBG block granting, homeless, Section 8, as
    well as reduced regulatory requirements over PHAs. Your
    staffing requests are going up while the OMB budget requests
    for programs are going down.
        How could you need even half that amount if we were to
    adopt all of the draconian cuts and removals from HUD
    jurisdiction? What are your true S&E needs were we to enact all
    these changes?
        Mr. Jackson. Those are our true S&E needs. And I will tell
    you that we have cut our staff substantially over the last 2
    years. And it is because in many cases, we have had an increase
    in the cost of living, increase in merit salary that in essence
    requires us to cut the staff but at the same time to meet the
    criteria.
        We feel today that it is very difficult for us to carry out
    some of our missions without an increase in staff and we are
    asking, as we have said before, for the increase in staff. And
    that is what we are projecting within the budget because we
    have to.
        Let me say this to you, Mr. Chairman. When I go out into
    the field--and I am probably one of the few secretaries that
    has ever spent any time in the field. I think I have been, of
    our 81 field offices, I think have been to 53 of them. I have
    been to every one of our regions.
        And when I walk in there and realize that there is not
    enough personnel within those specific field offices or
    regional offices to carry out the work, I think it is
    imperative that I ask not only the administration but also the
    Congress to give me leeway to make sure that those positions
    are filled.
        Senator Bond. Thank you, Mr. Secretary. We want to see that
    your programs work. We want to see that the ones that should be
    in HUD stay in HUD. I know you are going to have to travel to
    Alaska and the great Northwest but please stop in the Midwest
    on the way back.
        Mr. Jackson. And I can assure you I am going to stop by
    Senator Murray's State, too, before I get there or on the way
    back, one of the two.
        Senator Bond. Yes. All right. Well, I will turn the
    questioning over to Senator Murray now.
        Senator Murray. We are a stop on the way to Alaska, so it
    does work.

                NEW CDBG FUNDS TO BE SPENT ON HOUSING ACTIVITIES

        Mr. Secretary, you are the chief administrator for the
    Nation's housing needs. So can you tell me what percentage of
    the Bush Administration's new Consolidated Block Grant Program
    will be spent on housing activities?
        Mr. Jackson. No, I cannot. I think again until the
    legislation is developed by Commerce, I cannot.
        I can tell you 2005, $4.5 billion.
        Senator Murray. We have not gotten any authorizing
    legislation yet. You say that is going to be developed by the
    Department of Commerce?
        Mr. Jackson. Yes.
        Senator Murray. And that you would not have any say in that
    at all?
        Mr. Jackson. No. We will have input in it, yes.
        Senator Murray. So you will have input?
        Mr. Jackson. Yes.
        Senator Murray. So I will assume you will advocate for
    housing needs?
        Mr. Jackson. Absolutely.
        Senator Murray. And you know that roughly a quarter of CDBG
    funds today are used for housing. What would you advocate for
    under the new----
        Mr. Jackson. Again, I will tell you that, as I said a few
    minutes ago to you, I am convinced that the Community
    Development Block Grant Program has some ineffectiveness. But
    as a whole, it is a very excellent program that has done a lot
    for cities in this country.
        So I will continue to advocate the flexibility and that as
    much money as can be appropriated be appropriated for housing
    and community development, that is infrastructure, development
    zones.
        Senator Murray. As this authorizing legislation is put
    together and you are advocating to the Department of Commerce,
    what programs will you tell them should not be cut or what
    current uses under CDBG will you tell them have to remain as
    part of authorizing legislation? What do you think is
    important?
        Mr. Jackson. I think all of it is important.
        Senator Murray. So you are not going to tell them that
    anything is not eligible anymore? Everything will still be
    eligible? Is that what you----
        Mr. Jackson. I think that we have sent over to Congress
    some suggestions and that is for a proposal as to how we can
    best redistribute the Community Development Block Grant fund on
    an equity basis. That is for you all to decide.
        We did not make a recommendation because we thought that
    clearly that was not within our purview. And let me tell you
    why we did that. It is because there are some inequities that
    exist within the program.
        Once OMB did the pilot study for us, we said let us look at
    this and make the best recommendation to Congress that we can
    make. As a whole, I think we have done that. We have also made
    recommendations how to best administer the program.
        So when you start looking at the program, it is a very
    difficult process to say what should or should not be cut. In
    my perspective, all of those programs are very important.
        Senator Murray. So everything that is currently eligible
    for use under CDBG you believe will still be eligible for----
        Mr. Jackson. I will truly advocate that they should be.
        Senator Murray. So we are going to take CDBG, combine it
    with 17 other programs, and then cut the funding by a third and
    everything is still eligible?
        Mr. Jackson. My position is--again, I will go back. We
    reduced our budget by $4.5 billion. How that is going to play
    out in Commerce, I do not have the legislation before me. And
    once we have input in the process, I will tell them what I
    think is very important.
        Senator Murray. But you cannot give us any programs? Meals
    on Wheels, do you think that is affected? Child care? Elderly
    care?
        Mr. Jackson. Yes.
        Senator Murray. It is going to be tough, Mr. Chairman. I am
    looking forward to seeing the administration's proposal.
        All right. Well, let me ask one more question in my time
    then.

                              FOSTER CARE HOUSING

        Mr. Secretary, there are some studies out there indicating
    that the primary reason why as many as 30 percent of our
    children who are in foster care today cannot be reunited with
    one or both of their parents is because they do not have
    adequate housing.
        These are the cases where a parent has gotten over their
    substance abuse problems, fulfilled other requirements, and the
    judge is ready and prepared to reunite the kids with their
    parents as long as they find adequate housing.
        Now, the average welfare family has 2.7 children and the
    cost to the taxpayer of keeping those kids in foster care is
    about $48,000 a year. Your agency, however, provides housing
    for families of this kind for a subsidy of about $13,500 a
    year.
        Do you not think it makes more sense both for the families
    and for the taxpayer to make an aggressive effort to find
    housing for this population so kids can get out of foster care
    and be reunited with their parents?
        Mr. Jackson. I surely do. And let me tell you that that is
    why we have increased the homeless budget by $1.4 billion, but
    we have also created the Interagency on Homeless where we have
    four agencies working together to deal with the homeless
    problem from a holistic point of view, but from a whole
    perspective.
        I had a chance about 5 weeks ago to be out in California
    with Governor Schwarzenegger to see a program called Path that
    is doing exactly what the President has set forth.
        It starts with the person who has been on the streets or
    family that has been on the streets more than 90 days. And they
    start with basically looking at them from a physical, mental,
    and medical perspective, then training them for job training
    and putting them through.
        So I totally agree with you that it is much cheaper and
    much more productive to house them the way you have said with
    our program than to keep a child in foster care.
        Senator Murray. Okay. I understand that the Tenant
    Protective Fund has a special designated program just for
    family reunification. In fact, I believe Senator Bond was
    instrumental in getting that program authorized.
        Mr. Jackson. That is correct.

                  NEW VOUCHERS FOR THE TENANT PROTECTIVE FUND

        Senator Murray. But I also understand that no new vouchers
    have been issued for that program for the last 4 years and I
    just want to know why your agency has not issued any new
    vouchers to get some of those families reunited.
        Mr. Jackson. We are issuing the vouchers. And let me say
    this to you. Most housing--well, not most--all housing
    authorities realize that the homeless families take priority on
    their waiting list.
        If we can find or if you can denote to me those that are
    not doing that, I will be happy to speak with them. But that is
    a top priority of every housing authority in this country.
        Senator Murray. Well, I understand you are issuing
    renewals, but you are not issuing any new vouchers. And I have
    heard that that is because you want to leave that funding
    available for your rescissions. Is that correct?
        Mr. Jackson. That is not true.
        Senator Murray. Okay. So why have no new vouchers been
    issued?
        Mr. Jackson. We do not have new vouchers to actually issue
    at this point. I mean, we have funded the program and the new
    Section 8 voucher program by $1.1 billion increase.
        What is occurring is this, and we are going to have to deal
    with this, is that pre-1998, housing authorities received a
    budget base amount of money. And I can tell you because I am
    probably the only Secretary ever to appear before you have ran
    a housing authority.
        In Dallas, we got $20 million as an example and we housed
    as many people as we could. Today it is unit-based. Well, we
    just moved away from the unit-based. But it was unit-based.
        And what occurred is this. With the unit-based, we also put
    another appendage to it that 75 percent of those vouchers must
    be used for people 30 percent or less of median.
        What that created was a symptomatic problem. When we did
    that, 90 percent or over 90 percent of those people do not pay
    anything to live. In fact, we pay them to live in subsidized
    housing. We pay their utilities. We pay their expenses.
        So what we have seen is the Section 8 budget rise
    exponentially, but we are not housing any more people. If I go
    back to 1995, when I left the Housing Authority in Dallas, I
    will bet you that today that 60 percent of the people who were
    on that waiting list are still there today.
        Senator Murray. That is right because housing prices have
    increased.
        Mr. Jackson. No, they have not. They have increased in your
    area. They have increased on the east coast. But west,
    southeast, the housing costs for apartments have gone down.
    But, yet, we are paying extremely high prices because the unit-
    based system has protected landlords to charge what they wanted
    just to get a person in.
        I think competitively, once we go back to a system where
    people are paying, I think we will have a different situation.
    That is why we have suggested that we raise the limit to 60
    percent of median where we do have people.
        Pre-1998, a person spent about 3.5 years on a voucher.
        Senator Murray. Are you going to protect areas that have
    higher housing costs?
        Mr. Jackson. Today they're spending 8.
        Senator Murray. Are you going to protect areas like the
    Northwest and Northeast that----
        Mr. Jackson. Absolutely. And I think that that flexibility
    in the flexible voucher program gives the housing authority
    with a budget-based process and the flexibility they have to
    decide what they want to pay for a voucher.
        Senator Murray. My time is up.
        Senator Bond. Thank you, Senator Murray.

                                    HOPE VI

        I am going to try to wrap up my questions on this round.
    Obviously as you might expect, I have an extensive question on
    the HOPE VI rescission since I spent so long working to get it
    established and know how it works.
        I am going to give you some time and maybe somebody at OMB
    can help you write a rationale of why you are trying to not
    only gut it but also rescind prior year funding.

              IMPACT OF THE BUDGET-BASED SECTION 8 VOUCHER PROGRAM

        Let me move to the Section 8 vouchers. You know, we work
    with you and I think we reformed the Section 8 voucher program
    as a budget-based program by requiring HUD to allocate funds by
    a budget-based formula. Unfortunately, we have not been able to
    get the data for the 2005 bill to make sure we included enough
    funding. We did the best we could, but I would like to ask you
    what is the impact of the approach? Are the number of vouchers
    going to decrease from the high point? What is HUD doing to
    ensure that PHAs are providing better data? Are they lowering
    payment standards and what has been the impact of this new
    budget-based program for Section 8 tenants?
        Mr. Jackson. I welcome that question and let me tell you
    why, Mr. Chairman, because I think we have not held the public
    housing authorities accountable in the unit-based system.
        I do believe that the passage of the budget-based program
    last year, if with the passage of the flexibility this year,
    will give housing authorities the abilities to house more
    people and to have a tremendous turnover.
        I think we have to look at the basis for the Section 8
    program. And I think over the years, we have lost that
    perspective and I am not talking about the Congress. I am
    talking about the housing authorities.
        The Section 8 program was created as a transition between
    public housing and conventional housing. And when I say that, I
    mean whether it is affordable rental property or home
    ownership.
        We have, over the last 15 years, made it a substitute for
    public housing. And since 1998, we have made it basically
    public housing in many ways when we said only 30 percent or
    less must get 75 percent of the vouchers.
        To me, there are still people in this country at 60 percent
    of median who can use a voucher for a period of time. Pre-1998,
    we spent about 3 years with the voucher, 3.5 years. Since 1998,
    it has gone to about 8 years.
        But the key to it is that we are not serving any more
    people. We are serving the lowest of the lowest and we have
    planned projected prices that clearly should not be paid in
    many parts of the country.
        That is not in Senator Murray's area in the West Coast or
    in the East Coast. Maine, Massachusetts, yes, those are very
    high markets. But in the Southeast, the South, and the
    Southwest, the markets are not that high. In the Midwest, the
    markets are not that high. We have ample rental apartments, but
    still we are paying this unit-based cost.
        So my contention is, Senator, if we can pass the flexible
    part of the Voucher Program now that it is already budget
    based, we can begin to house more people and they will not be
    on the program as long.

                             NEGOTIATED RULE-MAKING

        Senator Bond. I raised concern earlier about the public
    housing negotiated rule-making. The negotiated rule was based
    on a study conducted by the Harvard University Graduate School
    of Design. Unfortunately, the OMB-revised rule appears to
    deviate significantly from the negotiated rule. Is not this
    revision, substantial revision a violation of the negotiated
    rule-making process which we are required by statute?
        Mr. Jackson. I had a meeting yesterday with the leadership
    of the three major entities that represent housing authorities.
    That is the Council on Large Housing Authorities, five of the
    Public Housing Authority directors, Ann Clap of the Council on
    Large Housing Authorities. They perceived that it is.
        We think that we were very candid with them in our process
    of negotiation when we said that there is always possibilities
    that there will be changes. During the comment period, you will
    have a chance to make your wishes known.
        We think that probably 85, 90 percent of what we negotiated
    is within the rule today. Were there changes? Yes. Will they
    have a chance to make sure that their voices are heard?
    Absolutely. Are the housing authorities losing? Yes.
        But the majority of the housing authorities are gaining
    under the present negotiated rules, Chairman Bond. And, you
    know, we think 80, 85 percent of them are gaining. Will we ever
    get 100 percent? No.
        But we believe--and we are open, as I told all three of the
    representatives yesterday, to listening to them and to go back
    and see if there is some efforts we can make to correct some of
    the concerns that they have.

                             FHA MORTGAGE INSURANCE

        Senator Bond. One final question is going to be on FHA
    mortgage insurance. And I would invite Mr. Donohue to come back
    up to the table and just give us a quick summary of what is
    happening with the increasing FHA defaults and what is your
    assessment of the Zero Downpayment program based on the audits
    you have conducted on the FHA mortgage insurance program.
        Mr. Donohue. We have done substantial work as far as audits
    with regard to the FHA default and we concur with the spiked
    increase of defaults in the past few years. I believe you
    quoted 6.9 percent for 2004.
        I believe in our review, the zero down payment or no out-
    of-pocket money for the recipient has inherent problems that
    can impact on the FHA funds even though I know FHA is
    increasing the premium amounts, but I do think that this could
    have an impact on the function and operation of FHA.
        Senator Bond. Mr. Secretary, home ownership is at an all-
    time high, 73.7 homeowners. However, some people are not ready
    for home ownership.
        Mr. Jackson. That is correct.

                              ZERO DOWNPAYMENT ACT

        Senator Bond. Why should we take the risk to the FHA fund
    when it appears that the only way you can reach out is to
    provide people no-cost housing which we have seen unfortunately
    leads to defaults? And it is not only disastrous for the
    community but disastrous for the credit history and the
    reputation of the families who get this so-called benefit.
        Mr. Jackson. Mr. Chairman, FHA claims are down 15 percent
    from last year. And why I think it is necessary, I will tell
    you. Again--and I do not say this for advisement. I am probably
    the most traveled Secretary to the persons that we serve.
        I would just like to use an example of a family that I met
    in Las Vegas, the Gonzaleses, who came to this country, I
    think, some 20 years ago. The wife works in the hotel, but she
    works in the maid service. The husband works in the kitchen of
    another major hotel.
        Together they make about $40,000 each. I believe that the
    most difficult things that they said to me with them is the
    ability to make the down payment and closing costs. They are
    paying about 42, 43 percent of their money for rent.
        If we can get them into a home, I am convinced in my heart
    that they are going to stay in that home. They will probably be
    paying about 30 percent of their income for rent.
        See, I believe this. I will not call the name of my friend
    because if I call him, you and I will both know him. But I have
    a friend who is a major doctor who has defaulted on two homes
    and both of them were zero down payments. He still has another
    million dollar home with a zero down payment.
        I believe that if we can give low-and moderate-income
    persons the same opportunities, we will not have a huge default
    rate. I believe we should give them that opportunity.
        And, you know, I will just close with this, something that
    my mother used to say, and this is why I stress home ownership
    a lot but also affordable housing. To live with a dream might
    be madness, but to live without a dream is insanity.
        There are a lot of people who want home ownership. I think
    if we can help them through what the President has put forth
    with the American Dreams Down Payment Act and Zero Downpayment
    Act a number of people who would not have the opportunity to be
    homeowners will be.
        Senator Bond. I appreciate your explanation. But when you
    look at what happens, I am afraid that is a path for a lot of
    hardship for communities and families.
        Senator Murray.

                               FARM LABOR HOUSING

        Senator Murray. Thank you. I just have a couple more
    questions and I will submit some. I have some more on HOPE VI
    too.
        But I wanted to ask you about a significant need across the
    country and my home State and that is for seasonable and
    permanent farm labor housing.
        I am aware of the assistance of the Department of Labor and
    Agriculture in this area as well, but it really is not enough
    to meet the needs out there.
        Can you talk to us about what HUD's current authority is
    and activities related to farm labor housing and do you think
    your agency is doing everything it can in that area?
        Mr. Jackson. I am just not sure. I have to ask the
    Assistant Secretary Weicher.
        Mr. Weicher. I am sorry, Senator Murray. We do not have
    responsibility for----
        Mr. Jackson. I did not think so.
        Mr. Weicher [continuing]. Lending. We do not have the
    responsibility for the Rural Housing programs and the Old
    Farmer's Home Administration. We can make loans in rural areas
    and we do, but those are separate programs.
        Senator Murray. So you do nothing for farm labor housing?
        Mr. Weicher. I beg your pardon?
        Senator Murray. You know, I notice that you talked a lot
    about homelessness and I know that the President reactivated
    the U.S. Interagency Council on Homelessness so cabinet-level
    leaders can work together on that problem.
        The farm labor community is one of the most poorly-housed
    populations in the Nation and the only government solutions
    really are spread out over three different departments.
        Mr. Secretary, you are the lead national official for the
    Nation's housing needs and farm labor housing is one of those.
        Would you see any merit in convening a cabinet-level
    working group to address farm labor housing and would you be
    willing to work with me on this?
        Mr. Jackson. Absolutely.
        Senator Murray. Well, I would like to----
        Senator Bond. Senator Murray, excuse me. I have been
    summoned back to my office and if you don't mind, I will give
    you the----
        Senator Murray. Great.
        Senator Bond. I thought you might just like a little bit of
    practice in case. So with that----
        Senator Murray. Senator Leahy and I will be more than----
        Senator Bond [continuing]. I thank you, Mr. Secretary, for
    your noble efforts to answer some unanswerable questions. I
    intend to ask others the same questions.
        And, Senator Leahy, you can continue with Senator Murray.
        Senator Murray [presiding]. I just have one additional
    question----
        Mr. Jackson. Thank you, Mr. Chairman.
        Senator Murray [continuing]. And I will turn it over to
    Senator Leahy. But thank you, Mr. Chairman.
        Mr. Secretary, I have one other question. I do want to
    follow up the farm labor housing with you. It is a critical
    housing issue and we have not done enough. We need to do more
    and I want to work with you on that.

                    ERROR IN DISTRIBUTION OF SECTION 8 FUNDS

        But let me ask you one other question. I recently heard
    from King County Public Housing Authority. It is one of the
    largest public housing authorities in my State. And they tell
    me that as a result of a computing error that was executed by
    HUD in the distribution of Section 8 funds, they are enduring a
    loss of $800,000 this year.
        And I am told that HUD staff admitted to them that this was
    done in error, but HUD is also telling them they now do not
    have the money to rectify that error, their error.
        As a result, this agency is contemplating sending out a
    letter to all the families on their waiting list explaining
    that as a result of those losses, they are going to be
    terminating that waiting list since no families on the waiting
    list will have any hope of getting a housing voucher at any
    time in the future.
        There are currently 5,000 seniors, disabled people, single
    parents, and refugees who are on that waiting list who are
    about to get that notice because of an error made by HUD.
        Are you familiar with this situation?
        Mr. Jackson. Yes.
        Senator Murray. Well, I would appreciate your response then
    today on what----
        Mr. Jackson. We are resolving that situation and it should
    be resolved immediately with the King County Housing Authority.
        Senator Murray. And will we be getting a phone call today
    regarding that?
        Mr. Jackson. I cannot say today, but Assistant Secretary
    Liu has been in contact with the executive director there.
        Senator Murray. Well, as of last night, they had not heard
    anything. Can we have someone call us today----
        Mr. Jackson. I surely will if they have not.
        Senator Murray [continuing]. And let us know when that
    phone call is going to be made and how that will be rectified?
        Mr. Jackson. I sure will, Senator.
        Senator Murray. Thank you very much.
        Senator Leahy.

                     STATEMENT OF SENATOR PATRICK J. LEAHY

        Senator Leahy. Thank you. Thank you, Senator Murray.
        Secretary Jackson, I would like to welcome you, in your
    first appearance before our newly reconstituted and renamed
    subcommittee. Sometimes it is hard to keep track of all the
    name changes.
        I see some familiar faces here, of course, Senator Bond,
    who just stepped out, and Senator Murray, two people with a
    great deal of experience.
        So I am looking forward to working with all of you as we
    tackle this new bill in the upcoming fiscal year.
        This is my first hearing as a member of the subcommittee,
    although I have been on the full committee for nearly 30 years.
    I wish we could start on a more positive note.
        But if we look at the President's proposed budget, it calls
    for a total of 12 percent in cuts to housing and community
    development programs. Some days I wish our housing and
    community development programs were treated with the same
    expanding budget as they are if they are in Baghdad or
    somewhere in Iraq and not here in the United States.

                          ELIMINATION OF CDBG PROGRAM

        Most egregious I find is the complete elimination of the
    Community Development Block Grant programs. I know that has
    been raised this morning, but I have got a couple of questions
    on it.
        And I am not suggesting it is an either/or thing with Iraq,
    but we do fall over ourselves to increase, for example, law
    enforcement money for Iraq at the same time we eliminate the
    Cops program here in the United States.
        We work to increase housing in Iraq, we cut it here. We
    increase some of the educational funds for Iraq, we cut it here
    in the United States.
        And after a while, people are justified in asking do we
    have to be an either/or as a great nation?
        CDBG is the largest program up for elimination. And the
    President says he calls it a Strengthening America's
    Communities Initiative, some of us however call it the
    Abandoning America's Communities initiative.
        Under the proposal, 18 community and economic development
    programs would be abolished. A new block grant program will be
    established at the Department of Commerce.
        Now, I see no specifics in the goals of this program. We
    have no information on how the money is going to be allocated.
    We have no information on what activities will be eligible. We
    do know however that it is going to be $2 billion less than was
    spent last year in community and economic development.
        And considering the fact that your agency, Secretary
    Jackson, is principally responsible for housing and community
    development, why would you agree to turn this over to the
    Department of Commerce? They have no experience in this field.
        Your department has decades of experience. You have superb
    professionals at HUD, from both Democratic and Republication
    administrations. Commerce has none of that expertise.
        How do you justify this?
        Mr. Jackson. Senator, as I said before the House Committee,
    we made what we perceived as a logical argument as to where the
    Economic Development Program should be housed, that is the
    Strengthening America's Community Initiative Program. The
    decision was made that it would go to Commerce.
        We are in full agreement that the economic and development
    programs from those 17, 18 departments should be consolidated.
    We felt that we could do the job at Housing. But Commerce also
    had an economic and development program.
        And the decision was made and I fully support the
    consolidation. I will tell you that right now of those
    programs.
        Senator Leahy. Does this not eliminate community
    development as part of HUD's core mission?
        Mr. Jackson. We have zeroed out $4.5 billion that was
    allocated for the Community Development Program. We still have
    the HOME program and other programs that were under the
    community development----
        Senator Leahy. If you have got 37 percent less money, how
    are you going to do it?
        Mr. Jackson. Senator, as I said to the Ranking Member
    Murray, we zeroed out $4.5 billion out of our budget. I cannot
    comment on what the budget will look like or what the programs
    will look like at Commerce.
        What I said to her is that we will use our vast experience
    in giving advice to Commerce as to what we think is very
    important with the Community Development Program.
        Senator Leahy. Do not hold your breath waiting for them to
    take that advice because basically they cut the money, they got
    rid of HUD's core mission, and handed it over to somebody who
    has no experience.
        The budgets for HUD when they've come up here over the
    years have been littered with bullet holes. One year, it is
    Section 8. Next it is Public Housing. Next it is CDBG.
        It appears to me that the administration just abandoned
    HUD. Obviously you feel differently. Your testimony says you
    feel differently. But it is awfully hard to see it otherwise.

                         ADDITIONAL COMMITTEE QUESTIONS

        Thank you, Senator Murray. If I have other questions, I
    will submit them for the record.
        [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

                        CDBG AND LOCAL COMMUNITY SUPPORT

        Question. The President's fiscal year 2006 Budget proposes to
    consolidate 18 economic development programs, including HUD's CDBG
    program, into one program within the Department of Commerce. In fiscal
    year 2005, the CDBG program was allocated $4.11 billion. However, the
    President's fiscal year 2006 Budget would provide only $3.7 billion for
    the consolidated initiative, which includes all 18 programs. I have
    heard from many Pennsylvania communities that the CDBG program provides
    critical funding to support many community development activities such
    as housing rehabilitation, public facilities, public services and
    economic development.
        With the elimination of the CDBG program--the largest source of
    Federal assistance to State and local governments for community and
    economic development projects, how do you propose to work with local
    communities to continue to meet HUD's mission to support community
    development and address the housing needs of society's most vulnerable?
        Answer. HUD will continue to administer all its housing and
    homeless assistance programs that provide much needed assistance in
    accordance with HUD's mission. The new program, Strengthening America's
    Communities Initiatives (SACI), at the Department of Commerce will also
    address community and economic development needs in a productive and
    targeted manner.

                                    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. In the past, HUD
    officials have cited problems with the slow pace of HOPE VI
    reconstruction and high costs, in comparison to other HUD programs.
    However, I have often heard from my constituents that delays of HOPE VI
    projects were linked to HUD's approval process. Can you respond to the
    concerns raised by my constituents that delays in HOPE VI projects were
    often the result of HUD policies?
        Answer. Since its inception as a demonstration program, HOPE VI has
    pursued the ambitious and complex goal of revitalizing the Nation's
    most severely distressed public housing developments. In pursuit of
    this objective over the last 12 years, the program has evolved
    significantly in its structure, methodology, and administration,
    offering an unprecedented learning opportunity for HUD and HOPE VI
    grantees.
        As the program evolved, the mixed-finance development approach was
    incorporated into the HOPE VI program. In accordance with 24 CFR 941,
    subpart 6, which controls such development, the Department has been
    reviewing the PHAs' development proposal and legal documents for each
    construction phase in each HOPE VI grant. Due to the size of the HOPE
    VI grants, combined with other leverage funds that the PHAs have
    obtained, each grant may be broken out into 5 or 6 construction phases,
    resulting in a complex, and potentially time-intensive review process.
    Despite the complexity of the mixed-finance approach, the time it takes
    to complete construction has actually decreased significantly over the
    life of the HOPE VI program. Where the average grant completion time
    was 8 years HUD is endeavoring to lower that average to 4\1/2\ years.
        This reduction in time is due to the heightened emphasis HUD
    continues to place on meeting deadlines and completing HOPE VI
    developments. Earlier in the HOPE VI Program, grantees were having
    difficulty constructing the required housing units in accordance with
    their original production schedules. HUD made significant strides to
    improve its oversight of HOPE VI grantees and management of the HOPE VI
    program between 2001 and 2004 in an effort to increase unit production
    and decrease delays in completing HOPE VI developments. These changes
    resulted in a shift from oversight and management approaches that
    included fluid production deadlines and expectations to a more balanced
    approach that makes HOPE VI grantees and HUD staff accountable for the
    progress of HOPE VI projects. Although grantees have clearly grown in
    capacity since the inception of the program, HUD's attention to
    deadlines and timely completion of developments has forced grantees to
    adhere to schedules and complete projects as planned. In turn, HUD
    continues to work internally to minimize the time necessary for review
    and approval by developing model documents, waiver opportunities and
    other streamlining procedures.
        Question. Additionally, 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. Rather than funding new rounds of HOPE VI grantees in
    fiscal year 2006, the Department believes that it is more responsible
    for the Department to aggressively manage and complete the grants
    currently awarded, many of which are years from completion. This pause
    will also give the Department time to continue to develop better
    methods for assessing distress, develop new financing tools and
    delivery mechanisms that are less costly and more efficient, and
    explore the need for a new public housing revitalization program that
    is designed to address the scope of severe distress present in today's
    public housing inventory.
        The Department recognizes the importance of addressing the current
    capital backlog within the public housing inventory. In most cases,
    this need can be more appropriately met through other modernization and
    development programs operated by the Department e.g., the Capital Fund,
    Capital Fund Financing Program and Mixed-Finance development. The
    Department continues to encourage housing authorities in need of this
    assistance to submit project proposals to these programs. To date, the
    Department has approved over $2.4 billion in transactions using the
    Capital Fund Financing Program, with approximately $94 million in
    additional funds in the pipeline. Of the approved transactions, over
    $254 million will be used for development activities.

                                 MOVING-TO-WORK

        Question. Moving-To-Work (MTW) has enabled public housing
    authorities to implement federally-funded housing programs based on
    local needs by providing budget flexibility and regulatory relief. On
    December 15, 2005, I, along with 11 Senators, sent you a letter
    supporting the extension of MTW agreements to 2011 for public housing
    authorities that request an extension of their current demonstration
    term. We have received your response and understand that participants
    whose agreements are expiring in 2005 will be offered a 1-year
    extension. While we thank you for your response and the 1-year
    extension, could you please clarify why some public housing authorities
    initially received MTW extensions through 2011?
        Answer. No housing authorities have received an extension to
    continue their MTW demonstration until 2011. Agreements for three of
    the demonstration participants have expiration dates that far out.
    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 the complexities of Chicago's Transformation
    Plan, their initial Agreement provided for a 10-year demonstration
    term, which expires in 2011.
        Question. You also stated in your letter that HUD is currently
    examining potential legislation to determine if a successor program to
    MTW would be useful. Why is HUD examining this possibility, rather than
    expanding the current MTW program?
        Answer. The examination of the MTW Demonstration and the
    overwhelming support it has received has led to the proposed
    legislation embodied in Title III of the State and Local Housing
    Flexibility Act of 2005. Title III would expand the program to allow
    even more Housing Authorities to participate. It would also establish a
    permanent program that includes features derived from the MTW
    Demonstration: the fungibility of programs, and flexibility to develop
    different approaches to providing housing assistance. At the same time,
    the proposal corrects some of the difficulties in the Demonstration
    that made it difficult to administer and to measure. These include
    requirements for uniform reporting and provision of uniform evaluation
    measures.

                                 OPERATING FUND

        Question. The Quality Housing and Work Responsibility Act of 1998
    requires that HUD develop a formula for allocation of Public Housing
    Operating subsidies through a negotiated rule making process that
    includes the active participation and consensus of stakeholders. In
    2000, Congress further directed HUD, in conjunction with the Harvard
    University Graduate School of Design, to conduct a study of the cost of
    operating a well-run public housing authority. It is my understanding
    that following completion of the cost study that HUD worked through a
    negotiated rule making process to develop a consensus with public
    housing authorities, private housing professionals and affordable
    housing advocates on the amount of subsidies, as well as transitional
    costs to implement the rule. I am gravely concerned that public housing
    authorities throughout Pennsylvania have contacted me recently
    asserting that the published rule alters this negotiated agreement
    reached on a consensus basis. Could you please provide me with an in-
    depth explanation of why HUD made changes to the negotiated funding
    rule prior to publication?
        Answer. Consistent with requirements under Executive Order 12866
    entitled ``Regulatory Planning and Review'' and other rulemaking
    authorities, the negotiated rule underwent further HUD and Executive
    Branch review prior to publication. As a result, certain of the
    committee's recommendations were revised to better reflect the
    administration's policies and budgetary priorities. Although changes
    were made to certain of the committee's recommendations, the proposed
    rule stays committed to the Harvard Cost Study and Negotiated
    Rulemaking recommendations.
        Question. Additionally, HUD's fiscal year 2006 Budget proposal was
    developed after the conclusion of meetings conducted as part of the
    negotiated rulemaking process. Does your budget request accurately
    reflect the funding necessary to implement the negotiated rule,
    including transitional costs?
        Answer. The 2006 request of $3.4 billion represents approximately
    89 percent of operating subsidy PHAs that are eligible under the
    proposed Operating Fund Rule. The proposed rule retains the Negotiated
    Rulemaking recommendation for a transition policy of up to 5 years to
    allow time for PHAs to align their resources with the new funding. The
    proposed rule provides PHAs with tools to convert to new asset
    management by providing monthly fees beyond the Harvard cost study for
    information technology, asset management, and asset repositioning. The
    proposed rule also provides PHAs with the ability to maximize other
    revenues streams without receiving an offset in subsidy. PHAs currently
    have approximately $2.8 billion in operating reserves that they can use
    for transition costs.
                                     ______

                Questions Submitted by Senator Pete V. Domenici

                       COMMUNITY DEVELOPMENT BLOCK GRANTS

        Question. The President proposes a reorganization of economic and
    community development programs by consolidating them in the Department
    of Commerce. This consolidation includes taking the CDBG program out of
    HUD and transferring it to the Department of Commerce.
        Eighteen programs from 5 agencies are involved in the proposed
    consolidation. The administration requests $3.7 billion for the new
    ``Strengthening America's Communities Grant Program.'' These programs
    are currently funded at $5.3 billion, so the proposed consolidation
    comes with a reduction in funding of $1.6 billion below the current
    level. By far the largest program in the proposal is the CDBG program,
    which currently receives about $4.7 billion. The administration knows
    Congress will not approve the proposed restructuring of economic and
    community development programs. We have seen proposals such as this
    from previous administrations. However, the proposed funding reduction
    will have a significant impact on the ability of the Appropriations
    Committee to support ongoing programs in the fiscal year 2006 spending
    bills. Mr. Secretary, is your department working on actual legislative
    language to reorganize the economic and community development programs
    of the Federal Government?
        Answer. The Department of Commerce has the lead on developing the
    legislative package to implement the Strengthening America's
    Communities Initiative (SACI). HUD has provided consultative support.
        Question. If your department isn't doing so, is another department
    or agency within the administration working on such legislation?
        Answer. The Department of Commerce has the lead on developing the
    legislative package to implement the Strengthening America's
    Communities Initiative (SACI). As stated, HUD has provided consultative
    support.
        Question. Do you anticipate that the administration will actually
    submit such legislation to the Congress?
        Answer. HUD is advised that the Department of Commerce is
    developing legislation that will be submitted to Congress.
        Question. Since Congress has no intention of approving the proposed
    reorganization, what impact do you anticipate your Department to
    experience when Congress has to reduce ongoing programs by $1.6 billion
    to stay within the overall discretionary spending gap proposed by the
    President?
        Answer. It is important to note that overall funding for 35 Federal
    community and economic development programs is only reduced 4 percent,
    roughly in line with other domestic spending. The President, via his
    2006 Budget, has proposed to consolidate 18 programs (from five
    agencies) within the Department of Commerce, including the CDBG
    Program. These programs would be consolidated into one new program--The
    Strengthening America's Communities Initiative. This initiative would
    support communities' efforts to meet the goal of improving their
    economic conditions through, among other things, the creation of jobs.
        Question. Are you concerned about this eventuality?
        Answer. As you know, CDBG funds are distributed according to
    statutory formula. If CDBG funds are significantly reduced, we are
    still required to distribute them according to the law. Nevertheless,
    HUD employees remain committed to the goals of promoting economic
    opportunity through community revitalization, home ownership, servicing
    society's most vulnerable--homeless individuals and families--and
    ending chronic homelessness.
                                     ______

                  Questions Submitted by Senator Patty Murray

                                 CDBG TRANSFER

        Question. The administration has stated publicly that so-called
    affluent communities should not receive assistance from its new smaller
    substitute community development program. What will this mean for
    communities that might be comparatively affluent but still have
    significant pockets of poverty in their service area?
        Answer. It is important that Federal funds for housing and
    community development be distributed in a way that maximizes their
    impact. In general, affluent communities possess the resources and tax
    base to provide services to their pockets of poverty, while distressed
    communities often lack adequate tax bases. While the distribution of
    funds cannot be changed without authorizing legislation, HUD will
    continue to examine certain policies and/or regulatory issues that
    would improve the program's effectiveness. For example, HUD's recently
    released CDBG formula study identified four distinct alternatives to
    the current formula, but Congress could opt for a variety of other
    approaches that HUD, or a new program, would implement. A policy review
    of this nature could provide an extensive menu of options for changing
    the allocation of Federal community and economic development funds.
    Further, CDBG grantees continue to express a need for HUD to provide
    technical assistance that would help improve grantee performance.
        Question. Will they be blocked from participating in your smaller
    substitute community development program?
        Answer. According to the Department of Commerce, the final number
    of communities that receive funding will depend on eligibility
    criteria, but the administration believes that funding should be
    targeted to those communities most in need. This will provide a greater
    level of funding to many communities than they currently receive.
    According to the Department of Commerce, for example, by funding only
    communities with poverty rates above 10 percent, approximately 700
    communities and 50 States could receive funding that is higher than
    their fiscal year 2005 CDBG funding levels.
        Question. A great many communities across the Nation build low
    income housing through the Section 108 loan guarantee program. With
    HUD's approval, they obtained a loan guarantee by pledging their future
    year CDBG funds. What would become of this Section 108 loan guarantee
    commitments if the CDBG program were eliminated?
        Answer. The fiscal year 2006 Budget proposes to eliminate the
    Section 108 Loan Guarantee Program. However, we believe that existing
    Section 108 funded activities will continue to be viable because of
    other collateral that was pledged before the loan was approved.
        Question. Will HUD still expect the communities to pay off these
    guarantees after you have gone ahead and eliminated the CDBG program?
        Answer. Communities will continue to have obligations for Section
    108 loan guarantee repayment. In some cases, communities may need
    assistance in meeting their obligations. This is being taken into
    consideration as part of the development of the Strengthening America's
    Communities Initiative (SACI) legislation.

                        CAPITAL NEEDS OF PUBLIC HOUSING

        Question. Mr. Secretary, the most recent study of the capital needs
    of public housing was published in 1998. That study, which was financed
    by HUD, estimated that there was an estimated capital needs backlog of
    $22.5 billion. The study also found that an additional $2 billion in
    needs was likely to accrue each year thereafter.
        Your budget asks us to cut the Capital grant program by a quarter
    of a billion dollars. You also want us to rescind almost $150 million
    in dollars already appropriated for the HOPE VI program and zero out
    the program next year.
        Mr. Secretary, I understand that, in a hearing before the House
    Financial Services Committee last month, you stated that the capital
    backlog has been reduced to $18 billion over the last 4 years.
        How is it that the capital backlog has been reduced by $4.5 billion
    when funding for all your capital programs have barely kept pace with
    the level of accruing deterioration each year?
        Answer. The administration's proposed budget provides sufficient
    funds to cover the accrual needs of Public Housing Authorities (PHAs).
    HUD commissioned a study of the capital needs of PHAs, which was
    released in 1998. That study identified an annual accrual of capital
    needs of approximately $2 billion per year, as well as a backlog of
    capital needs. The administration's proposed budget would provide
    Capital Fund Program (CFP) monies in excess of the annual accrual need,
    allowing PHAs to meet their accrual capital needs, as well as enabling
    them to address some of their backlog capital needs.
        Further, activities such as the demolition and disposition of
    public housing projects have resulted in the demolition of more than
    100,000 units of public housing since the preparation of the capital
    needs report in 1998. The vast majority of these units were distressed
    and therefore were the most expensive to maintain. This reduction in
    the number of public housing units has served to reduce both the
    backlog of physical needs as well as the annual accrual. It should also
    be noted that replacement units added to the inventory since the
    preparation of the report are new and therefore less expensive to
    maintain.
        In addition to annual appropriations PHAs now are able to access
    the private financial markets and unlock the value of their portfolios.
    HUD has been implementing the Capital Fund Financing Program (CFFP),
    which was authorized under the Quality Housing and Work Responsibility
    Act of 1998 (QHWRA). Through the CFFP, PHAs leverage funds from the
    private market via a pledge of their future CFP grants. HUD has
    approved CFFP Proposals in excess of over $2.4 billion, involving over
    102 PHAs in more than 40 transactions. Funds derived from the CFFP have
    enabled PHA's participating in the program to address a significant
    amount of backlog physical needs.
        In the future, HUD looks forward to expanding the CFFP to permit
    PHAs to use the Federal Public Housing Operating Fund in the same
    manner, and expand the use of mortgages to raise additional private
    capital.
        Question. Does HUD have a new study to back up your assertion that
    the capital backlog has been reduced by $4.5 billion? Would you please
    provide that study to the committee?
        Answer. The Department is proposing to conduct a study of backlog
    needs in 2007.

                               FARM LABOR HOUSING

        Question. Mr. Secretary, in our Hearing on April 14, 2005, I
    addressed the significant needs in Washington State for seasonal and
    permanent farm labor housing. As you are aware, the farm labor
    community is one of the most poorly housed populations in the Nation
    and the only government solutions are spread out over three different
    departments. Since you are the national official responsible for the
    Nation's housing needs, I asked that you raise this issue to the
    highest level by convening a cabinet level working group to look at
    creative solutions, including working with the private sector to
    address this problem. Mr. Secretary, I would like to thank you for
    agreeing to this request and working with me on this issue.
        Can you tell me the progress of your efforts with this goal?
        Answer. As you know, I am dedicated to increasing the minority home
    ownership rate in the United States, as well as expanding home
    ownership opportunities for very low-income populations. Under my
    leadership, HUD has expanded the resources and opportunities available
    to farm labor populations, and is now actively implementing policy
    recommendations that enhance the management, coordination, and delivery
    of HUD programs and services that improve the lives of farm labor
    populations throughout the United States. At my direction the
    Department continues to make enormous strides in delivering programs
    and services to these marginalized populations. These efforts are
    occurring through HUD's competitive and formula grant structures, as
    well as ongoing program processes which collectively have allowed HUD
    to invest over $32 million in fiscal year 2004 in farmworker
    communities and colonias areas.
        Some of this assistance includes: (a) $2.3 million in Housing
    Counseling Grants awarded to organizations providing counseling
    services to migrant/permanent farmworker communities and colonias
    located in Washington, Oregon, Florida, New Mexico, California, and
    Arizona; (b) $3.2 million in Continuum of Care/Emergency Shelter
    Homeless Assistance that entails funding to communities with high
    concentrations of migrant and permanent farmworker populations and
    colonias regions, and; (c) $3.2 million in Rural Housing and Economic
    Development (RHED) grant funds.
        I am very committed to insuring that HUD continues proactive
    efforts to improve the deplorable housing and living conditions of farm
    labor populations. These proactive efforts include equipping
    organizations that provide services to farm labor populations with the
    tools necessary to initiate and sustain housing and development
    services. One such technical assistance effort is the Rural Housing and
    Economic Development Gateway. A joint collaborative project between HUD
    and the Housing Assistance Council (HAC), a nonprofit organization that
    has been helping local organizations build affordable homes in rural
    areas since 1971. The Rural Gateway assists rural communities--
    including farm labor populations--improve local housing and economic
    conditions by providing information resources, technical assistance,
    training, and investment capital to rural communities.
        I know that decent, safe and sanitary housing is a critical
    foundation for farm labor populations. However, there are other basic
    necessities that play a vital role in addressing the plight of these
    communities. This is why I have given my unyielding support to the
    development of the Federal Interagency Partnership for Colonias and
    Migrant/Farmworkers Communities. The Partnership, initiated by HUD,
    provides a continuous dialogue with other Federal agencies that provide
    services to these distressed communities to join in coordinated joint
    ventures that expand the benefits to farm labor and colonias
    populations. The Federal Interagency Partnership includes 14
    organizations within Federal agencies that have agreed to identify,
    collaborate and streamline service delivery available to these
    distressed communities. In sum, the Partnership allows for the
    maximization of Federal services assisting farm labor and colonias
    populations. In addition to HUD, Partnership members include:
      --Corporation for National Service;
      --Department of Agriculture/Office of Rural Housing Service;
      --Department of Education/Office of Migrant Education;
      --Department of Health and Human Services/Offices of Minority and
            Special Populations and International/Global Health Affairs;
      --Department of Justice/Office of Civil Rights;
      --Department of Labor/Employment and Training Administration;
      --Department of Treasury/Community Development Financial Institutions
            Program and the Community Adjustment and Investment Program;
      --Environmental Protection Agency/Office of Pesticide Programs, and
            Office of Environmental Justice;
      --Federal Deposit Insurance Corporation;
      --General Services Administration/Computers for Learning Program;
      --Internal Revenue Service/Stakeholder Partnership, Education and
            Communication (SPEC) Group/Wage and Investment Division.
        These entities are working with HUD to implement collaborative
    projects, such as the Legal Working Group and the Government Kiosk
    Project, that introduce and expand housing resources and opportunities
    to farm labor and colonias populations.
        I have also given my support to the Legal Working Group for
    Colonias and Farmworker Populations. The Legal Working Group, a direct
    product of the Federal Interagency Partnership, consists of attorneys
    from 10 Federal departments and agencies who have jurisdiction over
    colonias and farmworker issues. The Legal Working Group works to
    address civil rights violations perpetrated on migrant and permanent
    farmworker populations as well as colonias residents. Residents of
    these communities face unique legal issues ranging from discrimination
    based on national origin to predatory lending and illegal land sales.
    The Legal Working Group was started to assist local community
    organizations--including legal aid groups--across the Nation address
    the unique needs of these marginalized populations. The goal of the
    Legal Working Group is to connect Federal, State, and local government
    agencies with community organizations so they can discuss and solve
    legal problems that impact farmworker populations in a timely manner.
    By working in a collaborative and coherent fashion, government agencies
    and the respective services they provide are more effective and
    responsive in addressing local problems.
        Another effort that I enthusiastically support is the Department's
    Government Kiosk Project, which provides very low-income populations
    with useful and timely information. The Department of Education,
    Department of Labor, Internal Revenue Service, and Environmental
    Protection Agency have recently joined HUD in bringing information the
    public needs, right to them. These Departments are a part of the
    project's efforts to provide information in a user--friendly format,
    and that dispenses important and useful government information to
    citizens--particularly low-income residents and those who do not have
    ready access to the Internet. The Government Kiosks are located in
    visible, high traffic areas such as shopping malls and mass transit
    centers, which assist in delivering useful and critical information--in
    both English and Spanish languages--to underserved populations.
    Visitors can access information on how to buy a home, apply for student
    loans, make their homes safe from pests, save for retirement, and find
    out if they are eligible for a Federal income tax credit.
        The Department is also responsible for conducting the National Fair
    Housing Policy/Training Conference. This conference provides another
    avenue for enhancing services to migrant and permanent farmworker
    communities and colonias residents. I know that many attendees found
    the information on predatory lending practices and persistent obstacles
    limiting equal access to housing very beneficial and insightful.
        Question. Will you work closely with me and my staff and provide
    the support and technical assistance necessary to address barriers and
    find solutions needed to properly address this problem?
        Answer. I am unequivocally committed to providing the necessary
    support and technical assistance required to alleviate existing
    barriers and develop sustainable housing and development solutions that
    introduce and expand affordable housing units to farm labor populations
    throughout the United States.
        My commitment is illustrated in the recent phase one completion of
    a Geographic Information System Statewide Mapping effort that
    identifies communities utilizing HUD's HOME Investment Partnerships
    Program (HOME) and Community Development Block Grant (CDBG) funds. This
    map identifies specific farm labor housing projects that have recently
    been completed, or are currently under development. Utilizing this
    information, HUD will provide tailored services such as housing
    counseling and financial literacy education, to identified farm labor
    populations.
        At my insistence HUD has also been providing needed technical
    assistance and funding to units of local government and non-profits
    providing services to farm labor populations in the Pacific Northwest,
    including the State of Washington. This assistance has led to the
    development of over 500 temporary or permanent housing units and
    related water and wastewater infrastructure systems.
        The Department also provides assistance to areas with high
    concentrations of farm labor populations, such as the Yakima Valley
    area of Washington. One recent effort connects economic development
    projects with local and regional farm labor housing efforts.
    Subsequently, new farmworker housing is being developed while
    simultaneously expanding job creation opportunities for this
    population.
        An additional benefit of this proactive activity is that HUD is now
    working with the Diocese of Yakima Housing Service and the Office of
    Rural Farmworker Housing to develop a needs assessment for the local
    farm labor population. The results of the assessment will provide a
    framework from which CDBG, HOME and other public funding resources will
    be pulled together to design and build affordable housing units, as
    well as introduce job creation opportunities for the farmworker
    population.
        The Yakima Valley Needs Assessment project mirrors a similar
    project that HUD recently completed in Manatee County Florida. The
    Manatee County Florida Farmworker Needs Assessment was initiated to
    address unmet local needs and capitalize on existing assets and
    partnerships with local governments, nonprofit groups, faith-based
    organizations, and local housing providers. Due to the absence of
    farmworker data and statistics, local organizations were challenged to
    obtain funding that would address the deplorable living conditions of
    area farmworkers. In response, HUD funded the design and implementation
    of a survey instrument that collected local farmworker housing
    statistics, work conditions, income, area demographics, financial
    literacy levels, and health conditions.
        The collected data has been analyzed and is having an enormous
    positive impact. Nonprofit and government entities are now able to
    accurately demonstrate the fundamental needs of the local farmworker
    community. A collateral benefit is that the survey has prompted local
    service providers to develop a farmworker profile, an outreach plan,
    and an action strategy from which to address identified needs.
        As these examples and technical assistance projects illustrate, I
    know the value and importance technical assistance brings to
    communities that so desperately need affordable housing and economic
    development opportunities. I will continue to work and provide
    technical assistance and other resources that alleviate the plight of
    farm labor populations. I look forward to working with you and your
    staff.
        Question. What are HUD's current authorities and activities related
    to farm labor housing?
        Answer. The Department administers the Southwest Border Region
    Colonias and Migrant/Farmworker Initiative (SWBR Initiative), to help
    these distressed communities to address their respective needs. The
    SWBR Initiative is not a program and as such, does not have specific
    grant dollars, but works to coordinate HUD services and programs going
    to these communities. The SWBR Initiative also works to identify
    existing resources, and collaborate with Federal, State and local
    partners to improve the plight of colonias and farmworker communities.
    The mission of the SWBR Initiative is to improve the housing and living
    conditions of migrant and permanent farmworker communities located
    throughout the United States, and colonias located along the U.S.-
    Mexico border.
        To maximize resources HUD staff routinely conducts joint workshop
    sessions that combine information on, and access to, several resources
    together, such as conducing sessions that consist of housing
    counseling, financial literacy education and other asset building
    resources.
        Over the past few years HUD, working through the SWBR Initiative,
    has invested over $120 million in farmworker communities and colonias
    through the Department's competitive and formula grant structures, as
    well as on-going program processes.
        Under my direction, during the past few years, HUD has initiated a
    number of projects that address the needs of farmworkers and their
    families residing in the Pacific Northwest. HUD sponsored a
    Practitioners Conference entitled ``Harvesting Hope for Our
    Communities--A Tri-State Practitioners' Conference'' that was held in
    Yakima, Washington. The conference brought together nearly 300
    attendees to not only discuss the challenges faced by farmworker
    communities, but also to develop useful and practical strategies, share
    techniques and methods, and formulate new partnerships to spur action
    and activities.
        Recent HUD efforts include conducting the first annual Yakima
    Valley Homeownership Fair at the Sun Dome in Yakima, Washington. The
    fair attracted over 1,750 attendees and over 25 exhibitors. The fair
    was held in Yakima Valley, the agricultural center of Washington State
    and home of a large migrant and permanent farmworker population.
    Informational materials, and on-site workshops, were available in both
    English and Spanish languages.
        With my support, HUD has also been proactive in outreach
    activities. In fact, only recently HUD staff participated in a
    bilingual (English and Spanish) radio broadcast (KDNA) in Granger,
    Washington that highlighted HUD's Federal Housing Authority home
    ownership information. The listening audience consists of over 25,000
    Spanish-speaking daily listeners located in Central Washington and
    South Central Oregon. These areas consist of very large populations of
    migrant and permanent farmworkers.
        This proactive activity also includes the recent distribution of
    HUD excess computers to various educational institutions located
    throughout the Yakima Valley of Washington. The recipient educational
    institutions have large populations of very low-income students that
    have no access to computers. Over 20 educational institutions,
    including rural communities with large farm labor populations, received
    over 125 excess HUD computers and related equipment.
        Another proactive activity that I am happy to report on is the
    placement of a HUD government kiosk in Sunnyside, Washington. As I
    mentioned earlier, HUD's government kiosk provides and dispenses
    important and useful government information--such as how to buy a home,
    save for retirement, and eligibility for a Federal income tax credit--
    to citizens, particularly low-income residents and those who do not
    have ready access to the Internet. Information is accessible in both
    English and Spanish languages.
        The placement of a government kiosk in Sunnyside, Washington is
    especially beneficial when one considers that Sunnyside has one of the
    largest concentrations of migrant and permanent farm labor populations
    in Washington State. The importance and utility of the government kiosk
    is demonstrated in the fact that this particular kiosk is the fourth
    active in the Nation, with a monthly average of nearly 900 hits a
    month.
        At my insistence, HUD has also been actively engaged in expanding
    our partnerships with Community and Faith-Based organizations. Only
    recently, HUD staff met with 90 individuals representing faith and
    community-based organizations at a 2-day grant-writing workshop. The
    workshop took place at the Holy Family Activity Center, Diocese of
    Yakima and was conducted by HUD's Faith Based and Community Liaison.
    The session provided attendees with effective grant writing techniques
    and assisted in strengthening the capacity of emerging organizations to
    compete for HUD and other Federal grant opportunities.
        An additional technical assistance workshop that also recently took
    place was entitled, ``Making Connections through Housing and Economic
    Development.'' The workshop facilitated discussion and cultivated
    partnership opportunities between housing and economic development
    organizations, professionals and public agencies that provide a variety
    of services to the Yakima Valley farmworker population.
        HUD has also been actively engaged in expanding the positive
    benefits of existing service providers. One example is HUD's assistance
    to a non-profit--La Clinica Self-Help Housing--based in Pasco, WA. La
    Clinica, has been in operation for the past 11 years, and is
    responsible for the development of 160 homes located in Benton,
    Franklin, Yakima, Grant and Adams County, Washington.
        With HUD's assistance La Clinica has now started to work with
    several additional funding resources, including the U.S. Department of
    Agriculture Rural Development program, and HUD's Community Development
    Block Grant program, HOME Investment Partnerships program, and the
    Housing Counseling program. These efforts recently allowed La Clinica
    to dedicate 10 new homes to local farmworker families in Pasco,
    Washington.
        My directions to staff have served as a catalyst for HUD staff to
    become actively and intimately engaged with local and regional efforts.
    This can be seen in HUD's recent participation in the Washington State
    Farmworker Housing Trust (WSFHT) Advisory Board. The WSFHT is a non-
    profit organization founded in 2003 to bring new resources to meet the
    need for decent and affordable farmworker housing in Washington. The
    Trust is a unique collaboration of growers, farmworker advocates,
    housing providers and community leaders.
        To advance the objectives of the WSFHT, HUD recently provided
    technical assistance funds that were utilized to organize and
    facilitate the WSFHT Capacity Conference in Yakima, Washington a few
    months ago. Participants at the conference developed a plan that will
    focus on building capacity to produce and effectively manage farmworker
    housing in the State.
        HUD's recent participation also includes providing assistance to
    the WSFHT Board that centered on how to design, structure and implement
    an effective needs assessment instrument. The WSFHT hopes to design and
    implement a farmworker needs assessment survey that will be used to
    define the magnitude and scope farmworker housing and living conditions
    and related needs in the State of Washington.
        Question. Do you believe your agency is doing all that it can in
    this area?
        Answer. As exemplified by my instructions and guidance to HUD
    staff, and subsequently by the proactive actions of HUD staff I believe
    that the Department is maximizing available resources and efforts to
    address the housing and living conditions of farm labor populations
    throughout the United States. As demonstrated by these actions I am
    firmly committed to ensuring that decent, safe and affordable housing
    is made available to migrant and permanent farm worker populations. My
    unyielding advocacy and support of HUD's Southwest Border Region
    Colonias and Migrant/Farmworker Initiative underscores the importance I
    place on introducing and expanding HUD services and programs to these
    marginalized populations. I am working to institutionalize HUD services
    and programs that benefit these communities so that they are not one-
    time successes.
        The benefits of this focused and concerted effort can be seen in
    the investment of over $120 million in the past few years that
    benefited migrant and permanent farmworker populations throughout the
    United States.
        To further the efforts and critical work that the SWBR Initiative
    continues to undertake, I am reassigning personnel to the State of
    Washington whose task will be to continue to introduce and expand HUD
    services to migrant and seasonal farm labor populations located in the
    Pacific Northwest Region.
        Through the Federal Interagency Partnership for Colonias and
    Migrant/Farmworker Communities, I will continue to support the
    identification of existing resources, and collaborate with Federal,
    State and local partners to improve the plight of these communities, as
    well as the collaborative joint-ventures, such as the Legal Working
    Group for Colonias and Farmworker Communities and HUD's government
    kiosk project.
        During my tenure, HUD has made enormous advances to ensure housing
    and development efforts are made available to farm labor populations. I
    will continue to make available every resource so that the plight of
    these populations is alleviated to the fullest extent possible.

                                   CONSORTIA

        Question. Your agency has consistently encouraged public housing
    authorities to streamline their operations to reduce the demand for
    administrative funds. Many public housing authorities in Washington
    State participate in a consortium so that they can achieve economies of
    scale in their purchasing of services. However, efforts to form
    consortia like these have been frustrated by HUD's inability to fully
    implement the consortia provisions required by the 1998 Quality Housing
    and Work Responsibility Act (QHWRA). In the 6 years since this law was
    enacted, HUD has not yet made its data and regulatory systems
    compatible with joint filing by consortia. Why has the Department not
    yet fully implemented consortia provisions of QHWRA?
        Answer. PHAs have always had the ability to form consortia for
    purchasing and contracting activities and the Department has encouraged
    that. Formation of consortia under Section 13 of QHWRA allows for PHAs
    to band together under a formal consortium agreement and subject to a
    joint PHA Plan filed with HUD for the administration of their public
    and assisted housing programs. Both types of consortia have been
    addressed in HUD's procurement handbook for Public and Indian Housing
    Authorities. HUD has not made its data and regulatory systems
    compatible with joint filing by consortia of all PHA reporting
    requirements because consortia are not legal entities HUD contracts
    with directly, which forms the foundation for all HUD systems.
    Consortia do not meet the standards of a reporting entity. Financial
    statement reporting and audits are governed by HUD's Uniform Financial
    Reporting Standards (UFRS), which follow Generally Accepted Accounting
    Principles (GAAP) and Government Accounting Standards Board (GASB)
    Statement 14, which defines financial reporting entities. Following
    from this, HUD assesses individual PHA performance pursuant to the
    funding and regulatory contracts between both parties, and includes as
    components of the evaluation process individual PHA financial
    statements, audits, and the physical condition of contractually covered
    public housing units.
        Question. For example, I understand that the Department has not yet
    enabled agencies to jointly file with HUD items like tenant-income
    data, Public Housing Authority Plans, and audits. If you are serious
    about encouraging PHAs to reduce the demand on administrative funds,
    shouldn't these long overdue technology upgrades be a very high
    priority for the agency?
        Answer. PHAs can and do submit joint PHA Plans to HUD. The PHA Plan
    template used for submitting plans includes a consortia designation.
    HUD has also substantially streamlined annual PHA Plan contents for
    PHAs with less than 250 units, which represents a group very likely to
    also form consortia, and reduces administrative burdens. Joint filing
    of tenant data and audits is not possible for consortia because PHAs
    are legal entities that contract directly with HUD for funding under
    various Federal housing programs. PHAs are regulated under Annual
    Contributions Contracts, grant agreements, and other funding
    instruments that require PHA level reporting to HUD. Financial
    statement reporting and audits are governed by HUD's Uniform Financial
    Reporting Standards (UFRS), which follow Generally Accepted Accounting
    Principles (GAAP) and Government Accounting Standards Board (GASB)
    Statement 14. GASB Statement 14 defines financial reporting entities.
    Consortia are not legally created organizations and do not otherwise
    qualify as reporting entities, and thus joint filing of audits for
    consortia is not possible. Where HUD treats multiple PHAs as one entity
    for consolidated reporting purposes, it is because they are legally and
    organizationally consolidated into one PHA entity. They transferred
    their units, funding, contracts, physical assets, and program
    administration to a consolidated PHA, which could include a regional,
    metropolitan, State, or county PHA.

                      MOVING-TO-WORK DEMONSTRATION PROGRAM

        Question. Mr. Secretary, three of the larger PHAs in my State--
    Seattle, King County, and Vancouver, participate in your ``Moving to
    Work'' demonstration program. This program helps ensure that low-income
    individuals will not be penalized by losing their tenant support as
    they struggle to transition off of public assistance. I understand that
    HUD has submitted legislation to the authorization committee to expand
    the number of PHAs that can participate in the Moving to Work program.
    If your legislation is not enacted, is there any risk that the PHAs
    currently participating in the program will have their participation
    terminated?
        Answer. No. The proposed Moving-To-Work (MTW) provisions in the
    State and Local Housing Flexibility Act will not terminate current
    program participants. This legislation provides automatic 3-year
    extensions for those MTW agreements that expire in 2005 and 2006. PHAs
    have the opportunity to enter the program automatically with the
    enactment of the legislation. At the end of any expired agreement
    period under the MTW Demonstration, PHAs can opt into the MTW program
    as described in the legislation under the established eligibility
    provisions. All existing MTW agreements would be honored to the end of
    their term. If legislation is not enacted, MTW PHAs would have to seek
    extensions on an individual basis.
        Question. Is there anything in your legislation that imposes new
    requirements on those PHAs that already participate in the program?
        Answer. Yes. Section 302(h)(1) provides that a PHA's performance in
    the MTW Demonstration and in the MTW Program would be assessed under
    applicable assessment systems that evaluate a public housing agency's
    performance with respect to public housing and voucher programs. This
    means that a PHA in the MTW Demonstration would be assessed by the
    Public Housing Assessment System (PHAS) or the Section Eight Management
    Assessment Program (SEMAP) until January 1, 2008. Thereafter, the MTW
    PHA in the demonstration or in the program would be required to meet
    performance standards developed pursuant to Section 302(h)(2). In
    addition to the requirements of section 302(h)(1), Title III may or may
    not affect current MTW agencies depending on existing individual
    agreements. Housing agencies in the demonstration negotiated contracts
    that provided specific conditions and imposed requirements, some of
    which may be different from the requirement of the proposed program.
    Housing agencies that elect to join the MTW Program when their
    contracts expire, or those that elect to opt out of the MTW
    Demonstration early and enter the MTW Program, will then be subject to
    the requirements of the program.

                               SECTION 8 VOUCHERS

        Question. Mr. Secretary, we have heard from many housing groups
    that, during last year's consideration of the Appropriations bill, HUD
    understated the amount of funding that would be needed to maintain the
    same number of Section 8 vouchers that were active in 2004. As a
    result, the program was under-funded by roughly $570 million and 80,000
    vouchers have been lost. We have also been told that your fiscal year
    2006 request will restore half or 40,000 of these vouchers. Are these
    figures accurate in your view?
        Answer. No. HUD did not understate the amount of funding that would
    be needed to maintain the same number of vouchers that were needed
    based on the May through July 2004 reporting period. The fiscal year
    2005 Appropriations Act provided a specific amount for the Housing
    Choice Voucher program to fund the voucher needs for that period and
    for the adjustments allowed for enhanced vouchers and the first time
    renewal of tenant protection vouchers and HOPE VI vouchers. As a
    result, the Department had to prorate downward the 2005 budgetary
    allocations to PHAs by approximately 4 percent. Our fiscal year 2006
    Budget request seeks to restore the entire 4 percent proration
    reduction.
        Question. Will the actual number of vouchers decline by 80,000 this
    year?
        Answer. No. A recent analysis of actual costs and leasing levels
    per data submitted by PHAs to the Voucher Management System through
    April 2005 are very constant over the 12-month period ending April 30,
    2005. The difference in vouchers leased for the period May through July
    2004, compared to February through April 2005, is less than 3,000
    vouchers.
        Question. If not, what are your precise estimates for the number of
    vouchers that were funded in 2004 and 2005?
        Answer. Actual vouchers leased and funded for calendar year 2004
    were 2,024,553.
        Based on the funding provided in the fiscal year 2005
    Appropriations Act, the Department expects to fund approximately
    1,980,000 vouchers in calendar year 2005.
        Question. How many vouchers will be funded if we fully fund your
    request for 2006?
        Answer. It is too early in the calendar year to estimate how many
    additional vouchers can be funded since only 4 months of data is
    available in 2005. Assuming the existing leasing levels and HAP costs
    can be sustained using the 2005 budgetary allocations, and existing
    inflation assumptions hold true, it is reasonable to conclude that an
    additional 40,000 to 50,000 families may be assisted.
        Question. Based upon HUD's ongoing monitoring of rent burdens, can
    you tell me the percentage of families paying more than 30 percent of
    adjusted income for rent as a national average in fiscal year 2003 and
    fiscal year 2004? Can you tell me the current percentage?
        Answer. Current percentages are as follows:
      --Fiscal year 2003--68 percent;
      --Fiscal year 2004--66 percent;
      --Current--69 percent.
        Under existing program requirements, new families and movers may
    elect to pay up to 40 percent of their income towards rent. For
    existing families in the program who chose not to move, there is no
    limitation on the percentage of their income they can pay towards rent.
        Although the percentages provided above indicate that the number of
    families paying more than 30 percent of income ranges between 66 and 69
    percent, more than 60 percent of those families' rent burden is between
    30 and 35 percent of adjusted income. The average rent burden for all
    vouchers is approximately 39 percent and does not represent a
    significant increase in the 35 percent average rent burden measured in
    1990.
        Question. What percentage of families has a rent burden exceeding
    40 percent of adjusted income?
        Answer. The percentage of families in public housing who have a
    rent burden exceeding 40 percent of adjusted income is as follows:
      --Fiscal year 2003--14 percent;
      --Fiscal year 2004--16 percent;
      --Current--18 percent.
        Question. The Department's fiscal year 2005 voucher funding
    implementation notice States that HUD will reduce existing voucher
    payments reserves from the previous standard of 1 month's funding, to
    no more than 1 week's reserve level. Some portion of this reduction was
    to be used to satisfy fiscal year 2005 rescission requirements.
        Does the Department plan to recapture or reduce reserves for any
    agency below the 1-week level during fiscal year 2005?
        Answer. It is not the Department's intention to reduce any PHA's
    reserves below the 1-week level during fiscal year 2005 or fiscal year
    2006.

                  REUNIFICATION OF CHILDREN WITH THEIR PARENTS

        Question. I understand that the Tenant protection Fund has a
    special designated program for family reunification. In fact, our
    Chairman, Senator Bond was instrumental in getting this program
    authorized. However, I understand further that no new vouchers have
    been issued for this program since fiscal year 2001 and historically
    HUD has made approximately 39,000 vouchers available for the family
    unification program. I also understand that it is up to each individual
    PHA to decide if these vouchers keep their identity after they expire.
    How many of the original 39,000 family unification vouchers are still
    used for that purpose and if you are under the authorized level, can
    PHAs move traditional vouchers into the family unification program?
        Answer. PHAs that received Family Unification Program (FUP)
    vouchers were obligated to use those vouchers for that targeted
    population for 5 years. HUD awarded 3,920 FUP vouchers in fiscal year
    2000 and 958 FUP vouchers in fiscal year 2001, so 4,878 vouchers are
    still required to be used for family unification purposes. PHAs that
    decide to voluntarily continue the FUP voucher program after the 5-year
    requirement is completed are not required to report those vouchers as
    FUP vouchers in HUD data collection systems. HUD therefore does not
    know the actual number of vouchers originally allocated for FUP that
    continue to be voluntarily used for this purpose.
        Under the housing choice voucher program, PHAs may establish local
    selection preferences for admission to the program that reflect the
    local needs and priorities of the community. PHAs may use vouchers that
    were not originally allocated as FUP vouchers for family unification
    purposes by establishing a local selection preference for qualifying
    families.
        Question. Why hasn't your agency requested or issued new vouchers
    to get more of these families reunited over the last 4 years?
        Answer. PHAs currently have the ability to use their vouchers to
    promote family unification by establishing local preferences for
    admission to the regular voucher program for qualifying families. A
    special set-aside of vouchers is not necessary in order for PHAs to
    serve this particular population. The Housing Choice Voucher Program
    has grown into a complex, overly prescriptive program that is
    increasingly difficult to administer. The present program has separate
    rules for more than a dozen different types of vouchers. A major
    component of program reform and simplification is to allow local PHAs
    to decide how best to use vouchers to address the needs and priorities
    of their community, rather than to continue to dictate these decisions
    from Washington through a myriad of complicated boutique voucher
    programs.
        Question. Is there any truth to the assertion that you have not
    issued new vouchers out of the Tenant Protection Fund because you want
    to leave that funding available for your proposed rescissions?
        Answer. No. There is no truth to the assertion that HUD has not
    funded tenant protection voucher requirements. HUD has and is issuing
    new vouchers out of the Tenant Protection Fund for tenant protection
    assistance to assist families impacted by public housing relocation and
    replacement activities and conversion actions related to HUD's
    multifamily portfolio. As of June 9, 2005, HUD has allocated 16,211 new
    vouchers out of the tenant protection line item appropriated in the
    fiscal year 2005 Consolidated Appropriations Act.
        Question. Do you intend to propose rescissions from the Tenant
    Protection fund for fiscal year 2005, or if we accept your proposal for
    fiscal year 2006?
        Answer. The rescission language enacted under the Housing
    Certificate Fund gives the Department flexibility to take the
    rescission from any account within the Department. The Tenant
    Protection set-aside can certainly be subjected to the rescission if
    there are unobligated balances remaining under this set-aside. However,
    at this time there is no specific proposal to rescind Tenant Protection
    funds.

                                  HOMELESSNESS

        Question. Mr. Secretary, does HUD intend to provide a legislative
    proposal for the ``Samaritan Initiative,'' and if so does it limit
    supportive services such as case management and would this have a
    negative impact because providers and communities would not be able to
    fund the housing and supportive services necessary to achieve the goal
    of ending homelessness?
        Answer. As presented in the 2006 Budget request, HUD proposes to
    consolidate its 3 competitive homeless grant programs into a single
    program. This new consolidated program will include the eligible
    activities similar to the Samaritan Initiative, which will focus on the
    chronically homeless, and will combine housing subsidies paired with
    quality case management. A key ingredient to the overall success of
    ending chronic homelessness is to effectively access mainstream
    healthcare, social services and employment resources so that HUD's
    limited homeless assistance funding can be increasingly devoted to
    housing.

                                    HOPE VI

        Question. Mr. Secretary, your budget proposes to eliminate all
    funding for the HOPE VI program next year, and you are also asking us
    to rescind every penny of the $143 million that we appropriated for the
    program this year.
        This program is designed to assist public housing agencies in
    demolishing their most dilapidated housing units and replacing them
    with new, safe and affordable units for mixed-income individuals. I
    understand that part of your agency's rationale for decimating the HOPE
    VI program is that you believe that the program has already achieved
    its intended goals.
        Do you believe that we have already eradicated all of the
    dilapidated public housing units in America?
        Answer. The Department has not had the opportunity to eradicate
    every unit of dilapidated public housing in America. However, HUD has
    met its goal to eliminate 100,000 units of the worst public housing
    through HOPE VI Revitalization and Demolition grants, as well as other
    funding and approval mechanisms. Since surpassing the goal to eliminate
    100,000 units of severely distressed public housing by fiscal year
    2003, HUD has continued its commitment of removing this housing from
    the public housing stock. Through fiscal year 2004, HUD had approved
    for demolition a cumulative total of 165,155 units and PHAs had
    completed demolition of 116,545 total units.
        Since the Department has met this demolition goal, the HOPE VI
    program is no longer necessary. However, the Department recognizes that
    there is an estimated $18 billion capital backlog in the public housing
    inventory. While there is clearly serious need for investment in the
    inventory, it is not clear how much of this backlog is represented by
    severely distressed units needing wholesale demolition and replacement
    as articulated by HOPE VI. Current definitions used by the Department
    to define severe distress were developed in response to a sub-set of
    the public housing inventory that by and large no longer exists i.e.,
    severely distressed, super-block, high-rise, public housing
    developments with significant social problems in major cities like
    Cabrini Green and Robert Taylor Homes in Chicago. A new method for
    assessing severe distress, one that considers the nuances of today's
    public housing inventory and is more objective, should be developed
    before HUD funds additional wholesale revitalization of public housing
    communities.
        In the interim, the needs of the remaining public housing inventory
    can be more appropriately met through other modernization and
    development programs operated by the Department e.g., the Capital Fund,
    Capital Fund Financing Program and Mixed-Finance development. The
    Department continues to encourage housing authorities in need of this
    assistance to submit project proposals to these programs. To date, the
    Department has approved over $2.4 billion in transactions using the
    Capital Fund Financing Program, with approximately $94 million in
    additional funds in the pipeline. Of the approved transactions, over
    $254 million will be used for development activities.
        Question. I understand that HUD wants to address the remaining
    dilapidated public housing units by finalizing regulations requiring
    all the public housing authorities to demolish their most dilapidated
    housing. That will be a huge undertaking.
        Are you proposing to give the public housing agencies any
    additional resources to accomplish this massive goal of demolishing all
    dilapidated public housing?
        Answer. The Quality Housing and Work Responsibility Act of 1998
    (QHWRA) revised Section 202 for mandatory conversion, and added another
    possibility for removals by crafting a voluntary conversion option as
    well. More than 140,000 severely distressed housing have been
    demolished over the last 10 years. As a result, it is anticipated that
    mandatory conversions will affect the last remaining units that do not
    meet the minimal threshold conditions and the related formula cost
    test. The Department has requested additional vouchers to cover
    Mandatory conversion needs for fiscal year 2006. PHAs will be
    responsible for using their existing resources to pay demolition and
    relocation costs as they do now under Section 18, Demolition and
    Disposition.
        Question. Your budget is proposing that capital grants to the
    public housing authorities be reduced by over a quarter of a billion
    dollars or almost 10 percent next year. Some experts have observed that
    cuts in funding to help housing authorities maintain their units will
    mean that we will just create more dilapidated buildings that will be
    eligible for HOPE VI grants.
        How do you respond to that assertion?
        Answer. The administration's proposed budget provides sufficient
    funds to cover the accrual needs of Public Housing Authorities (PHAs).
    HUD commissioned a study of the capital needs of PHAs, which was
    released in 1998. That study identified an annual accrual of capital
    needs of approximately $2 billion per year, as well as a backlog of
    capital needs. The administration's proposed budget would provide
    Capital Fund Program (CFP) monies in excess of the annual accrual need,
    allowing PHAs to meet their accrual capital needs, as well as enabling
    them to address some of their backlog capital needs.
        Further, activities such as the demolition and disposition of
    public housing projects have resulted in the demolition of more than
    100,000 units of public housing since the preparation of the capital
    needs report in 1998. The vast majority of these units were distressed
    and therefore were the most expensive to maintain. This reduction in
    the number of public housing units has served to reduce both the
    backlog of physical needs as well as the annual accrual. It should also
    be noted that replacement units added to the inventory since the
    preparation of the report are new and therefore less expensive to
    maintain.
        In addition to annual appropriations, PHAs now are able to access
    the private financial markets and unlock the value of their portfolios.
    HUD has been implementing the Capital Fund Financing Program (CFFP),
    which was authorized under the Quality Housing and Work Responsibility
    Act of 1998 (QHWRA). Through the CFFP, PHAs leverage funds from the
    private market via a pledge of their future CFP grants. HUD has
    approved CFFP Proposals in excess of over $2.4 billion, involving over
    102 PHAs in more than 40 transactions. Funds derived from the CFFP have
    enabled PHA's participating in the program to address a significant
    amount of backlog physical needs.
        In the future, HUD looks forward to expanding the CFFP to permit
    PHAs to use the Federal Operating Fund in the same manner, and expand
    the use of mortgages to raise additional private capital.

                            PROPOSED SECTION 811 CUT

        Question. Mr. Secretary, why is Section 811 Housing for Persons
    with Disabilities being singled out for a 50 percent cut in this budget
    including the elimination of all funding for new production and
    rehabilitation of accessible housing units?
        Answer. The cut in the Section 811 Budget was one of several
    difficult decisions that the Department had to make this year. As you
    know, significant cuts and changes were also proposed for other
    programs, such as the Community Development Block Grant program.
        Question. This proposal to eliminate the project-based side of
    Section 811 appears to be completely at odds with the administration's
    stated goal of promoting community-based alternatives to costly and
    ineffective institutional settings for people with severe disabilities.
        Why is HUD seeking to cut Section 811 funding by 50 percent at a
    time when HHS has been working so hard to promote independence and
    community integration for people with disabilities through the
    President's New Freedom Initiative?
        Answer. The Department will continue to support the President's New
    Freedom Initiative by supporting and fully funding the 40,000 units
    that are supported by Section 811 funds.
        Question. How will HUD ensure that low-income people with
    disabilities continue to have access to affordable housing in light of
    the fact that rental subsides alone are not sufficient because rental
    units are not available in most communities?
        Answer. The Department will continue to support the 200,000 units
    that are occupied by persons with disabilities in various HUD programs.
    As you know, this includes 40,000 units that are supported by the
    Section 811 program. These units are located in many communities
    throughout the United States.

                         OPERATING FUND NEGOTIATED RULE

        Question. The cost of implementing the recommendations of the
    Operating Fund rule negotiated between HUD and stakeholders was nearly
    $4 billion in 2003 dollars. In addition, agencies will incur transition
    costs for the conversion to property-based rather than agency-wide
    accounting and management required by the rule. Your budget requests
    just $3.4 billion for the operating fund for fiscal year 2006. Your
    department arrived at a negotiated agreement with stakeholders on this
    rule in June. Did funding needs of the negotiated rule figure into your
    budget request?
        Answer. The issue of ``transition costs'' was discussed during
    negotiated rulemaking but was not agreed to in the final Agreement.
    Hence, the fiscal year 2006 Budget request does not include any funding
    for transition costs. However, that PHAs currently have approximately
    $2.8 billion in operating reserves that they can use for transition
    costs.
        Question. As I understand it, the Operating Fund proposed rule
    recently sent to Congress is materially different than the rule
    negotiated with public housing stakeholders last June.
        Isn't changing the terms of the rule after you have arrived at a
    negotiated position a fundamental breach of this agreement?
        Answer. Consistent with requirements under Executive Order 12866
    entitled ``Regulatory Planning and Review'' and other rulemaking
    authorities, the negotiated rule underwent further HUD and Executive
    Branch reviews prior to publication. These changes were necessary in
    order to incorporate changes reflective of budget and policy
    priorities.
        Question. The Department released data regarding the impact of the
    previously-negotiated rule on individual agencies. When do you plan to
    release agency-level data regarding the impact of you proposed rule? I
    think this would be key to a productive comment period on the proposed
    rule.
        Answer. Impacts of the proposed rule on PHAs were presented to the
    various public housing trade associations and other representatives and
    posted on REAC's Operating Subsidy web-site: http://www.hud.gov/
    offices/pih.
                                     ______

                Questions Submitted by Senator Richard J. Durbin

        Question. The President's budget proposes a 5 percent cut in fiscal
    year 2006 funding despite the acknowledgment that two new jurisdictions
    will become eligible for formula funding, bringing the total number of
    jurisdictions eligible for formula funding to 125. The proposed 2006
    funding levels of $268 million would return HOPWA to a funding level
    between the 2001 ($257.4 million) and 2002 ($277.4 million) when there
    were only 103 and 107 jurisdictions, respectively. This means that the
    current HOPWA program must support more grantees with less money than
    ever before. Why is the Department withdrawing necessary funds while
    increasing eligible jurisdictions?
        Answer. The Department's fiscal year 2006 Budget request of $268
    million for the Housing Opportunities for Persons with AIDS (HOPWA)
    program will provide continued housing support for the most vulnerable
    individuals and their families living with HIV/AIDS. The funding
    request is approximately at the same level as recent program
    expenditure patterns (the most recent 3-year average was $274 million
    for all HOPWA grantees). HUD estimates that HOPWA housing subsidies and
    support in community residences and through direct rental assistance
    will enable over 67,000 households to reduce their risks of
    homelessness and improve their access to healthcare and other support.
    In addition, HOPWA grantees have shown good success in leveraging other
    resources to operate these housing programs by committing State, local,
    and private resources to their community efforts. On a technical note,
    the qualification of new formula recipients has a minimum effect on
    formula distributions. This is because they qualify for the smallest
    allocations, (generally around $350,000) and because the newly
    qualifying cities are in metropolitan areas that are likely to have
    been included in a grant to the State in a prior fiscal year. This
    latter change would have no net fiscal impact but would change the
    entity responsible for managing these grant activities. The correct
    number of HOPWA formula eligible communities in fiscal year 2006 will
    be 122. This number is being updated based on the use of AIDS
    surveillance data recently obtained from the Centers for Disease
    Control and Prevention (CDC). HUD has determined that the number of
    formula recipients in 2006 will only increase by one additional
    recipient (Palm Bay, Florida) as this metropolitan area meets the
    statutory eligibility requirements with a population of more than
    500,000 persons and a cumulative number of cases of AIDS of greater
    than 1,500 cases of AIDS. Further, this area had previously been
    included in formula funding to the State of Florida, and as such, no
    significant net effect will occur, as the amount of funds allocated to
    the State will be proportionately smaller. Also, in fiscal year 2005,
    one newly designated recipient (Lakeland, Florida) made use of the
    authority provided in a new administrative provision to the HOPWA
    appropriations act that with the agreement of their State, allows the
    State to continue to serve as the grantee for managing the HOPWA
    program in their metropolitan area. The required data from CDC involves
    the use of cumulative cases of AIDS in making these determinations,
    which includes a significant number of persons who have died due to
    AIDS. In 1999, HUD recommended an updated formula based on a CDC
    estimate of persons living with AIDS adjusted for area housing costs.
    The need to update the formula was further identified in the recent
    PART review for this program and a more accurate distribution could be
    based on a CDC report for persons living with AIDS and area housing
    costs.
        Question. HUD is in the process of foreclosing on Lawndale
    Restoration, 1,240 project-based Section 8 apartments in Chicago's
    Lawndale Community. In the past, project-based vouchers would have been
    maintained after foreclosure. However, HUD is not offering that
    possibility, and is instead offering tenants Housing Choice Vouchers.
    If all qualifying tenants receive Housing Choice Vouchers, tenants of
    Lawndale Restoration will comprise a group that is 25 percent of the
    tenants who have been relocated from the Chicago Housing Authority
    during the past 5 years under its Plan for Transformation.
        HUD is not offering other more flexible approaches that take into
    consideration whether project-based assistance, Housing Choice Vouchers
    or a combination of the two would be more appropriate rental assistance
    for this property. Why?
        Answer. Over the last several years, the Department has not offered
    a project-based Section 8 contract after foreclosure. The Department
    believes that residents want flexibility, and the option to relocate if
    they so choose. The housing choice voucher gives residents that
    ability. In the case of the Lawndale project, the Department is aware
    of residents that have indicated their desire to relocate and there are
    some residents who want to remain at the project.
        Although the Department will be issuing vouchers to eligible
    residents, no resident will be required to leave the project if they
    desire to stay. If a resident who desires to move from the development
    is unable to find other housing, they will always have their current
    housing available to them. If a resident decides to move permanently
    from the complex, it is because they desire to do so and not because of
    the foreclosure action.
        Question. Some studies have indicated that 15 percent of voucher
    holders in Chicago are unable to sign a lease within 6 months that they
    have to find an apartment. Given the saturation in Chicago, explain how
    an additional thousand families from Lawndale Restoration will impact
    the housing market in Chicago?
        Answer. The Department engaged a contractor to perform a market
    study in Chicago last year. The purpose of the study was to determine
    whether the rental market in Chicago could absorb the number of
    families projected to be relocated from public housing to private
    sector housing (assisted by the Housing Choice Voucher program) as a
    result of redevelopment activity at the Chicago Housing Authority. The
    market study concluded that there is an ample supply of vacant
    affordable private sector housing to absorb the families projected to
    be housed in private sector housing. The market study estimated that
    there would be 40,000 affordable vacant units in the local rental
    market annually. Based on the market study, the Department believes
    that the private market can absorb the families that would be impacted
    by the Lawndale restoration.
        Question. Will these families be able to find decent housing in
    Chicago?
        Answer. The Department engaged a contractor to perform a market
    study in Chicago last year. The purpose of the study was to determine
    whether the rental market in Chicago could absorb the number of
    families projected to be relocated from public housing to private
    sector housing (assisted by the Housing Choice Voucher Program) as a
    result of redevelopment activity at the Chicago Housing Authority. The
    market study concluded that there is an ample supply of vacant
    affordable private sector housing to absorb the families projected to
    be housed in private sector housing. The market study estimated that
    there would be 40,000 affordable vacant units in the local rental
    market annually. Based on the market study, the Department believes
    that the private market can absorb the families that would be impacted
    by the Lawndale restoration.
        Question. Beyond the Housing Choice Vouchers, will HUD assist these
    families in finding housing? If so, how?
        Answer. The Department has already provided relocation assistance
    (including the costs to move, transportation to find alternate housing,
    housing counseling, etc.) to the 180 residents who were required to
    move from three of the buildings currently being demolished. HUD is
    also providing the same relocation assistance to 35 residents of
    another building in the complex that has severe structural problems.
        For the remaining buildings, the Department is not requiring the
    residents to relocate and therefore there will be no other assistance
    provided except for the housing choice voucher. The purchasers of the
    buildings will be required to provide relocation assistance while they
    make the necessary repairs to the buildings if the residents have to be
    relocated during construction. If a resident decides to move
    permanently from the complex, it is because they desire to do so and
    not because of governmental action and no government relocation
    assistance to those residents will be provided.
        Question. On March 10, 2005, I sent a letter to HUD requesting that
    the Department reconsider HUD's decision to deny the Kankakee County
    Housing Authority funding for its entire voucher allotment. Please
    update me on the status of this request.
        Answer. The Senator's request on behalf of the Kankakee County
    Housing Authority (KCHA) concerned HUD's denial of a request from that
    agency that HUD adjust the leasing figures used to calculate KCHA's
    calendar year 2005 voucher program renewal funding. As background, in
    December 2004, HUD provided to each Housing Authority (HA) the leasing
    and cost information, based on each HA's prior submissions, that HUD
    intended to use as the basis for calculating each HA's calendar year
    2005 funding for voucher program renewals. Each HA was given the
    opportunity to request an adjustment of any data that was not accurate
    or that qualified for adjustment under the terms of the fiscal year
    2005 Appropriations Act. KCHA responded to that information and
    requested that HUD adjust its leasing numbers to include a number of
    vouchers that had been provided to KCHA in a tenant protection action
    in August, 2001, but which were not yet under lease during the period
    HUD was required to use to calculate calendar year 2005 funding. KCHA's
    request was denied because the vouchers provided to KCHA in 2001 had
    been in their inventory for a sufficient period of time that they
    should have been under lease by the time period used to calculate the
    calendar year 2005 funding, which was May through July of 2004. The
    fiscal year 2005 Appropriations Act provided that HUD make necessary
    adjustments for costs related to first time renewals of tenant
    protection vouchers. At the time of KCHA's request, the vouchers in
    question had been renewed three times; as a result, KCHA was not
    eligible for an adjustment to their leasing numbers.

                              SUBCOMMITTEE RECESS

        Senator Murray. Well, thank you very much, Senator Leahy.
    And I agree with you and appreciate your words today.
        This subcommittee will stand in recess until Thursday,
    April 21, when we will take the testimony from OMB Director
    Bolten. And I can assure you we will be talking about the HUD
    budget among other things.
        [Whereupon, at 11:05 a.m., Thursday, April 14, 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
                                      2006

                                  ----------

                            THURSDAY, APRIL 21, 2005

                                           U.S. Senate,
               Subcommittee of the Committee on Appropriations,
                                                        Washington, DC.
        The subcommittee met at 9:34 a.m., in room SD-138, Dirksen
    Senate Office Building, Hon. Christopher S. Bond, (chairman)
    presiding.
        Present: Senators Bond, Bennett, Stevens, Murray, and Kohl.

                       EXECUTIVE OFFICE OF THE PRESIDENT

                        Office of Management and Budget

    STATEMENT OF JOSHUA B. BOLTEN, DIRECTOR

                OPENING STATEMENT OF SENATOR CHRISTOPHER S. BOND

        Senator Bond. Good morning. The Senate Appropriations
    Subcommittee on Transportation, Treasury, the Judiciary,
    Housing and Urban Development, and Related Agencies will come
    to order.
        We welcome Josh Bolten, Director, Office of Management and
    Budget. I look forward to your views, Director Bolten, on the
    President's overall budget request for 2006, as well as budget
    issues related to OMB's own needs.
        The President's budget request for 2006 calls for some $840
    billion in overall discretionary budget authority, including
    $419 billion for the Department of Defense and $32 billion for
    Homeland Security. For DOD, this would be an increase of $19
    billion, or 4.8 percent, over 2005. For Homeland Security, this
    would be an increase of $1 billion, or 3.1 percent, over 2005.
    Even with significant increases in security-related spending,
    the overall 2006 budget request would hold overall spending to
    a 2.1 percent growth, just below the rate of inflation.
        Consequently, the budget proposes that overall non-security
    discretionary spending would be reduced from the 2005 level by
    $3 billion, or 0.7 percent, for a total of $389 billion.
    Moreover, on non-defense discretionary spending, the budget
    proposes more than 150 reductions and eliminations in Federal
    programs to save $20 billion in budget authority in this coming
    fiscal year alone.
        I support the President's goal of cutting the deficit in
    half by 2008. However, reducing the deficit solely on the back
    of domestic discretionary spending is very troubling and, I
    believe, an ill-conceived strategy that could have disastrous
    results for many important, congressionally supported, as well
    as popularly supported domestic programs. To be clear,
    discretionary spending should be reduced where appropriate. We
    should not, however, reduce those programs solely to meet
    arbitrary deficit reduction numbers, especially when many of
    these programs are important to the health, safety, and quality
    of life of the citizens of our Nation.
        More importantly, mandatory spending must be reduced to
    achieve any true spending reform and deficit reduction. While I
    support the President's efforts to reform Social Security in
    order to avoid bankrupting the future of our children and our
    children's children, I am concerned that the budget proposes
    total mandatory spending of $1.6 trillion in 2006, an increase
    of $107 billion, or 7 percent, over fiscal year 2005. Mandatory
    spending currently accounts for some 63 percent of total
    Federal spending and by 2010 will grow to $2.1 trillion which
    would represent 68 percent of total spending. This is a total
    annual growth rate of some 6.3 percent, which towers over any
    savings expected to be achieved from domestic discretionary
    spending cuts.
        However, we are not here to discuss reforming mandatory
    programs, no matter how important. We are here to discuss the
    President's proposed budget for domestic discretionary
    spending, especially those programs within the jurisdiction of
    the Transportation, Treasury, and HUD Appropriations
    Subcommittee, or the THUD committee, as it is called.
        The House and Senate Appropriations and Budget Committees
    and OMB share responsibility for recommending a budget to
    Congress and the President that will ensure the continued
    effective running of the United States Government for each
    fiscal year. However, at the end of the day, we as
    appropriators must present to Congress and then the President a
    bill that is financially sound, responsible, and capable of
    maintaining the efficient running of government.
        As part of this process, OMB has an obligation to propose
    funding recommendations that are consistent with budget and
    program realities. The administration's budget should not be
    based on flawed data and budget assumptions and should not
    include recommendations that violate Congress' Budget and
    Impoundment Control Act of 1974.
        Unfortunately, I believe this budget request contains a
    number of flawed budget assumptions, as well as a number of
    ill-considered budget and policy recommendations. In many
    cases, Mr. Bolten, I believe you and the President have been
    ill-served by your staff, and it is especially problematic in a
    year of tight budget allocations.
        As you may know, I had the distinct honor previously of
    serving as chair of the VA/HUD Appropriations Subcommittee and
    now as the chair of this subcommittee. This has allowed me to
    develop some familiarity with $170 billion of domestic
    discretionary spending, or 50 percent of the President's budget
    for domestic discretionary spending. I will focus my comments
    and questions today and for the record primarily on programs of
    which I have a personal knowledge and interest. Nevertheless, I
    understand that my concerns with the fiscal year 2006 budget
    are similar to the concerns my colleagues are wrestling with in
    other appropriations subcommittees.
        First, let me express my sincere disappointment that the
    administration has proposed to eliminate the HUD Community
    Development Block Grant program, along with 17 other programs,
    and replace these with a block grant program in Commerce called
    Strengthening America's Communities Initiative.
        The administration proposes to fund this initiative only at
    $3.7 billion, which is an overall reduction for all these
    programs of almost $2 billion, or some 34 percent, from the
    2005 level.
        The proposed elimination and related reduction of funding
    for CDBG, as well as many of these other programs is, in my
    view, a tragedy. Communities across the Nation rely on CDBG to
    fund critical housing and community development programs, and
    without these funds, many local programs will falter and fail.
        Equally important, CDBG is a critical component of HUD's
    mission. CDBG helps to make HUD's housing mission successful.
    That is why they call it Housing and Urban Development. Without
    CDBG, it is the Department of Housing, and if your proposals go
    forward to block grant everything, housing would probably wind
    up as an office in the Secretary of Commerce's office that
    hands out block grant monies. As history tells us, successful
    community development relies on a comprehensive approach to
    housing and community development.
        Now, CDBG is not perfect. CDBG funds are not always used
    well or effectively. However, HUD, OMB, and select CDBG
    interest groups recently ratified a consensus document to
    address weaknesses in the CDBG program by creating an outcome
    measurement system to establish new benchmarks and better
    oversight. Since this document is designed to address OMB's
    concerns, I am puzzled by the administration's proposal to
    dismantle a program that has been redesigned to become more
    effective and successful as required by the administration.
        I have some more practical concerns, however. Even if we
    were to pass a new Commerce block grant this year--and I will
    have to say, talking with my colleagues, I find a minimum
    amount of high enthusiasm in the Congress for that--if you were
    successful to replace CDBG with a block grant, how is it
    possible for the Commerce Department to implement the program
    for 2006, including the issuing of regulations, the hiring and
    training of staff, and the education of communities in how
    these funds must be used? What happens to communities with
    existing projects that rely on CDBG funding, especially those
    projects with section 108 loan guarantees where the guarantees
    rely on a flow of future CDBG funding?
        I will also have additional questions with regard to the
    proposed consolidation of the Community Development Financial
    Institutions program, the Bank Enterprise Act program, and the
    Section 4 Capacity Building LISC/Enterprise program into the
    new proposed Commerce block grant. None of these activities
    would fit into a block grant scheme, and I think the Nation
    would be a loser for it.
        Another major funding area that OMB has not adequately
    supported--and we have talked about this before--is basic
    scientific research, primarily the physical sciences, which is
    mainly funded through the National Science Foundation. I no
    longer have responsibility in my committee for that, but let me
    reemphasize that NSF should play a critical role in the
    economic, scientific, and intellectual growth of the Nation.
    Our country's future resides in our ability to lead the world
    in science and technology, especially in the global
    marketplace. NSF should be one of our primary tools in meeting
    the goals of the 21st century by pushing the boundaries of
    scientific research and technology. This work of NSF will
    significantly build our economy and speed innovation.
        The lack of support of NSF and the physical sciences and
    the growing funding disparity between the life sciences and the
    physical sciences is jeopardizing our Nation's ability to lead
    the world in scientific innovation. We are jeopardizing the
    work of the National Institutes of Health because we are
    undermining the physical sciences which provide the
    underpinning for medical technological advances. Inadequate
    funding for NSF hurts our economy and the creation of good jobs
    which would help address the outcry of outsourcing jobs to
    other countries. The bottom line is that by underfunding NSF,
    we are shooting ourselves and our future generations in the
    foot.
        I know that this is not in this committee, but I believe
    that this is of such major concern that it ought to be
    addressed at the top policy levels in the administration. We
    have proposed and I have heard general plaudits for the goal of
    doubling the funding of NSF in 5 years, or a 14.7 percent
    increase annually, and I think the entire scientific community
    and anybody who looks at it would agree.
        But let us go back to the THUD committee. I am really
    puzzled and concerned over the administration's proposal to
    rescind $2.5 billion from HUD's Housing Certificate Fund. As
    you know, we have spent several years reforming the Section 8
    tenant-based voucher program to limit the growing costs, and we
    have required public housing authorities to implement a more
    responsible budget-based planning and funding system for the
    program. As a responsible part of these reforms, much of the
    funds that have been available normally for rescission from
    within HUD over the last few years are no longer available. In
    point of fact, when the HUD Secretary, Alphonso Jackson, came
    before us, we asked him to identify any account or source of
    funds at this time which could support a $2.5 billion
    rescission from within HUD. He was unable to do so, and I can
    understand his problem. But this is a question which needs
    concrete answers before we draft this bill and try to impose
    cuts in an area where nobody knows that rescissions can be
    made.
        To be blunt, everyone's expectation is that OMB and HUD
    will have a system for evaluating and verifying where
    rescission funds will come from with a reasonable level of
    certainty. In particular, I expect OMB to provide an assessment
    of where these rescissions will come from and the methodology
    that OMB and HUD used in determining the amount of the
    rescission.
        In addition, the administration is seeking to eliminate
    HOPE VI, as well as rescind the HOPE VI fiscal year 2005
    funding of $143 million. As you may know--you may not know, but
    I am here to advise you--I set the stage for HOPE VI by
    including a demonstration project in the 1990 National
    Affordable Housing Act that allowed the demolition and
    replacement of Pruitt-Igoe Public Housing in St. Louis with
    vouchers and new housing. This approach has revolutionized the
    way we reformed obsolete public housing by allowing for the
    demolition of obsolete housing and the creation of mixed income
    private and public housing. This program has resulted in
    leveraging new private investment and the revitalization of
    entire communities. If anybody has any doubts about it, I would
    invite them to come to St. Louis or the many other communities
    where HOPE VI has been extremely successful.
        I am concerned today also with the administration's
    penchant for rescinding 2005 funding programs that were
    supported by Congress and enacted by the President. There are
    other examples throughout the budget, including within this
    subcommittee. For example, the administration proposes a
    rescission of $74 million appropriated in 2005 for the Maritime
    Administration for the national defense tank vessel
    construction program. The rescission would eliminate the
    program. Both rescission requests raise possible violations of
    the Congressional Budget and Impoundment Control Act, as well
    as significant costs to the subcommittee, depending on our
    actions. If we do not rescind these funds from the enacted 2005
    appropriations, the subcommittee will have to make up some $212
    million that must come from offsets or cuts in other programs.
    If the rescissions do go forward, we think that there are other
    significant liabilities that will be incurred by the Federal
    Government, and it is an open question where those funds will
    come from.
        Another substantial concern in the 2006 budget is Amtrak
    funding. I have not been a cheerleader for Amtrak. I supported
    it as Governor. But as the people at OMB should know, there are
    many of my colleagues and supporters that will seek to backfill
    this funding shortfall. I think you can count probably 55 or 60
    votes on the Senate floor. That means we will have to cut other
    programs. These are program cuts and offsets that the
    administration has been unable or unwilling to identify. To be
    honest, I find the proposal for the Amtrak budget not
    responsible. I support the administration's efforts to initiate
    long overdue and fundamental reform of Amtrak's failed business
    model, but it is obvious that the $360 million the
    administration is proposing to support the dismantling of
    Amtrak is totally inadequate and could throw the entire
    passenger train industry into chaos, with bankruptcy and untold
    problems throughout the system, and for rail transportation
    generally. Clearly, whatever approach Congress takes, the
    funding for Amtrak will be far greater than proposed and will
    have to come from somewhere.
        I also support the Airport Improvement Program which
    provides Federal grants to airports for projects to enhance
    safety, capacity, security, and environmental concerns. Yet,
    the 2006 budget requests $3 billion for AIP, a reduction of
    nearly $500 million from the 2005 enacted level, and a $600
    million reduction from the amount authorized for 2006. This is
    a popular and important program that has broad support. The
    proposed funding will impact the funding available for primary
    and non-primary airports. Adequate funding is especially
    important in view of rising fuel costs.
        Another area of concern to me is the Federal Government's
    ability or lack thereof to procure and manage information
    technology systems. To be clear, this is a problem that has
    existed for many years through both Democratic and Republican
    administrations. The Federal Government spends over $60 billion
    on IT projects, but it appears that a large portion of these
    funds are not managed effectively. For example, the Internal
    Revenue Service's Business Systems Modernization has been
    fraught with cost overruns, missed deliverables, and is
    currently designated as high risk by the Government
    Accountability Office. I could go down a list of problematic IT
    systems, but that would require another hearing. I think it is
    imperative--and this is where I have a constructive suggestion
    for OMB--to do a better job protecting the taxpayers' interest
    in procuring and overseeing its multi-billion dollar portfolio.
    Perhaps OMB could develop a cadre of experts to assist
    individual agencies in the IT arena by helping to establish IT
    requirements, helping to negotiate IT contracts, and helping to
    ensure that contractors meet all the requirements, benchmarks,
    and time lines. I look forward to working with you on IT
    procurement and management and any plans the agency may have to
    address this issue.
        I do not think it is too much to ask the Federal Government
    to live within a budget. I did so as Governor of Missouri, and
    I believe in responsible spending. In conclusion, however, I do
    not believe that we should have to live within a budget that is
    based on flawed assumptions and is fiscally questionable,
    especially when proposed budget shortfalls must be offset from
    other programs and activities that the administration was
    unable to identify or propose. How can we make the budget work
    if OMB cannot?

                               PREPARED STATEMENT

        Mr. Director, I would like to work with you in particular
    on the Government's IT issues. We also need your help and
    assistance in developing a budget and an appropriations plan
    that will allow our subcommittee to produce a responsible bill.
        I look forward to working with you on these issues, and I
    now turn to my ranking member, Senator Murray. Senator.
        [The statement follows:]

               Prepared Statement of Senator Christopher S. Bond

        The Senate Appropriations Subcommittee on Transportation, Treasury,
    the Judiciary, Housing and Urban Development and Related Agencies will
    come to order. We welcome Josh Bolten, Director, Office of Management
    and Budget (OMB). I look forward to your views on the President's
    overall budget request for fiscal year 2006 as well as budget issues
    related to OMB's own needs.
        The President's budget request for fiscal year 2006 calls for some
    $840.3 billion in overall discretionary budget authority, including
    some $419.3 billion for the Department of Defense and $32 billion for
    Homeland Security. For DOD, this would be an increase of $19 billion or
    4.8 percent over fiscal year 2005. For Homeland Security, this would be
    an increase of $1 billion or 3.1 percent over fiscal year 2005. Even
    with significant increases in security-related spending, the overall
    fiscal year 2006 budget request would hold overall spending to a 2.1
    percent growth, just below the rate of inflation.
        Consequently, the budget proposes that overall non-security
    discretionary spending would be reduced from the fiscal year 2005 level
    by some $3 billion or 0.7 percent for a total of $389 billion.
    Moreover, as to non-defense discretionary spending, the budget proposes
    more than 150 reductions and eliminations in Federal programs which
    would save some $20 billion in budget authority in fiscal year 2006
    alone.
        I support the President's goal of cutting the deficit in half by
    fiscal year 2008. However, reducing the deficit almost solely on the
    back of domestic discretionary spending is very troubling and, I
    believe, an ill-conceived strategy that could have disastrous results
    for many important, congressionally-supported domestic programs. To be
    clear, discretionary spending should be reduced where appropriate. We
    should not, however, reduce these programs solely for sake of deficit
    reduction, especially when many of these programs are important to the
    health, safety and quality of life of our Nation's citizens.
        More importantly, mandatory spending must be reduced to achieve any
    true spending reform and deficit reduction. And while I support the
    President's efforts to reform Social Security in order to avoid
    bankrupting the future of our children and children's children, I
    remain very concerned that the budget proposes total mandatory spending
    of $1.6 trillion in fiscal year 2006, an increase of $107 billion or 7
    percent over fiscal year 2005. Mandatory spending currently accounts
    for some 63 percent of total Federal spending. By fiscal year 2010,
    mandatory spending will grow to $2.1 trillion and will represent some
    68 percent of total spending. This is a total annual growth rate of
    some 6.3 percent which towers over any savings expected to be achieved
    from domestic, discretionary spending.
        However, we are not here to discuss reforming mandatory programs,
    no matter how important. We are here to discuss the President's
    proposed budget for domestic, discretionary spending for fiscal year
    2006, especially those programs within the jurisdiction of the
    Transportation/Treasury Appropriations Subcommittee.
        The House and Senate Appropriations and Budget Committees and OMB
    share responsible for recommending a budget to the Congress and the
    President that will ensure the continued effective running of the
    United States Government for each fiscal year. However, at the end of
    the day, we, as appropriators, MUST present to the Congress and then
    the President a bill that is financially sound, responsible and capable
    of maintaining the efficient running of the government.
        As part of this process, OMB has an obligation to propose funding
    recommendations that are consistent with budget and program realities.
    The administration's budget request should not be based on flawed data
    and budget assumptions, and should not include recommendations that are
    a violation of the Congressional Budget and Impoundment Control Act of
    1974.
        Unfortunately, I believe this budget request contains a number of
    flawed budget assumptions as well as a number of ill-considered budget
    and policy recommendations. In many cases, Mr. Bolten, I believe that
    you and the President have been poorly served by your staff. This is
    especially problematic in a year of tight budget allocations.
        As you know, I have had the distinct honor of serving as the former
    chair of both the VA/HUD Appropriations Subcommittee and now as the
    chair of the Transportation/Treasury Appropriations Subcommittee. This
    has allowed me to develop familiarity with some $170 billion of
    domestic discretionary spending or some 50 percent or more of the
    President's budget for domestic, discretionary spending. As a result, I
    will focus my comments and questions today and for the record primarily
    on programs of which I have a personal knowledge and interest.
    Nevertheless, I understand that my concerns with the fiscal year 2006
    budget are similar to the concerns my colleagues are wrestling with in
    other appropriations subcommittees.
        First, I am very disappointed that the administration has proposed
    to eliminate the HUD Community Development Block Grant (CDBG) program
    along with some 17 other programs and replace these programs with a new
    block grant in the Department of Commerce called the Strengthening
    America's Communities initiative. The administration also is proposing
    to fund this new initiative at $3.7 billion which is an overall
    reduction for all these programs of almost $2 billion or some 34.2
    percent from the fiscal year 2005 level.
        The proposed elimination and related reduction of funding for CDBG
    as well as many of these other programs is a tragedy. Communities
    across the Nation rely on CDBG to fund critical housing and community
    development programs. Without these funds, many local programs will
    falter and even fail. Equally important, CDBG is a critical component
    of HUD's mission; CDBG helps to make HUD's housing mission successful.
    Moreover, the use of CDBG consolidated plans helps to ensure that
    communities tie together CDBG, housing funds and other Federal and
    State resources into a comprehensive approach to local housing and
    community development needs.
        Without CDBG, HUD's mission will be reduced to almost solely
    housing. As history tells us, successful community development relies
    on a comprehensive approach to housing and community development.
        CDBG is not a perfect program and CDBG funds are not always used
    well or effectively. However, HUD, OMB and select CDBG interested
    groups recently ratified a consensus document to address weaknesses in
    the CDBG program by creating an Outcome Measurement System to establish
    new benchmarks and better oversight. Since this document is designed to
    address OMB's concerns, I am puzzled by the administration's efforts to
    dismantle a program that has been redesigned to become more effective
    and successful according to administration requirements.
        I have more practical concerns, however. Even if we pass a new
    Commerce Block grant this year to replace CDBG, how is it possible for
    the Commerce Department to implement the program for fiscal year 2006,
    including the issuing of regulations, the hiring and training of staff,
    and the education of communities in how these funds must be used? What
    happens to communities with existing projects that rely on CDBG
    funding, especially those projects with section 108 loan guarantees
    where the guarantees rely on a flow of future CDBG funding?
        I also will have additional questions with regard to the proposed
    consolidation of the Community Development Financial Institutions
    program, the Bank Enterprise Act program and the Section 4 Capacity
    Building ``LISC/Enterprise'' program into the new proposed commerce
    block grant. None of these activities easily fit into a block grant
    scheme.
        Another major funding area that OMB has not adequately supported is
    basic scientific research--primarily, the physical sciences--which is
    mainly funded through the National Science Foundation. NSF plays a
    critical role in the economic, scientific and intellectual growth of
    this Nation. Our country's future resides in our ability to lead the
    world in science and technology, especially in the global marketplace.
    NSF is one of our primary tools in meeting the global challenges of the
    21st Century by pushing the boundaries of scientific research and
    technology. This work will grow our economy and speed innovation,
    improving the quality of life for all people.
        However, the lack of support for NSF and the physical sciences and
    the growing funding disparity between the life sciences and the
    physical sciences is jeopardizing our Nation's ability to lead the
    world in scientific innovation. Further, we are jeopardizing the work
    of the National Institutes of Health because we are undermining the
    physical sciences, which provide the underpinning for medical
    technological advances. Inadequate funding for NSF also hurts our
    economy and the creation of good jobs, which would help address the
    outcry of outsourcing jobs to other countries. The bottom-line is that
    by underfunding NSF, we are shooting ourselves and our future
    generations in the foot. I hope we can get NSF back on the path of
    doubling the budget as I have strongly advocated.
        I also am very puzzled and concerned over the administration's
    proposal to rescind some $2.5 billion from HUD's Housing Certificate
    Fund. As you know, we have spent several years reforming the section 8
    tenant-based voucher program to limit the growing costs and require
    PHAs to implement a more responsible budget-based planning and funding
    system for the voucher program. As a responsible part of these reforms,
    much of the funds that have been available normally for rescission from
    within HUD over the last few years are no longer available. In point of
    fact, HUD's Secretary, Alphonso Jackson, was unable to identify any
    account or source of funds at this time which could support a $2.5
    billion rescission from within HUD. This is a question which needs
    concrete answers before we draft this bill. To be blunt, everyone's
    expectation is that OMB and HUD have a system for evaluating and
    verifying where rescission funds will come from with a reasonable level
    of certainty. In particular, I expect OMB to be able to provide an
    assessment of where these rescissions will come from and the
    methodology that OMB and HUD used in determining the amount of the
    rescission.
        In addition, the administration is seeking to eliminate HOPE VI as
    well as rescind the HOPE VI fiscal year 2005 funding of $143 million.
    As you may know, I set the stage for HOPE VI by including a
    demonstration project in the 1990 National Affordable Housing Act that
    allowed the demolition and replacement of Pruitt-Igoe Public Housing in
    St. Louis with vouchers and new housing. This approach revolutionized
    the way we reformed obsolete public housing by allowing for the
    demolition of this obsolete housing and the creation of mixed income
    private and public housing. This program has resulted in leveraging new
    private investment and the revitalization of entire communities.
        While I am opposed to the elimination of the HOPE VI program, I am
    more concerned today with the administration's penchant for rescinding
    fiscal year 2005 funding from programs that were supported by the
    Congress and enacted by the President. There are other examples
    throughout the budget, including within the Transportation/Treasury
    Appropriations Subcommittee. For example, the administration also
    proposes a rescission of $74 million appropriated in fiscal year 2005
    for the Maritime Administration for the National Defense Tank Vessel
    Construction program. This rescission would eliminate this program.
    Both rescission requests raise possible violations of the Congressional
    Budget and Impoundment Control Act as well as significant costs to the
    subcommittee depending on our actions. If we do not rescind these funds
    from these fiscal year 2005 enacted appropriations, the subcommittee
    will have to make up some $212 million that must come from offsets or
    cuts in other programs.
        Another area of substantial concern in the fiscal year 2006 budget
    is Amtrak funding. I am not a fan of Amtrak but it appears, as OMB
    knows, that many of my colleagues are supporters and will seek to
    backfill this funding shortfall. This means we will have to cut other
    programs, and these are programs cuts and offsets that that the
    administration has been unable or unwilling to identify. I also find
    the Amtrak budget incredibly irresponsible. While I support the
    administration's efforts to initiate long overdue and fundamental
    reform of Amtrak's failed business model, it is obvious that the $360
    million that the administration is proposing to support the dismantling
    of Amtrak is totally inadequate and could throw the entire passenger
    train industry into chaos. Clearly, whatever approach the Congress
    takes, the funding for Amtrak will be far greater than proposed and
    will have to come from somewhere.
        I also support the Airport Improvement Program which provides
    Federal grants to airports for projects to enhance airport safety,
    capacity, security, and environmental concerns. Yet, the fiscal year
    2006 budget requests $3.0 billion for AIP, a reduction of nearly $500
    million from fiscal year 2005 enacted level and a $600 million
    reduction from the amount authorized for fiscal year 2006. This is a
    popular and important program that has broad support and the proposed
    funding will impact the funding available for primary and non-primary
    airports.
        Another area of concern to me is the Federal Government's ability,
    or lack thereof, to procure and manage information technology systems.
    To be clear, this is a problem that has existed for many years through
    both Democratic and Republican administrations. The Federal Government
    spends over $60 billion on IT projects but it appears that a large
    portion of those funds are not managed effectively. For example, the
    Internal Revenue Service's ``Business Systems Modernization'' has been
    fraught with cost overruns and missed deliverables and is currently
    designated as a ``high risk'' area by the Government Accountability
    Office. I could go down a laundry list of problematic IT systems but
    that would require another hearing. I believe it is imperative that the
    Federal Government, led by OMB, must do a better job of protecting the
    taxpayer's interest in procuring and overseeing its multibillion dollar
    portfolio. Perhaps, OMB could develop a cadre of experts that assist
    individual agencies in the IT arena by helping to establish agency IT
    requirements, helping to negotiate the IT contract, and helping to
    ensure the contractor meets all requirements, benchmarks and timelines.
    I look forward to hearing OMB's efforts in IT procurement and
    management and any plans the agency may have in addressing this serious
    issue.
        I don't think it is too much to ask the Federal Government to live
    within a budget. I did so as governor of Missouri and I believe in
    responsible spending. However, I do not believe that we should have to
    live within a budget that is based on flawed assumptions and is
    fiscally questionable, especially when proposed budget shortfalls must
    be offset from other programs and activities--programs and activities
    that the administration was unable to identify or propose. How are we
    expected to make the budget work if OMB cannot?
        Mr. Bolten, I would like to work with you in particular on the
    government's IT issues. However, we also need your help and assistance
    in developing a budget that allows our subcommittee to develop a
    responsible bill. I look forward to working with you on all these
    issues.
        I now turn to my Ranking Member, Senator Murray.

                       STATEMENT OF SENATOR PATTY MURRAY

        Senator Murray. Thank you very much, Mr. Chairman. I join
    with you in welcoming OMB Director Bolten here to our
    subcommittee this morning.
        It has been at least 3 years since the OMB Director has
    appeared before the subcommittee, so I am pleased that Director
    Bolten could be with us to discuss the budget request for his
    own office, as well as the larger budget request of the
    President for the coming fiscal year.
        Mr. Chairman, in addition to serving on the Appropriations
    Committee, I serve on the Budget Committee. Chairman Bond used
    to serve on the Budget Committee, but he has moved on to bigger
    and better things wisely.
        You did not need to hear what he just said.
        Over the past several weeks, the Budget Committee has been
    busy drafting a budget and moving it through committee markup
    and passing it to the Senate floor. I voted against that budget
    both in committee and on the floor because I believe it did not
    reflect the right priorities for our county, and it did not
    strike the right balance between taxes, deficit reduction, and
    the very real needs that are facing our communities.
        I actually have to say that participating in the budget
    debate over the past couple weeks has reminded me of a very
    lengthy and painful visit to the dentist's office, and the
    Muzak in the dentist's office played nothing but a repeating
    loop of that song we all know well, ``Don't Worry, Be Happy.''
        Don't worry about the drastic cuts, the unidentified
    rescissions, the user fees, and the problems we are pushing
    down the road. Don't worry about what is actually in the
    budget. We will deal with it later. It is kind of don't worry,
    be happy.
        Well, frankly, I am very worried because I can see what is
    going to happen to some of our country's most critical needs.
    We are setting ourselves up for a train wreck.
        The budget resolution that was presented in the committee
    accepted the President's proposed funding figure for non-
    defense, non-homeland security discretionary spending. It was a
    real cut below last year's level. During debate on the budget,
    many amendments were offered to restore funding cuts that were
    proposed in the President's budget. We had amendments to
    restore funding for Amtrak, the Community Development Block
    Grant program, first responders, cops on the street, vocational
    education, and others. Almost all of those amendments were
    rejected, but still many Senators were telling us don't worry,
    be happy because when Congress gets around to the
    appropriations process later in the year, we are not going to
    enact those cuts anyway.
        Well, that does not make the problem go away. In fact, it
    actually makes it worse.
        For example, the Senate failed to adopt an amendment to
    restore $1.4 billion in spending so Amtrak could maintain rail
    service next year. Even though that amendment failed, I have
    heard a number of my colleagues in the Senate say, don't worry,
    be happy, we will find enough money in the appropriations
    process to keep Amtrak alive anyway.
        Similarly, an amendment was offered to restore funding for
    the Community Development Block Grant program. While that
    amendment failed, an amendment was later adopted that said we
    will somehow find the funding to restore the CDBG program
    through cuts in unidentified programs. Again, it is don't worry
    about what is actually in the budget, be happy.
        As the budget resolution now moves toward conference, I am
    having a very hard time convincing some of my colleagues to
    understand the math does not add up. If we are going to adopt a
    ceiling for domestic discretionary spending that comes close to
    the President's number, we are either going to have to accept
    many of the budget cuts or we are going to have to impose
    severe cuts in other programs.
        Amtrak and CDBG are just two of the President's proposals
    under this subcommittee's jurisdiction. The President's budget
    proposes an unallocated rescission of $2.5 billion to be
    derived from any program within the Department of Housing and
    Urban Development. The budget does not tell us where that $2.5
    billion would come from.
        And last week, HUD Secretary Jackson would not provide a
    guarantee to the subcommittee that those severe cuts would not
    come at the expense of programs serving the poor or even the
    homeless. Again, it is don't worry about the budget cuts, don't
    worry about the impact on the poor and homeless, just be happy.
        Similarly, within the subcommittee's jurisdiction, the
    President is proposing a large number of new user fees, fees
    that some say are just new taxes. These are fees that are not
    going to be adopted by the authorizing committees and therefore
    will require discretionary appropriations the President has not
    requested. In fact, if the past is any guide, it is not clear
    that the administration will ever get around to even submitting
    their user fee proposals to the authorizing committees.
        When I add together all of these funding holes, I see a
    shortfall of between $5 billion and $6 billion just for
    programs under the jurisdiction of this subcommittee.
        So I am one Senator who cannot buy into the ``don't worry,
    be happy'' attitude of some of my colleagues, and frankly, I am
    very worried. This subcommittee is facing a very tough road
    ahead and it will have a painful impact on our communities.
        Absent some recognition on the part of the conferees on the
    budget resolution of the very real holes in the President's
    budget proposal, I believe that some of my colleagues will be
    facing a very rude awakening when we get to the appropriations
    process later this summer.
        I would implore my colleagues to stop listening to the
    music and instead focus on the impossible choices we are
    setting ourselves up for if we stick to the President's
    proposed ceiling for domestic discretionary spending.
        Mr. Bolten, I also want to question you today about the
    President's dramatic cuts to the Hanford nuclear waste cleanup.
    The President's cuts may violate the Federal Government's legal
    obligations under the Tri-Party Agreement, and I am not going
    to remain quiet while this administration walks away from its
    responsibility to the people of the Tri-Cities in my State.
        I also want you to know that I am very concerned about the
    President's budget proposals relating to the Bonneville Power
    Administration. The White House plan will force higher
    electricity rates on Northwest residents and on our businesses.
    I know I do not need to remind you, Mr. Bolten, our region is
    still really feeling the effects of the Enron manipulation of
    the market at the same time we are experiencing extremely high
    gas prices. We have had enough pain when it comes to energy,
    and we do not need a White House plan that puts energy traders
    above Northwest citizens and businesses.
        Another White House proposal for BPA would cripple our
    ability to invest in our transmission and generation systems,
    which will leave our entire region vulnerable to blackouts and
    higher energy costs.

                               PREPARED STATEMENT

        So, Mr. Bolten, those are some of the things I want to
    explore with you during this hearing.
        Mr. Chairman, thank you so much for holding this, and I
    look forward to the discussion.
        [The statement follows:]

                   Prepared Statement of Senator Patty Murray

        I want to welcome OMB Director Bolten to the subcommittee this
    morning. It's been at least 3 years since the OMB Director has appeared
    before the subcommittee, so I'm pleased that Director Bolten could be
    with us to discuss the budget request for his own office, as well as
    the larger budget request of the President for the coming fiscal year.
        In addition to serving on the Appropriations Committee, I serve on
    the Budget Committee. Chairman Bond also used to serve on the Budget
    Committee, but he has since moved on to bigger and better things.
        Over the past several weeks, the Budget Committee has been busy
    drafting a budget, moving it through committee mark-up, and passing it
    on the Senate Floor. I voted against that budget, both in committee and
    on the Floor, because I believe it did not reflect the right priorities
    for our country. It did not strike the right balance between taxes,
    deficit reduction, and the very real needs facing our communities.
        Participating in the budget debate over the past several weeks has
    reminded me of a very lengthy and painful visit to the dentist's
    office. And the muzak in this dentist's office played nothing but a
    repeating loop of that song, ``Don't Worry, Be Happy''.
        Don't worry about the drastic cuts, the unidentified rescissions,
    the user fees, and the problems we're pushing down the road. Don't
    worry about what's actually in the budget. We'll deal with it later.
    Don't worry. Be happy.
        Well frankly, I am worried, because I can see what's going to
    happen to some of our country's most critical needs. We are setting
    ourselves up for a train wreck.
        The Budget Resolution presented in committee accepted the
    President's proposed funding figure for non-Defense, non-Homeland
    Security discretionary spending. It was a real cut below last year's
    level. During debate on the budget, many amendments were offered to
    restore funding cuts that were proposed in the President's Budget. We
    had amendments to restore funding for Amtrak, the Community Development
    Block Grant Program, first responders, cops on the street, vocational
    education and others.
        Almost all of these amendments were rejected, but still many
    Senators are telling us: ``Don't worry. Be happy,'' because when
    Congress gets around to the Appropriations process later in the year,
    we aren't going to enact those cuts anyway.
        Well that doesn't make the problem go away. In fact, it makes it
    worse.
        For example, the Senate failed to adopt an amendment to restore
    $1.4 billion in spending so that Amtrak could maintain rail service
    next year. Even though that amendment failed, I have heard a number of
    my colleagues in the Senate say, ``Don't worry. Be happy.''; we will
    find enough money through the Appropriations process to keep Amtrak
    alive anyway.
        Similarly, an amendment was offered to restore funding for the
    Community Development Block Grant Program. While that amendment failed,
    an amendment was later adopted that said that we will somehow find the
    funding to restore the CBDG program through cuts in other unidentified
    programs. Again, it's don't worry about what's actually in the budget--
    be happy.
        As the Budget Resolution moves toward conference, I am having a
    very hard time getting my colleagues to understand that the math just
    doesn't add up. If we are going to adopt a ceiling for domestic
    discretionary spending that comes close to the President's number, we
    are either going to have to accept many of his budget cuts, or we are
    going to have to impose severe cuts in other programs.
        Amtrak and CBDG are just two of the President's proposals under
    this subcommittee's jurisdiction. The President's budget proposes an
    unallocated rescission of $2.5 billion to be derived from any program
    within the Department of Housing and Urban Development.
        The budget doesn't tell us where that $2.5 billion would come from.
    Last week, HUD Secretary Jackson would not provide a guarantee to this
    subcommittee that these severe cuts would not come at the expense of
    programs serving the poor or even the homeless. Again, it's don't worry
    about the budget cuts. Don't worry about the impact on the poor or
    homeless. Be happy.
        Similarly, within the subcommittee's jurisdiction, the President is
    proposing a large number of new user fees--fees that some say are just
    new taxes.
        These are fees that are not going to be adopted by the authorizing
    committees and therefore, will require discretionary appropriations
    that the President has not requested.
        In fact, if the past is any guide, it is not clear that the
    administration will ever get around to even submitting their user fee
    proposals to the authorizing committees.
        When I add together all these funding holes, I see a shortfall of
    between $5 billion and $6 billion just for programs under the
    jurisdiction of this subcommittee.
        So, I am one Senator that can't buy into the ``don't worry, be
    happy'' attitude of some of my colleagues. Frankly, I am worried. This
    subcommittee is facing a very tough road ahead, and it will have a
    painful impact on our communities.
        Absent some recognition on the part of the conferees on the Budget
    Resolution of the very real holes in the President's budget proposal, I
    believe that some of my colleagues will be facing a very rude awakening
    when we get to the Appropriations process later this summer.
        I would implore my colleagues to stop listening to the music and
    instead focus on the impossible choices that we are setting ourselves
    up for if we stick to the President's proposed ceiling for domestic
    discretionary spending.

                            HANFORD NUCLEAR CLEANUP

        Mr. Bolten, I also want to question you about the President's
    dramatic cuts to the Hanford nuclear waste clean up. The President's
    cuts may violate the Federal Government's legal obligations under the
    Tri-Party agreement. I am not going to remain quiet while this
    administration walks away from its responsibility to the people of the
    Tri-Cities.

                                      BPA

        I also continue to be concerned by the President's budget proposals
    relating to the Bonneville Power Administration. The White House plan
    will force higher electricity rates on Northwest residents and
    businesses. I don't need to remind you, Mr. Bolten, that our region is
    still feeling the painful effects of Enron's manipulation of the market
    at the same time we're experiencing record gas prices. We've had enough
    pain when it comes to energy. We don't need a White House plan that
    puts energy traders above Northwest citizens and businesses.
        Another White House proposal for BPA would cripple our ability to
    invest in our transmission and generation systems, leaving our entire
    region vulnerable to blackouts and higher energy costs. Those are some
    of the things I want to explore with you during this hearing.

                               PREPARED STATEMENT

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

                   Prepared Statement of Senator Thad Cochran

        Mr. Director, thank you for being here today to discuss the
    President's budget request. It is a pleasure to work with you as we
    move forward through the appropriation process.
        The President's plan to cut the Federal deficit in half over the
    next 5 years is laudable and we will work with you to achieve this
    goal, and I am hopeful that the Senate and the House will agree soon
    upon a budget resolution that will be the framework for our work for
    the remainder of the year.
        We appreciate your leadership in defining priorities and thank you
    for the good work that you do as Director of the Office of Management
    and Budget.

                         STATEMENT OF JOSHUA B. BOLTEN

        Senator Bond. With that introduction, Director Bolten, we
    would be happy to have your views.
        Mr. Bolten. Thank you, Mr. Chairman and Senator Murray.
    Thank you for your warm welcome.
        I am, indeed, pleased to be here this morning to discuss
    the President's 2006 budget request for the Office of
    Management and Budget and also discuss the broader budget
    issues that each of you raised in your opening statements.
        I would like to begin with a brief review of the
    President's overall 2006 budget request. The 2006 budget funds
    efforts to defend the homeland from attack. We are transforming
    our military and supporting our troops, as they fight and win
    the global war on terror. We are helping to spread freedom
    throughout the world. We are promoting high standards in our
    schools, among many other priorities reflected in the
    President's budget.
        Those policies, especially tax relief, have helped create
    millions of new jobs, a rebound in business investment, and
    record home ownership rates. In order to keep our economy
    strong and achieve the President's goal of cutting the deficit
    in half by 2009, as you mentioned, Mr. Chairman, we need to
    continue the President's pro-growth policies and, importantly
    for this discussion, exercise even greater spending restraint
    than we have in recent years.
        During the first term, the President committed to spend
    what was needed on the war on terror and to protect the
    homeland, and he committed to enforce spending restraint
    elsewhere. Because of this focus, deficits are below what they
    otherwise would have been. With continuation of the President's
    pro-growth economic policies and responsible spending restraint
    now, we will remain on track to cut the deficit in half by 2009
    to a level that is well below the 40-year historical average
    deficit of 2.3 percent of GDP.
        The administration proposes to tighten spending further
    this year by limiting the growth in overall discretionary
    spending, even after significant increases in defense and
    homeland security, to 2.1 percent. Mr. Chairman, you
    highlighted that in your opening remarks, and you did note that
    that is less than the projected rate of inflation, I believe.
    If you did not note it, I note it now. So, Senator Murray, your
    comments, as well, are on target, which is to say that in those
    non-security areas, the President is proposing a spending level
    that is below inflation--so a real cut.
        In non-security discretionary accounts, the President's
    proposal would cut spending by nearly 1 percent, 0.7 percent,
    as you pointed out, Mr. Chairman. That is the tightest such
    restraint proposed since the Reagan administration.
        The budget also proposes more than 150 reductions and
    eliminations in non-defense discretionary programs, saving
    about $20 billion in 2006, and an additional set of reforms in
    mandatory programs, saving about $137 billion over the next 10
    years. So, Mr. Chairman, we are not focusing our efforts
    exclusively on the discretionary side of the budget. We also
    believe that it is important to begin the process of digging in
    on the mandatory side.
        To ensure the Federal Government spends taxpayer dollars
    most 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 performance
    and reporting standards, integration of budget policy with
    performance measures, and finally, Mr. Chairman, the one that
    you highlighted in your opening statement: electronic
    government, e-government, initiatives, and how we spend our IT
    money.
        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 budget policy accordingly.
        Consistent with the President's overall 2006 budget
    proposal, the Office of Management and Budget has itself
    submitted a disciplined request. OMB's total budget request
    amounts to about $75 million, the same as was appropriated for
    the agency in the 2005 budget process.
        To achieve this spending restraint, OMB is pursuing cost
    savings wherever possible. As in the past, OMB is achieving
    cost savings largely through reductions in staffing. We are
    principally an agency of people and that is the only place we
    can really go to find the savings. Last year, OMB was
    appropriated $1.6 million less than the President's budget
    request. In addition, OMB, like other agencies, absorbed a pay
    raise of 3.7 percent. To accommodate these lower funding
    levels, we have reduced OMB staff from 527 positions in fiscal
    year 2001 to 510 positions in 2004 to 490 positions anticipated
    in 2005 and 2006.
        With these lower levels of resources and staffing, we
    believe OMB can continue to deliver high-quality performance
    and fulfill our many important core responsibilities. Our best
    known of these responsibilities is the preparation of the
    President's annual budget. In addition, our responsibilities
    include oversight of other budgetary matters, management
    issues, the administration's legislative proposals, regulatory
    reforms, procurement policies, and other important subjects. We
    assure that all such proposals are consistent with the 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 and with this
    committee in particular to develop a final budget that is
    consistent with our goals of spending discipline and focusing
    on priorities.

                               PREPARED STATEMENT

        Mr. Chairman, that concludes my prepared statement. I know
    you and Senator Murray have raised a number of issues in your
    opening statements. I would be happy to respond to any of them
    in questions.
        [The statement follows:]

                     Prepared Statement of Joshua B. Bolten

        Mr. Chairman, Senator Murray, members of the subcommittee, I am
    pleased to be here this morning to discuss the President's fiscal year
    2006 budget request for the Office of Management and Budget (OMB).

     WINNING THE WAR ON TERROR, PROTECTING THE HOMELAND AND STRENGTHENING
                                  THE ECONOMY

        I would like to begin with a brief review of the President's
    overall fiscal year 2006 budget. The 2006 budget funds efforts to
    defend the homeland from attack. We are transforming our military and
    supporting our troops as they fight and win the Global War on Terror.
    We are helping to spread freedom throughout the world. We are promoting
    high standards in our schools. The President's policies in this budget,
    especially tax relief, have helped create millions of new jobs, a
    rebound in business investment, and record homeownership rates. In
    order to keep our economy strong, and achieve the President's goal of
    cutting the deficit in half by 2009, we need to continue the
    President's pro-growth policies and exercise even greater spending
    restraint.
        During the first term the President committed to spend what was
    needed to win the War on Terror and protect the homeland--and he
    committed to enforce spending restraint elsewhere. Because of this
    focus, deficits are below what they otherwise would have been. With
    continuation of the President's pro-growth economic policies and
    responsible spending restraint, we will remain on track to cut the
    deficit in half by 2009, to a level that is well below the 40-year
    historical average deficit of 2.3 percent of GDP.
        The administration proposes to tighten spending further this year
    by limiting the growth in overall discretionary spending, even after
    significant increases in defense and homeland security, to 2.1
    percent--less than the projected rate of inflation. In other words,
    under the President's 2006 budget, overall discretionary spending will
    see a reduction in real terms. In non-security discretionary accounts,
    the President proposes to cut spending by nearly 1 percent--the
    tightest such restraint proposed since the Reagan Administration.
        The budget also proposes more than 150 reductions and eliminations
    in non-defense discretionary programs, saving about $20 billion in
    2006, and an additional set of reforms in mandatory programs, saving
    about $137 billion over the next 10 years.

                               DELIVERING RESULTS

        To ensure the Federal Government spends taxpayer dollars most
    effectively, the administration continues to implement the President's
    Management Agenda (PMA). The PMA helps individual agencies and programs
    focus on and produce results, and 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.

                                  OMB'S BUDGET

        Consistent with the President's overall fiscal year 2006 budget
    proposal, the Office of Management and Budget has submitted a
    disciplined request. OMB's total budget request amounts to $75.1
    million--the same as was appropriated for the agency in the 2005 budget
    process.
        To achieve this spending restraint, OMB is pursuing cost savings
    wherever possible. As in the past, OMB is achieving cost savings
    largely through reductions in staffing. Last year, OMB was appropriated
    $1.6 million less than the President's budgetary request. In addition,
    OMB--like other agencies--absorbed a pay raise of 3.7 percent. To
    accommodate lower funding levels, we have reduced OMB staff from 527
    positions in fiscal year 2001, to 510 positions in 2004, to the 490
    positions anticipated for 2005 and 2006.
        With these lower levels of resources and staffing, we believe OMB
    can continue to deliver high-quality performance and fulfill our many
    important core responsibilities. Our best known of these
    responsibilities is the preparation of the President's annual budget.
    In addition, our responsibilities include oversight of budgetary
    matters, management issues, the administration's legislative proposals,
    regulatory reforms, procurement policies and other important subjects.
    We assure that all such proposals 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 and
    focusing on priorities.

        Senator Bond. Thank you very much, Mr. Director. We look
    forward to working within that constrained budget for OMB, but
    I would like to go back to some of the questions I raised in my
    opening statement.
        Please give me your rationale for eliminating CDBG. You
    just went through a drill with the interested parties to figure
    out how to make CDBG work better. It has had tremendous impact
    in many communities, a favorable impact. The joint HUD/OMB
    Grantee Outcome Measurement Working Group came up with these.
    We have got communities with existing projects relying on CDBG
    funding, especially with section 108 loan guarantees. Why did
    you decide to cut off this program?

                       COMMUNITY DEVELOPMENT BLOCK GRANT

        Mr. Bolten. Mr. Chairman, the judgment about the
    consolidation of these programs, not their total elimination,
    but the consolidation of these programs into one single place
    had a lot to do with how we best target our resources. The
    administration's judgment about how to rationalize the many
    economic development programs that exist today in government
    was focused on trying to make sure that we make the best use of
    the limited resources we have available. We are, indeed,
    proposing reducing those resources overall, but also targeting
    those resources on the areas most in need.
        Right now, through the CDBG program and the CSBG program,
    we have a lot of money going out to the States and localities
    largely on a formula basis with the Federal Government not
    really able to tell what it is getting for its money. It has
    become almost an entitlement, if you will, on the State revenue
    sharing side of the ledger.
        What we are trying to do with this proposal is make sure
    that we are applying the money that we do have most effectively
    to meet economic development goals. Right now a lot of CDBG
    money and CDBG money goes toward worthy goals, many of them
    duplicated in other Federal programs. What we would like to see
    this money do is not simply support a variety of local safety
    nets that are provided for those most in need in our country,
    but ensure that what we are doing with the money is promoting
    economic development in the community that will make the social
    safety net less necessary.
        Senator Bond. Community development, from my experience, is
    significantly different than general economic development, what
    the Commerce Department does. That is why they set up the
    Department of Housing and Urban Development. From my personal
    experience, I can tell you that there is a very vital role for
    communities to play in the community development which develops
    strong communities in relation to housing.
        Essentially you are saying you do not want a Housing and
    Urban Development Department. You do not want that function. I
    would think that you would have a proposal to continue the
    reforms that you have worked out with respect to CDBG to make
    sure that that program works, unless you honestly believe that
    community development is not a worthwhile goal. Are you saying
    that?
        Mr. Bolten. No, sir, Mr. Chairman. The administration does
    strongly believe in community development as a worthwhile goal.
    The question is what to do with our available Federal dollars.
    As Secretary Jackson testified before you, he said that he
    thought the CDBG formula approach has become less targeted than
    it ought to be on those communities with real development
    needs. The consolidation of all these programs in the Commerce
    Department, which has the best experience with creating public/
    private partnerships to promote economic development, is the
    approach that the administration has chosen to try to target
    those needs.
        A lot of communities, we believe under the proposal we have
    put before you, will actually end up with more money than they
    do under the existing formulas. What we are trying to do is
    make sure that those communities most in need and those most
    likely to make good use of Federal dollars in promoting an
    environment where there are jobs, where there is housing, that
    is where we are trying to put the money, and that was the
    purpose of the proposal that the President put before you.
        Senator Bond. I just think that is flat wrong.
        Let me ask you about the practical problems. HUD staff has
    experience and expertise, local relationships. How do you
    expect the Commerce program to implement the program in 2006?
    You have left the salaries and expenses in CDBG for
    administering the program. Do you expect to take the CDBG staff
    into Commerce? How are the communities which use section 108
    loan guarantees going to be made whole? These are some real
    practical problems I see.
        Mr. Bolten. There are some important practical problems,
    Mr. Chairman. It has been our contemplation to move some of, at
    least, the core staff over to the Commerce Department. Should
    the Congress in its wisdom decide to support the President's
    proposal, I can assure you, we will work very closely with you
    and other interested members to make sure that the transition
    is smooth and not disadvantageous to any of the programs
    involved.
        Senator Bond. Thank you, Director.
        Senator Murray.

                                     AMTRAK

        Senator Murray. Mr. Bolten, for some time now, I have been
    trying to figure out who really speaks for the administration
    when it comes to your budget and policies for Amtrak. As you
    know, your budget requests zero for Amtrak, and the President's
    budget states explicitly--and I want to read it. It says,
    ``With no subsidies, Amtrak would quickly enter bankruptcy
    which would likely lead to the elimination of inefficient
    operations and the reorganization of the railroad through
    bankruptcy procedures. Ultimately, a more rational passenger
    rail system would emerge.''
        Now, I have heard it on good authority that your
    administration's stated expectation to put Amtrak into
    bankruptcy was not crafted by anyone at the Department of
    Transportation but was, rather, crafted in your office.
    Secretary Mineta has been crossing the country making speeches
    and telling the press that it is not the administration's goal
    to put Amtrak into bankruptcy.
        Can you tell me this morning, is this language in the
    President's budget correct, or is Secretary Mineta correct?
        Mr. Bolten. Well, I think, Senator Murray, they are both
    correct. All of our proposals, are prepared in close
    coordination between the relevant agencies and OMB. It is not
    the objective of the administration to put Amtrak into
    bankruptcy, but having failed for several years now to achieve
    the kinds of necessary reforms in the Amtrak system, we felt
    that at this point we have no alternative but to propose a
    budget that may, indeed, have that effect in order to get the
    kind of action and reform that we need.
        I thought Secretary Mineta put it very well in a New York
    Times op-ed that he published about 2 months ago. He said,
    ``there are some who have suggested that our reforms are aimed
    at killing Amtrak. Not true. If we wanted to kill Amtrak, we
    would not have to lift a finger. We cannot save intercity
    passenger rail service by burying our heads in the sand and
    simply shoveling more money into a system that cannot help but
    fail.''
        Senator Murray. Well, can you answer me, does the
    administration want to reorganize Amtrak in bankruptcy or keep
    it out of bankruptcy? Which one?
        Mr. Bolten. We would actually be happier to do it without a
    bankruptcy, but our proposals to do it in that fashion have so
    far----
        Senator Murray. So you intend to have it in bankruptcy to
    reorganize it.
        Mr. Bolten. We believe it needs to be reorganized one way
    or the other. If bankruptcy is the only option, then we believe
    that if we are to be responsible with the taxpayers' dollars,
    that is the only way to do it.
        Senator Murray. Earlier last month, Secretary Mineta had an
    interview with National Public Radio on the administration's
    plan for Amtrak, and the NPR reporter pointed out that the
    President's budget requests zero for Amtrak, and then he asked,
    what is the real figure that the administration is willing to
    spend on Amtrak? Secretary Mineta answered, probably in the
    area of about $1.5 billion to $2 billion, and then he went on
    to point out that Amtrak was woefully behind in maintaining
    tunnels and other infrastructure under its control.
        Do you concur with Secretary Mineta's remarks that the
    administration is willing to spend between $1.5 billion and $2
    billion on Amtrak next year?
        Mr. Bolten. I do not want to put a specific figure on it at
    this point, but the administration is, indeed, prepared to
    spend more money on Amtrak in the future if we get a
    rationalized system that does, as Secretary Mineta was
    suggesting in his remark, suggest on making sure that the
    infrastructure is in place for the continuing effective
    operation of those portions of Amtrak that can be commercially
    competitive. But what that requires is a complete
    reorganization and restructuring of Amtrak so that we do focus
    our resources on those portions that can, in fact, be
    commercially competitive. That is a lot less than what is
    currently out there and which has been persistently subsidized
    with taxpayer dollars without any prospect realistically at
    this point of ultimately achieving what was the original
    objective of Amtrak, which was putting this rail system on a
    commercially sound basis.
        Senator Murray. Well, earlier this year, I was very
    critical of Amtrak's board of directors. For the first time,
    that board to failed to articulate a budget request to Congress
    at the beginning of the year as it is called to do in the Rail
    Passenger Service Act. It appeared to me that since every one
    of the Amtrak board members are now Bush appointees, they did
    not want to articulate a budget that was different from the
    President's.
        Today, however, in the Russell Senate Office Building
    across the street from us, the Amtrak board is revealing its
    own reform plan for the railroad to the Senate Commerce
    Committee. The Amtrak board chairman is testifying that the
    board is requesting the Appropriations Committee provide $1.82
    billion for the railroad for next year. That is more than a 50
    percent increase over the current level of funding. The board
    will argue that reforming Amtrak costs money and that the
    railroad simply cannot survive on its current level of
    spending.
        In fact, the DOT Inspector General is going to testify this
    morning as well that simply maintaining the current Amtrak
    system will require an increase of between $200 million and
    $300 million above the current funding level.
        Mr. Bolten, now that the board of directors, made up
    entirely of the President's appointees, has articulated a
    funding request to Congress, is OMB prepared to submit to us a
    funding request to Congress for Amtrak?
        Mr. Bolten. Senator Murray, we have submitted the
    President's funding request for Amtrak to the committee.
        Senator Murray. For zero.
        Mr. Bolten. We have included about $300 million for the
    maintenance of some intercity rail in that category.
        While I have not had a chance to review what the board is
    presenting, I am told that they do have some important steps
    forward in reform. We obviously do not agree with them on the
    amount of money they want to put in, but there are enormous
    anomalies in this system that need, I think at this point,
    urgently to be corrected----
        Senator Murray. So you will not endorse the $1.2 billion
    that they are asking for?
        Mr. Bolten. No, I will not, Senator.
        Senator Murray. Well, our committee is going to mark up the
    appropriations bill likely in July. Can we expect you to submit
    a budget request for Amtrak by the July 4th recess?
        Mr. Bolten. Senator, you have our request before you.
        Senator Murray. Which is zero.
        Mr. Bolten. For those portions of Amtrak not related to
    intercity rail, yes.
        Senator Murray. Well, that is going to make it very
    difficult, Mr. Chairman.
        Senator Bond. Thank you, Senator Murray. That is the
    question I was prepared to ask. When are we going to see a
    responsible proposal for reform from the administration? This
    proposal to push Amtrak into bankruptcy could cause tremendous
    disruption. They have mortgaged Penn Station. This is a
    disaster. I would be willing to work with you on a responsible
    reform program, but to zero it out, the costs are going to be
    significant. The Acela trains are out of operation now. That is
    20 percent of the revenue. We have got a disaster on our hands,
    and throwing $364 million at intercity service, when you have
    the tremendous costs that the bankruptcy of Amtrak is going to
    cause, without any responsible plan for reform, just is not
    credible.
        I hope that with the Commerce Committee and the
    administration's recommendations, we will get some kind of
    realistic proposal prior to our marking up in July because I do
    not know what we can do with the request that you presented. It
    is designed to fail. So anyhow, you made your point, but I tell
    you that this is a disaster that is going to focus right on OMB
    and the person who controls it.
        Let me move to other block grant issues. The Capacity
    Building LISC/Enterprise program and CDFI are very important.
    The Bank Enterprise Act gets banks into underserved areas where
    there are no traditional financial institutions. LISC provides
    significant funds to provide nationwide leadership for
    developing and training existing nonprofits. This gives them an
    opportunity to compete for block grant funds.
        Why are you backing away from these programs and why do you
    think it is time to cut off funding for these elements that are
    essential in underserved areas?
        Mr. Bolten. Mr. Chairman, I am not in a good position to
    speak to all of the individual details of those, but I know
    that the judgment of those who put this program together was
    that we could best serve all of those needs through one
    consolidated program. I believe a lot of those needs and
    desires can still be met through the consolidated program we
    have proposed at the Commerce Department. I would like to give
    you more information, if I may, for the record.
        [The information follows:]

                      Strengthening America's Communities

        The President's Budget supports the Federal Government's role in
    economic and community development. The current Federal approach is not
    optimally designed to achieve results for our communities. During 2004,
    the administration reviewed the effectiveness and structure of Federal
    economic and community development efforts and found several weaknesses
    in the current design of these programs. The Strengthening America's
    Communities Initiative (SACI) proposes to consolidate 18 programs into
    a unified grant program. The new program, within the Department of
    Commerce, will clarify the purpose of Federal development assistance,
    simplify the grant process, target funds to those communities most in
    need of assistance, and hold grantees accountable for results in
    exchange for flexible use of the funds.
        While some individual programs or projects within our communities
    have been successful, the delivery of such resources is often
    duplicative and overly complex. The administration believes there is a
    better way. If one were starting from scratch, no one would design a
    Federal assistance system that has 18 grant programs spread across five
    cabinet agencies. The administration believes local flexibility is more
    effective than Federal control. Economic and community development
    activities such as those provided by the LISC/Enterprise and CDFI
    programs, which you mentioned, will remain eligible activities under
    SACI. In exchange for this flexibility, SACI will include
    accountability measures that require communities to demonstrate
    progress toward locally-selected goals for development. The
    administration also believes that eligibility and funding criteria
    should target communities that are most in need of assistance.
        We look forward to continuing to work with the Congress to
    determine ways to improve the Federal approach to economic and
    community development to ensure that taxpayer resources are spent not
    on wealthy communities, but on the distressed. In the end, these
    investments should generate measurable results for low-income persons
    and economically distressed areas.

        Senator Bond. Well, I do not see how that is going to work.
        This is a good one: where are you going to get the $2.5
    billion from the housing certificate fund, Section 8? I assume
    that you have some rationale. Where are these rescissions going
    to come from? Where is that money?
        Mr. Bolten. Mr. Chairman, the figure we proposed for
    rescissions is, I believe, consistent with the historical range
    of rescissions that have been available each year.
        Senator Bond. That is before we reformed the program. Mr.
    Director, we reformed the program because there were these
    problems. We reformed it so that we would not have these huge
    rescissions. And now you are assuming that the program operates
    as it has in the past, but we worked with HUD and reformed the
    program. And I do not know where you are going to find them.
    Historically they were there. Now they are not there.
        Mr. Bolten. Well, we believe, Senator, that they are still
    there, that there still will be substantial unobligated
    balances. Whether the exact figure ends up being $2.5 billion
    or not may be open to discussion, but we believe that even with
    the reforms in place, there will be substantial balances
    available----
        Senator Bond. Well, I will be most anxious, and I am sure
    by July 1 you and HUD will be able to tell us where that money
    is.
        Mr. Bolten. I expect we will know quite a bit more by July.
        Senator Bond. If you would give us the methodology for the
    record. I would like to know how you are coming up with it
    because I do not believe it is there.
        [The information follows:]

                                 HUD Rescission

        Each year, since 1998, large rescissions have been taken from this
    account--an average of $2 billion per year. These funds represent
    recoveries of amounts previously appropriated and obligated that are in
    excess of current needs.

                            [In millions of dollars]
    ------------------------------------------------------------------------
                                                 BA (Pre-
                   Fiscal Year                  Rescission)     Rescission
    ------------------------------------------------------------------------
    Fiscal year 2001........................          13,941         (1,947)
    Fiscal year 2002........................          15,641         (1,589)
    Fiscal year 2003........................          17,112         (1,600)
    Fiscal year 2004........................          19,257         (2,844)
    Fiscal year 2005........................          20,064         (1,557)
    Fiscal year 2006 proposed...............          20,917         (2,500)
    ------------------------------------------------------------------------

        As is the case each year, HUD may have a general idea ahead of
    time, but they will not determine which funds from which accounts will
    be used to satisfy the rescission until June or July of 2006.
        While the estimate of excess funds available for rescission may
    change, there is every reason to believe based on past experience that
    sufficient funds will be available for rescission.
        In addition, the final appropriations language has been
    sufficiently broad, and the President's Budget requests similar
    language again for fiscal year 2006, to enable the Department to look
    to other sources of funds to rescind within the Department should there
    be insufficient funds within this account. In 2003, for example,
    Congress enacted a rescission of $1.6 billion which was satisfied with
    $1.17 billion in unobligated balances in the Section 8 account and $426
    million in unobligated balances from other accounts.

                                  AIP PROGRAM

        Senator Bond. Let me ask you, before I turn it over, about
    the AIP program. This cuts the entitlement for primary airports
    to be cut in half. The Alaska airport supplemental is reduced
    by 50 percent. Why did you decide to cut this program?
        Mr. Bolten. Mr. Chairman, let me give you a response on
    that for the record.
        [The information follows:]

                            AK Airport (AIP Program)

        The 2006 Budget provides $3.0 billion for the Airport Improvement
    Program (AIP). These resources are sufficient to fund construction of
    all planned new runways and tarmacs, and remain high compared to
    historical levels (as recently as fiscal year 2000, the AIP program was
    funded at $1.9 billion). The Budget also includes language that should
    alleviate your concerns about the entitlement for primary airports and
    the Alaska airport supplemental. Under the approach included in the
    Budget, the basic structure of the entitlement formulas are preserved
    with airports experiencing very modest reductions (less than 10
    percent) in entitlement amounts. The Alaska supplemental would fare
    even better, with no loss of funding.

        Senator Bond. All right.
        I see that Senator Bennett has joined us, but I will go on
    to Senator Murray for the next question, and then turn to
    Senator Bennett.
        Senator Bennett. Thank you.
        Senator Murray. Thank you, Mr. Chairman. Let me just echo
    the chairman's remarks. I look forward to seeing the list from
    you and Secretary Jackson on where those rescissions are going
    to be before our markup. I simply do not see how we can do that
    without your request in.
        But I want to go back to one thing on Amtrak before I move
    on. The $360 million that you were talking about in the budget
    is by law just for mass transit systems--I know you understand
    that--operating over Amtrak property. It is not for Amtrak
    trains. So the issue we are concerned about is what the board
    is testifying before Commerce today and those needs.
        Let me ask you one other question on Amtrak. It is my
    understanding that the brake problems that have been discovered
    with the Acela trains that we are hearing so much about is not
    going to be reparable very quickly. In fact, the Acela trains
    may stay parked, we hear now, for some months, and Amtrak may
    lose as much as $60 million in net revenue as a result. That
    additional $60 million loss may eat up almost every dollar of
    working cash that the railroad can generate prior to the
    beginning of next fiscal year. I wanted to find out if your
    agency was monitoring that situation and the revenue impact on
    Amtrak.
        Mr. Bolten. We are monitoring it. We do know that they have
    some working capital available carried over. I had heard even a
    slightly larger figure than $60 million was possible. I know
    they are carrying over some working capital in that range, but
    Senator, we will keep an eye on that situation.
        Senator Murray. It is my understanding Secretary Mineta is
    saying he does not want to put Amtrak into bankruptcy. So is it
    possible that you are considering a supplemental appropriation
    to deal with this dramatic loss of revenue?
        Mr. Bolten. We are not considering one at this time, but we
    are monitoring the situation.

                                  HANFORD SITE

        Senator Murray. Okay. I appreciate that.
        I wanted to turn to a different topic for a minute and ask
    you, while you are here, about the budget for the cleanup of
    Hanford nuclear reservation. You may know that in the past
    month we have had over 1,200 workers at Hanford who have
    received their layoff notice, and some of those are
    attributable to seismic issues at the waste treatment plant.
    Others are attributable to the fact that funding shortfalls are
    expected in fiscal year 2006.
        This year the budget you sent over cuts funding for
    environmental management programs by $548 million nationwide.
    Hanford alone makes up $297 million, about 54 percent of that
    cut in funding. And we want to know why in my State you are
    proposing cuts that are falling so disproportionately on
    Hanford compared to other sites in the Nation?
        Mr. Bolten. Senator, let me come back to you with a more
    detailed response, but my recollection about that situation was
    that that was a judgment about how much could reasonably be
    spent in the coming year, that there has been, I believe, over
    the several recent years an acceleration in spending on the
    Hanford cleanup, and that the folks who have worked with the
    spending flow on this believe that this was a reasonable amount
    to be spending in this year and still keep us on track to
    getting the cleanup done on time.
        [The information follows:]

                                    Hanford

        The budget requests funding to meet the administration's
    commitments for cleanup at nuclear sites, recognizing that
    uncertainties can limit cleanup activities. The President's request for
    fiscal year 2006 for Hanford is $1.8 billion, a 20 percent increase
    above the fiscal year 2001 enacted level. At Hanford, there are legal
    uncertainties associated with tank closures brought on by Washington
    State Initiative 297 and related lawsuits, which have introduced
    uncertainties in the areas of waste importation, permitting, and waste
    retrieval and disposal activities. Additionally, since the State of
    Washington was not included in section 3116 of the Ronald W. Reagan
    National Defense Authorization Act for fiscal year 2005, which resolved
    radioactive waste classification issues in Idaho and South Carolina,
    the administration is evaluating how to proceed.
        The 2006 budget request takes into account these legal
    uncertainties. It also reflects completed work associated with the
    waste tanks, including removing liquids from the single-shell tanks.

        Senator Murray. Well, I do not understand how the Federal
    Government is going to meet its legal requirements under the
    Tri-Party Agreement with funding cuts of that size. I assume
    you are aware of the Tri-Party Agreement.
        Mr. Bolten. I am.
        Senator Murray. The DOE's contract for a waste treatment
    plant calls for Bechtel to receive $690 million each year, and
    that steady multi-year stream of $690 million per year was
    chosen to avoid a situation where there would be huge year-to-
    year swings in the funding that is required to complete the
    plant. But for fiscal year 2006, the administration wants to
    provide $64 million less than the contracted amount. So the
    President's budget really appears to be guaranteeing a delay in
    the start of the waste treatment plant, and that is in
    violation of the Tri-Party Agreement.
        Can you guarantee me that the administration will request
    funding above the $690 million level in future years so we
    avoid a delay of the waste treatment plant and keep its word
    with the Tri-Party Agreement?
        Mr. Bolten. I am not in a position to guarantee you what
    specific funding levels will be in any particular year, but I
    would like to come back to you and show you and your staff the
    spending stream that the Department of Energy has proposed to
    ensure that we do get the Hanford site cleaned up within the
    scheduled----
        Senator Murray. Okay. Well, I would very much like to meet
    with you and go through that because I do not see how on earth
    we are going to meet the legal requirements of the Tri-Party
    Agreement with these funding deficits. So I would appreciate
    that.
        Senator Bond. Thank you, Senator Murray.
        Now we turn to Senator Bennett. Since we have had a couple
    of rounds, if you would like to take two rounds, we will give
    you the opportunity to explore your areas of interest with the
    Director.
        Senator Bennett. Thank you very much, Mr. Chairman.
        Mr. Director, you know, but we acknowledge, you have one of
    the toughest jobs in Washington, and it is always easy to be a
    politician when there is a surplus because you can meet
    everybody's needs and be a hero. When you are fighting a
    deficit, it is always difficult, and to use the label of an old
    movie, you become Dr. No. That is a tough position to be in. I
    sympathize with you.
        You have been around town long enough to know that you are
    being set up when I make those kinds of kind comments in
    advance of where I am going.
        Mr. Bolten. Senator, you missed the earlier part of the
    hearing in which Senators Bond and Murray where kind enough to
    skip those comments.
        They moved directly to what follows.

                STRENGTHENING AMERICA'S COMMUNITIES INITIATIVES

        Senator Bennett. They moved directly to it. All right.
        I am chairman of the Agriculture Appropriations
    Subcommittee. The President's budget requests no funds at all
    for the Rural Business Opportunity grant program, Rural
    Business Enterprise grant program, Rural Empowerment Zones, and
    Enterprise Community grant program, all of which are
    administered by the Rural Development at USDA.
        The budget does propose a newer and smaller community
    development grant program to combine these programs with others
    to be administered by the Department of Commerce. I wonder what
    expertise the Department of Commerce has with respect to rural
    community development that causes you to take this out of USDA
    and put it in Commerce because the pressure, obviously, is on
    me to find those funds, to take care of it in agriculture. Have
    you proposed an increase in Commerce to make up for the fact
    that this money is all taken away from USDA, or am I getting
    into the weeds and something you are not personally familiar
    with?
        Mr. Bolten. No, sir. I am not intimately familiar with the
    individual programs, but overall we have proposed a
    consolidation of many programs, about 18 programs, spread
    across at different agencies, including the Agriculture
    Department, but primarily from HUD, into the Commerce
    Department. One of the reasons why we have chosen to implement
    a consolidation in the Commerce Department is that that is
    where there is, we believe, the best expertise on economic
    development overall, whether it be rural or urban, and also
    that it is an agency that is accustomed to promoting public/
    private partnerships, which we believe are part of the answer
    toward achieving economic development in areas that have lagged
    so far.
        Senator Bennett. All right. I suppose you are not the
    person for me to ask this, but before I can be comfortable in
    straight-arming everybody who has typically come to the
    Agriculture Subcommittee for this kind of support, I think I
    need to have some reassurance from the Department of Commerce
    that they do know what they are doing and they are not just
    going to cut this off willy-nilly and say, okay, you are out
    because we have consolidated and then we are going to take what
    money we have and it is less money overall and give it to the
    programs we are familiar with, and because rural America is the
    stepchild, we are just going to say you are out and injured.
        You are not the one to direct the Commerce Department to
    come talk to me, but I think I will use your answer as a reason
    to say to them, you ought to be talking to our subcommittee and
    telling us what you are going to be doing in these areas
    because cutting them out entirely from the President's budget,
    without the kind of explanation you have given us here, has
    caused great angst, as I am sure you can understand.
        Mr. Bolten. Senator, I think it is a legitimate question
    and I will take the opportunity to ask Secretary Gutierrez to
    be sure that you are fully briefed on how they would intend to
    deal with the situation, in which we acknowledge we are
    consolidating programs with less money available, but what we
    will be trying to do is target Federal monies where it is, (A),
    likely to be most effective and, (B), to areas of the most
    need.

                                  CDBG FUNDING

        Senator Bennett. That leads us to what I assume may have
    been raised before I got here. This is CDBG money with respect
    to HUD. Can you tell us in what way CDBG has been considered
    ineffective? I understand that word has been used to describe
    it. If I am covering ground that has already been covered----
        Senator Bond. We have asked the question and have not
    gotten any answers.
        Senator Bennett. There is no such thing as repetition in
    the Senate.
        So I would like to hear your rationale.
        Mr. Bolten. Senator, the question has not been asked in
    quite that way.
        I believe the formal rating of the CDBG program from our
    assessment system was ``results not demonstrated'' because what
    goes on with a lot of the CDBG money is that it goes out by
    formula to localities, and the Federal Government then has no
    particular way to track what happens to it and, most important,
    what sort of results are being achieved with the Federal money.
    It has become essentially a Federal revenue sharing program.
        What we are trying to do with the President's proposal of
    consolidating these various programs, including CDBG, into the
    Commerce Department is ensure that we focus our resources where
    we believe they can be most effective, where the Federal
    Government can track results, and insist on accountability for
    the use of the money rather than just sprinkling around funds
    to what, in many cases I am sure, are laudable goals but not
    necessarily the top Federal priority nor in a way that permits
    the Federal Government to tell the taxpayers how the money is
    being spent.
        Senator Bennett. Again, that sounds very logical, and once
    again, there is great angst on the part of people involved in
    the program--they are not only laudable, but in many cases
    absolutely essential, particularly in housing--that somehow the
    Commerce Department is not the place where they feel
    comfortable going with their concerns.
        I am perfectly willing to support something that says just
    because inertia has kept it one place, does not mean it needs
    to stay here. I know how damaging inertia can be. I tell people
    the problem with inertia is not inertia at rest, which is the
    accusation that is usually made about civil servants. It is
    inertia at motion, that a body in motion tends to stay in
    motion and in the same direction, long after the direction
    ceased to make sense. So I am very sympathetic with the general
    position you have just outlined.
        But that having been said, there are a lot of folks who are
    very, very concerned that the Commerce Department has no
    sympathy or no understanding or no expertise with which to deal
    with housing problems.
        I am as anxious to make sure that we get our financial
    house in order in a macro sense as anybody, but I see the
    specifics of the people who are living on the edge and
    literally from year to year in terms of their Section 8 funds,
    their affordable housing. It is frustrating that we cannot give
    them any sense of permanence. And these are not people who are
    living well by your standards or mine. They are living very
    much on the edge, and every year the Congress has to rescue the
    housing funds that tell them you can stay in your home for 1
    more year before this program is going to be challenged again
    and show up in the budget thing. And they show up in my office
    in Salt Lake with ``am I going to be able to keep my house? And
    if I cannot, I have no idea where I am going.'' These are
    people in their 70's and 80's who are hanging on, as I say,
    from month to month. Every year I say, well, I will talk to
    Chairman Bond, and every year Chairman Bond comes through. So I
    am a hero in Utah because of the work he does here.
        What reassurance can we give these people in this kind of
    situation that Commerce has the expertise, has the
    understanding, has the concern that these programs represent?
        Mr. Bolten. Well, first of all, I think the kinds of
    concerns you identified should be addressed through the housing
    programs that are specifically directed toward that. But beyond
    that----
        Senator Bennett. Yes, but they need the money and the money
    gets chopped off every year or cut back every year. And we have
    to restore it in this committee.
        Mr. Bolten. But I believe that is an issue separate from
    the CDBG issue where the money is going out to community
    development organizations. I will ask Secretary Gutierrez to
    address it with you when he speaks about the agriculture side,
    but I think Secretary Gutierrez can give good comfort about how
    they would handle the community development needs that are
    intended to be addressed by CDBG.
        Senator Bond. Thank you very much.
        Senator Bennett. Thank you, Mr. Chairman.
        Senator Bond. Senator Stevens.

                             ESSENTIAL AIR SERVICE

        Senator Stevens. Thank you very much.
        Mr. Director, it is nice to be with you today.
        I too have some problems, but each of them requires a
    little recitation of history. The first is Essential Air
    Service. When we decided that we were going to terminate the
    old Civil Aeronautics Board, which directed that every place
    that wanted air service would get it, and it got it at a
    substantial cost to the Federal Government indirectly, we
    created this program to assure that the small areas, which
    would lose air service because they were not economical, would
    have at least a minimum amount of service.
        In my State, as you know, 78 percent of the travel between
    cities is by air because there are no roads. Congress made a
    decision a long time ago not to build roads, particularly after
    about one-third of our State was withdrawn for wild and scenic
    rivers and parks and wildlife refuges, et cetera. It would be
    very difficult to get through them, and the roads would have to
    go around those things.
        This has been a very meaningful program in my State and, as
    a matter of fact, is the only lifeline for many people who live
    in the villages, of which we have 231 now. The difficulty is
    this. We also tied together the Postal Service delivery of mail
    to those places by creating the bypass mail system which
    requires that the postal cargo go to hubs and from those hubs,
    they fly out the mail to villages. We tie the two together so
    we have passenger seats and cargo going at least three times a
    week to these villages. That is their total lifeline.
        Some of them were supported for many years by riverboats or
    boats that went up and down the coast, which as you know, is
    half the coastline of the United States. There was one boat
    that went up one time and came back called the North Star.
        Now, it looks like it is an expensive program, but if you
    do away with it, the costs are going to be extremely higher. We
    still have the responsibility to deal with those places, and
    most of the travel through that area is somehow or other
    federally supported anyway through BIA, the Indian Health
    Service, and others. Unless you want to buy some airplanes and
    fly BIA around or fly the Indian Health Service around, the
    cheapest way to do it is through combining both the mail and
    cargo and passenger service. It cannot work unless you have the
    Essential Air Service contribution.
        Now, you have a proposal that requires matching funds and
    the assistance depends upon the distance to the nearest large
    or medium airport. Well, we are, as you know, one-fifth the
    size of the United States. Some of those villages are 500 miles
    from the nearest real airport and a couple of them even further
    than that.
        I would urge you to look at this. I understand your concept
    of having in some areas, where they have a capability of
    contributing local matching funds, that it might be possible.
    But in areas such as ours where the principal beneficiaries of
    these are the native villages, the application of your new
    principle will just increase Federal costs. You will be
    chartering airplanes if you do not buy them. I would urge you
    to take a look at that.
        Only about 35 of the communities actually benefit from the
    program but they are communities that are tied into the bypass
    mail system too. There is a joint subsidy to maintaining this
    traffic. And I will not ask for an answer to that because I
    just think you ought to take a look at it and study it.
        Mr. Bolten. We will take a look at that.

                                      EDA

        Senator Stevens. Now, next is the EDA. As the State that is
    coming into the 21st century after everybody else, we just came
    on board with EDA in recent years. It really does not even have
    an office in the State. It came to us from either San Francisco
    or Seattle, and those people came up at fishing time and they
    looked around and put a few bucks around the place, but they
    really did not plan how to bring these communities into the
    21st century.
        Some time ago, I negotiated with the Department and we
    agreed to an obligation that they would put $15 million in
    funding for development projects for Alaska over a period of
    years. This is the last year of that. But we got that deal
    because we showed them that we had been totally left out.
    Either we are going to have some economic development that
    helps these people come into the private sector and be
    contributors, or they are going to continue to be one of the
    faucets we have to turn on and off in terms of Federal
    assistance forever.
        Again, I urge you to take a look at the problem of
    elimination of the EDA in terms of our area. It is just unfair.
    Hawaii and Alaska became a State in 1959. A lot of the Federal
    officials did not even discover us until 1969, and that is when
    a brash, young lawyer came to the Senate.
        Senator Bond. They have been paying attention ever since.
        Senator Stevens. They have been paying a little bit of
    attention, but it took them 20 years to wake up.

                    RURAL COMMUNITY ADVANCED PROGRAM (RCAP)

        Thirdly, the elimination of the rural community advanced
    programs, the RCAP, within the agriculture bill. Here again, we
    have two monstrous areas that are capable of agriculture
    production. We finally have one agriculture county station in
    Alaska. We have one and they get limited assistance. But we
    have been using the rural community development grants and some
    of these others to reach out to the villages and provide them
    with basic sanitation, basic clean water, and basic concepts of
    maintaining health. The result: we have reduced the cost to the
    Indian Health Service. We have increased the performance of
    these children in school. And now, along comes the concept that
    this is going to be done away with.
        There is one in particular, the high cost energy grant. We
    have places that are paying $5 a gallon for fuel. They are
    paying 28 cents probably in the rest of the States. We have
    been trying to construct local power plants using local fuels
    to try and see if they can get away from buying and having fuel
    transported. All that is transported in there is at government
    expense. So again, by eliminating this program, we are
    eliminating the inching that we are doing, inching away from
    total Federal dependency on their lives.
        I would like for you to sit down and talk to some of your
    people sometime.
        By the way, most people do not know it, but some of the
    outer islands of Hawaii have problems very similar to ours.
    That is why the four of us are with each other all the time
    because we have similar problems. Actually Hawaii is larger
    than Alaska, if you fill in the water in between the islands.
    You know what I mean?
        They have problems out there in the periphery that are as
    bad as ours along the coasts and in the interior and up along
    the Arctic coast.
        Those two offshore States need this program. We need a way
    to try to find a way to discuss it with your people because,
    not meaning to be offensive, but your recommendations are one-
    size-fits-all.
        Senator Bond. Mr. Director, I would suggest that this is an
    opportunity for you to schedule a meeting with Senator Stevens,
    Senator Murkowski, Senator Inouye, Senator Akaka. I think it
    would be a very informative session for you. I wish I could be
    a fly on the wall to watch, but I would urge you to have that.
        Senator Kohl.
        Senator Stevens. Just so you know, Josh is a close friend,
    as a matter of fact, and I hesitate to make these suggestions
    to him in public. I probably could have made them in private,
    but I want them on the record anyway, Josh.
        Senator Bond. As they say in the business, harsh letter to
    follow.
        Mr. Bolten. I always look forward to an opportunity to
    engage with Chairman Stevens.
        Senator Bond. Director Bolten is a good friend. You ought
    to see how we treat our enemies.
        Senator Kohl.

                   MANUFACTURING EXTENSION PARTNERSHIP (MEP)

        Senator Kohl. Thank you, Mr. Chairman. Mr. Bolten, over the
    past several years, the administration has attempted to slash
    funding for the Manufacturing Extension Partnership program,
    which is a program that helps small and mid-sized American
    manufacturers to modernize in order to compete in the global
    marketplace. MEP has a proven track record I think that you are
    aware of. They have consistently demonstrated their ability to
    create jobs and improve profits of these companies. I have
    visited many of them around my own State, but there are
    indications that are very clear that they replicate this kind
    of success all over the country. I do not understand why that
    program, which has been so successful, is really a program
    that, for the most part, the administration has indicated they
    want to terminate.
        The funding for the program has been just at over $100
    million over the last several years. It is also funded at the
    State and local levels. It is also paid for, in small part, by
    those companies that use it. So it is a good program and it is
    not a really expensive Federal program, but it does have good
    dividend returns.
        Maybe you could make a comment on it. We are still trying,
    as you know, in this budget this year to restore the funding.
    It was cut down to something like $39 million or $38 million,
    which spread across 50 States really is not sufficient. We want
    to get that restored to where it was, $112 million. Can we hope
    that you will support this effort, which is relatively modest,
    but I think it is significant in terms of protecting
    manufacturing jobs in this country and growing that part of our
    economy?
        Mr. Bolten. Senator, the MEP program is one that I have had
    a number of very strong anecdotal reports about, about success
    stories there. In many respects, it is the kind of program in
    an unconstrained budget environment you might like to continue.
    But the program was originally intended, as it was originally
    set up, ultimately to be self-sustaining through fees paid by
    those that take advantage of its services. The administration
    would still like to move it to that basis.
        It was funded this past year, I believe, at just over $100
    million. The year before that, the Congress funded at about $40
    million, which is the request that the administration is making
    this year. We are not proposing total termination this year. We
    have proposed a substantially reduced funding level in part
    because of the many strains that you have seen exhibited even
    here at just this one hearing, the many strains in the budget,
    where we need to set priorities and allocate our Federal
    dollars, our taxpayer dollars, where we think they can make the
    most good and where they are the most needed.
        The MEP program has good anecdotes, produces some good
    results, but I think it is also a program that can meet the
    needs of its constituency hopefully ultimately on a self-
    sustaining basis, which is why we have proposed that for this
    year, it be cut back to the level that it was funded at year-
    before-last.
        Senator Kohl. Well, ultimately it is a judgment and you all
    submit a budget that represents your best judgments, and I do
    respect that. As you know, you can be right and you can be
    wrong. I have given a lot of attention to the program, and I am
    utterly convinced as a businessman that it really returns
    dividends for the money that is spent, and that the money that
    we are spending at the Federal level is relatively modest. To
    signal that the government is going to get out of that business
    and either it will be self-sustaining or funded at the State
    and local level or it will go out, which is what that judgment
    means, I do not think is the correct decision to be making. I
    wish I could convince you that the program really deserves to
    be supported at its modest levels and not jettisoned. I will
    just continue to work on that and I hope that we can have some
    success.
        The anecdotal evidence that you point to is really more
    than anecdotal. There is solid evidence that the program is
    effective and works. Solid evidence. It is not just anecdotal.
    So in that light and considering the fact that we are working
    so hard to maintain our job base in that part of our economy, I
    guess I do not fully understand why you all decide that you
    want to basically get to a termination of Federal support for
    that program, except that you are saying--and I have heard this
    from others who have preceded you in defending your decision--
    that is just our decision. You say we have heard evidence that
    it works. We have heard evidence that it is a good program.
    Nevertheless, we want to get to the point where we defund it.
    And it is the manufacturing sector. I do not quite understand.
        Mr. Bolten. Well, Senator, it is really a question of
    priorities, that we believe that this program can be self-
    sustaining, that it does get resources from States and
    localities, that our Federal dollars are better spent on other
    priorities.
        One of the priorities of this administration is, indeed, to
    make sure that our manufacturing sector, especially those
    involved in exports, remains strong. Secretary Gutierrez I know
    is devoting a lot of time and energy to that, and he has a new
    Assistant Secretary who focuses on those issues.
        One of the important initiatives that we are undertaking
    right now at OMB is we have taken in a review of regulations
    that are regarded by the manufacturing community as impeding
    their competitiveness, especially internationally, and we are
    reviewing those for ways in which we can, without undermining
    other health and safety objectives and environmental
    objectives, free up our manufacturing community to be more
    effective and competitive. We hope to get your support in that
    undertaking as well.
        Senator Kohl. I thank you, and Mr. Chairman, I thank you.

                                  PART PROGRAM

        Senator Bond. Thank you very much, Senator Kohl.
        Mr. Bolten, I commend you for your emphasis on the PART
    program. I think it is very important that you determine what
    programs are effective. I note that the National Science
    Foundation, which I said earlier is extremely important in our
    ability to lead the world in science and technology, has the
    future of the U.S. job market and economy in its
    responsibility. We are seeing India, China, and Japan quickly
    outpacing the United States with developing scientists and
    engineers and the skills that go along with them. And the
    Program Assessment Rating Tool, the PART, has found NSF to have
    one of the strongest report cards. Parenthetically I would note
    that OMB has one of the weakest report cards.
        Could you explain to me why you have chosen, when you are
    supposedly establishing priorities, not to put any priority on
    this institution which holds the future growth and development
    of our country in its grasp?
        Mr. Bolten. Mr. Chairman, let me begin by associating
    myself with the remarks that you made in your opening statement
    about the importance of the physical sciences to our economy,
    to the future competitiveness of our economy. What we did in
    this budget was we did increase NSF funding by 2.4 percent
    overall.
        Senator Bond. Whoopee.
        Mr. Bolten. I note, Mr. Chairman, that you said whoopee to
    that.
        Senator Bond. We will strike that from the record.
        Mr. Bolten. I would like to request that it remain in the
    record, because in the current budget context, whoopee for 2.4
    percent is actually appropriate. We are in a budget context
    where we are cutting the non-security elements by a real 1
    percent, a nominal 1 percent, a real cut larger than that, when
    you factor in inflation. So when we are growing an agency by a
    substantial part of the budget by 2.4 percent, I think in this
    context that is an expression of support.
        In an unconstrained budgetary environment, would we like to
    see more money going into those programs that PART so well as
    NSF does? I personally would. I appreciate your comments about
    the PART system and how we are trying to use it to inform
    budgetary decisions so that we focus our dollars on programs
    that are working. NSF appears to be working. And I would like
    to see us in a situation where we are able to give them the
    resources they need going forward.

                               FEDERAL IT PROGRAM

        Senator Bond. I am from the Show Me State, Mr. Director,
    and I would like to see that in the budget recommendations and
    not just in our discussions.
        I mentioned the Federal IT programs. I am sorry we are
    missing the OMB hearing in the Committee on Government Reform
    on the House side on whether OMB is properly managing the $65
    billion in IT spending. The committee says OMB did not develop
    a single aggregate list identifying projects and the weakness.
    OMB has not developed a structured, consistent process for
    deciding how to follow up on corrective actions that it has
    asked agencies to take. And the GAO is going to be giving a
    report.
        Can you give us a brief idea of what you expect to do in
    this IT area? It is a significant challenge. What do you intend
    to do on it?
        Mr. Bolten. Thank you, Mr. Chairman. I have not had a
    chance to review, I think it is, a GAO report that is being
    discussed over on the House side. I will review it and we will
    take its recommendations seriously and factor them into our
    process going forward.
        I will say that this administration has put a great deal of
    focus on the management of IT, which is a huge part of our
    budget, as you mentioned in your remarks, and one that has been
    seriously challenged for many years. It is not a problem that
    can be fixed overnight.
        But the President felt that it was an important enough part
    of good management of the government that he made it one of the
    five areas that we rate in our President's Management Agenda.
    We use those scorecards now, the ones that you referenced in
    your previous question. We use those scorecards to keep track
    of how agencies are doing and we try very hard to instill in
    the agencies both an appreciation of the importance of good
    management of IT, which to most managers seems like a very
    technical thing that somebody else ought to take care of, No.
    1, and No. 2, that they need to do that with a focus on results
    so that we do not have fiascoes like we have had at several
    agencies.
        Senator Bond. We will look forward to working with you on
    that.
        I was going to ask you a question on highway funding. I
    think $284 billion is not adequate for our highway needs, but I
    can assure you that we are looking forward to giving you a
    highway bill that does not increase the deficit but maybe does
    a little better job in meeting our basic infrastructure needs.
        I would ask my last question. We are drastically cutting
    many programs that are important to the quality of life of
    Americans to our economic future on the discretionary side. We
    are seeing mandatory spending going up $107 billion in 2006. I
    would ask you the rhetorical question, are you going to do
    something about limiting the explosive costs of mandatory
    spending, and when can we see some real results?
        Mr. Bolten. Absolutely, Mr. Chairman, and the mandatory
    problem is one that dwarfs the challenges we face in our
    discretionary budget. It has three major components in
    entitlement spending: Social Security, Medicare, and Medicaid.
    On the last, the President has put forward proposals included
    in his budget and now, I know, being debated in the context of
    the budget resolution, to begin to get control of some of the
    explosive cost growth in the Medicaid program. We have put
    forward, I think, some very responsible proposals that just
    begin to ensure that we are spending our dollars there
    responsibly. There has been a great outcry about the supposed
    cuts the administration has proposed in Medicaid. What is
    actually going on is that instead of the current trajectory on
    auto pilot of Medicaid spending increasing out over the next 10
    years at 7.4 percent growth, the administration is proposing
    that that growth be reduced to 7.2 percent. Obviously, there is
    a lot more that needs to be done.
        Medicare, which is the biggest part of the problem, is an
    issue with a wide variety of elements that contribute to the
    problem. The biggest one is overall health care costs. I know
    the time is expired, so I will not go into any detail on
    initiatives to control health care costs. But that is crucial.
    At some point I believe we will also need to take another look
    at the Medicare system, which you have just legislated on, to
    ensure that we are getting the taxpayers value.
        The third element is Social Security. The President, as you
    know, has an initiative----
        Senator Bond. I know the President has made a
    recommendation. I look forward to supporting plans there, and I
    hope you will do something. When we thought we were getting a
    $400 billion Medicare increase, that was wrong by almost
    double. That is really disappointing.
        That is my final question. I will turn to Senator Murray
    for such questions as she may wish to ask.
        Senator Murray. I have a couple other areas, Mr. Chairman,
    so I appreciate that. One of them is regarding air passengers.
        In the Homeland Security budget, the administration
    proposed to increase the security fee paid by passengers by 120
    percent next year from $2.50 to $5.50 per segment. As you
    probably are well aware, the airlines are complaining bitterly,
    and I think correctly, that this is a $1.5 billion tax increase
    which further undermines their ability to recover economically.
        In Secretary Mineta's formal testimony before us, he
    justified a half billion dollar cut in airport investments by
    arguing that several airports are not yet charging the full
    allowable passenger facility charge that they are allowed under
    law. Secretary Mineta's testimony implied that the proper way
    to invest in airports is through another $350 million in fees
    instead of from appropriations from the Airport and Airway
    Trust Fund.
        So in addition to all these other problems, as you well
    know, the price of oil between $50 and $60 a barrel is not
    helping either.
        I am curious whether the administration has any sympathy
    for the airlines, first of all, and the challenges that they
    are facing with this, and really why, if you understood that
    you were giving us a double whammy with two proposals, one to
    increase the airport facility fees by $350 million and also
    requiring $1.5 billion in higher fees at the same time.
        Mr. Bolten. Senator, we recognize that the airline industry
    is challenged, as is the rail industry, as are our highways, as
    are virtually all modes of transportation especially by high
    oil prices. But we also know that we have a responsibility to
    be prudent with the taxpayers' dollar.
        Now, the increase in the fees that you referenced, I think
    it is, from about $3 per segment up to about $5 a segment is
    what we are talking about, an authorized increase in the fee
    that goes on an airline ticket. What we are trying to do is
    bring us closer to making it possible for those fees to fully
    fund the cost of the airport screening that has now been
    implemented since 9/11.
        The Federal Government has to pay those costs, or the
    taxpayer has to pay those costs. The question is who is going
    to bear it. We have two choices. We can try to impose that cost
    on those who are using the airline services or we can impose
    them on the general taxpayer. I believe that given that choice,
    the former answer is almost always the right answer, that you
    want those who are taking advantage of a service to bear the
    cost.
        Senator Murray. Well, it is except if you will recall, when
    the airlines went down after September 11, the economic impact
    was devastating. We certainly felt it in my end of the world.
    So I think we have to be very careful what kind of economic
    impact we put on the airlines.
        Mr. Bolten. That is understood.
        Senator Murray. I wanted to bring up another topic with you
    that I am deeply concerned about. I have served on this
    Appropriations Committee for 13 years, and throughout that time
    I have had the pleasure of working on a bipartisan basis with
    several different chairmen, including Senator Shelby and
    Senator Bond. I believe that despite my policy differences with
    the administration, I have always been very careful to leave my
    door open to any member of the administration to talk about
    policies of importance to my State or to the country. I have
    worked closely with the Bush administration on trade and
    commerce issues and port security, and those are all important
    to me.
        I say that because I have been really disappointed to learn
    over the past few weeks that the Executive Office of the
    President has been promoting a funding proposal that they want
    included in the pending supplemental that is before us right
    now. But as far as I can tell, this proposal has only been
    floated to majority members of the subcommittee and the
    majority staff. I wanted to ask you if you believe that the
    Executive Office of the President has the responsibility to
    come to Congress and justify its budget like every other agency
    in the Government.
        Mr. Bolten. I believe we do, yes.

                       EXOP/OFFICE OF POLICY DEVELOPMENT

        Senator Murray. Well, I do too and I believe that partisan
    differences should never enter into the considerations of this
    subcommittee when it comes to the financial needs of the
    Executive Office.
        So I want to know if you can tell me why the administration
    is floating a proposal to eliminate the Office of Policy
    Development in the White House and merge it with the larger
    White House salaries and expenses account, and really more
    importantly, why has this proposal not been formally
    transmitted as a budget amendment through OMB.
        Mr. Bolten. Senator, I cannot tell you why it has exactly
    been approached this way. I know we would be happy to engage
    with you on the proposal, and I am happy to discuss it with
    you. Probably this hearing is not----
        Senator Murray. Can you just tell us why none of the
    minority staff on the Appropriations Committee has been talked
    to about this?
        Mr. Bolten. I do not know who has been contacted and who
    has not been contacted.
        Senator Murray. I can tell you that none of them have. We
    just know about it.
        Mr. Bolten. Well, as I say, we would be happy to engage
    with you on the issue. It is something with which I have a
    little bit of familiarity and I know it would be an important
    and very useful piece of flexibility for the management of the
    White House in a situation where in the last 2005 budget the
    Office of Policy Development was drastically cut. I think that
    to enable the chief of staff in the White House to properly
    manage the White House resources--I think what they are
    suggesting is simply an ability to merge some of the accounts
    to make it easier to deal with that kind of situation.
        Senator Murray. I think you may remember that during the
    Transportation/Treasury conference last year we adopted
    reprogramming guidelines for the Executive Office of the
    President which were most generous and most flexible. It is
    just disconcerting that this proposal is being floated on a
    plain white piece of paper to Republican members only. I just
    would suggest to you that you work with all of us on this
    committee and we would appreciate that consideration.
        Mr. Bolten. We would be happy to engage with you, Senator,
    and I will make sure that does happen.
        Senator Murray. I know my time is up and I know the
    chairman is ready to go.

                     BONNEVILLE POWER ADMINISTRATION (BPA)

        I would just say I do have a question on Bonneville Power
    Administration. I think it is a topic you and I have gone
    through a number of times. We are very concerned about the
    President's proposals for power marketing administrations to go
    to market-based rates. Congress has spoken on that. I think you
    know that that is not going to fly on this end of the road.
        But the other one is the proposal in the budget that would
    limit BPA's use of third party financing. I am not sure if you
    are closely familiar with it, but it is by accounting financing
    arrangements against BPA's borrowing authority limits. I wanted
    to ask you if you think BPA's investments and using third party
    financing are liabilities of the U.S. Treasury or they are
    liabilities of the Northwest ratepayers.
        Mr. Bolten. Senator, if I may, I would like to respond on
    this issue in general to you for the record, with the
    chairman's permission.
        [The information follows:]

                     Bonneville Power Administration (BPA)

        BPA currently pays its obligations using power revenues from its
    ratepayers. Therefore, its liabilities accrue immediately to its
    ratepayers. Given that BPA is a wholly-Federal entity within the
    Department of Energy, the administration is committed to ensuring that
    BPA has the resources necessary to honor its liabilities.
        The legislation the administration transmitted on June 1, 2005 to
    count BPA and TVA debt-like transactions against their debt caps is
    intended to accurately reflect these agencies' liabilities for the
    benefit of their ratepayers and other stakeholders, including
    taxpayers. Third party financing in which the non-Federal partner bears
    substantial risk would not be counted toward their debt caps, and this
    is the kind of partnering the administration has urged these agencies
    to explore. In addition, the Budget proposes to increase BPA's debt cap
    by $200 million, which exceeds the amount of third-party financing BPA
    informed us it would like to pursue over the next 5 years, so our
    proposal should not have any programmatic effect on BPA's operations.

                         ADDITIONAL COMMITTEE QUESTIONS

        Senator Bond. Okay. I really appreciate that because it has
    extreme consequences, and we have entered into a number of
    agreements believing that it is Northwest ratepayers, and if
    there is a difference of opinion, we need to know that.
        Senator Murray. Thank you, Mr. Chairman. I appreciate it.
        Senator Bond. Thank you very much, Senator Murray.
        [The following questions were not asked at the hearing, but
    were submitted to the Office for response subsequent to the
    hearing:]

                  Questions Submitted by Senator Patty Murray

             IMPACT OF HUD'S UNALLOCATED RESCISSION OF $2.5 BILLION

        Question. Mr. Bolten, last week, our subcommittee held a hearing
    with HUD Secretary Alphonso Jackson. Your administration has singled
    out the Department of Housing and Urban Development for the largest
    cuts of any major Federal agency. I find this to be particularly tragic
    given the agency's mission to house the poor and seek to redevelop the
    Nation's most troubled communities.
        Your budget for HUD seeks authority to rescind $2.5 billion in
    unobligated balances from any program within HUD. In response to my
    questions, Secretary Jackson could not commit to me that this
    rescission would not come at the expense of existing levels of funding
    to house the poor. He could not even guarantee that this funding cut
    would not come at the expense of programs serving the homeless. It was
    clear that this proposal to impose a $2.5 billion rescission against
    the agency was not something that was concocted at HUD.
        Mr. Bolten, since this proposal appears to have been developed and
    supported at your agency, can you guarantee me that if we adopt your
    proposal to rescind $2.5 billion from any program at HUD, that these
    funds will not work a hardship on any of the low-income communities
    that are served by HUD? Can you provide me with a guarantee that this
    rescission will not end up coming at the expense of programs serving
    the disabled, or the homeless, or people living with HIV/AIDS?
        Secretary Jackson told us that he would be trying to develop a list
    as to where this $2.5 billion would come from over the course of the
    next several weeks. Can you guarantee us that we are going to get this
    list prior to the time that this subcommittee marks up?
        Answer. While the estimate of excess funds available for rescission
    may change, there is every reason to believe, based on past experience
    that a large recovery will occur. Each year, since 1998, large amounts
    have been available for rescission from the Section 8 account--an
    average of $2 billion in rescissions per year. These funds proposed for
    rescission in the fiscal year 2006 budget represent recoveries of
    amounts in the Section 8 programs or other HUD programs previously
    appropriated and obligated that are in excess of current needs.
        The President's 2006 Budget does allow the Department to look to
    other sources of funds within the Department should there be
    insufficient funds within this account. However, this would not affect
    new funds in any program account. The funds proposed for rescission
    will not be needed to meet current obligations.
        In 2003, for example, Congress enacted a rescission of $1.6 billion
    which was satisfied with $1.174 billion in unobligated balances in the
    Section 8 account and $426 million in unobligated balances from other
    accounts including the Flexible Subsidy account ($306 million) and
    small amounts from seven other accounts, with no programmatic effects.
        As is the case each year, HUD may have a general idea ahead of
    time, but will not determine which funds from which accounts will be
    used to satisfy the rescission until June or July of 2006. While the
    estimate of excess funds available for rescission may change, based on
    past experience sufficient funds will be available within the Section 8
    programs.

                      PART--PROGRAM ASSESSMENT RATING TOOL

        Question. Mr. Bolten, I understand that your Program Assessment
    Rating Tool--or ``PART'' is the administration's tool to rate the
    effectiveness of Federal programs and help inform your budget
    decisions. As I review the President's Budget, it appears that several
    programs are slated for funding cuts despite receiving a positive PART
    rating. For example, the airport grant program and the Fair Housing
    Assistance Program are rated ``moderately effective'', yet their
    budgets are cut. The Education Department's college prep program--
    ``GEAR-UP''--is rated as ``adequate.'' Yet your budget is proposing
    that all funding for that program be eliminated.
        It appears that, for all the effort and expense that the agencies
    and OMB are going through to execute the PART process, it is not
    informing your budget decisions. Why not?
        Why would an agency have an incentive to improve a program and
    achieve a better PART score if OMB is just going to turn around and cut
    or eliminate the program anyway?
        Answer. As the administration prepared its list of proposed major
    reforms and budget savings, we were guided by three major criteria:
      --Does the program meet the Nation's priorities? The budget increases
            funding to strengthen our Armed Forces, improve our homeland
            defenses, promote economic opportunity, and foster compassion.
      --Does the program meet the President's principles for appropriate
            use of taxpayer resources? If an appropriate Federal role could
            not be identified in a program's mission, the budget generally
            proposes to reduce or eliminate its funding.
      --Does the program produce the intended results? The Bush
            Administration is measuring the effectiveness of the
            government's programs--and the results are helping us make
            budgeting decisions.
        Just as a low PART rating does not automatically result in a
    funding decrease, a high PART rating does not automatically result in a
    funding increase. A PART assessment is an important factor, but not the
    only factor, in funding decisions. For example, while the GEAR UP
    program was rated ``adequate,'' it is among a number of narrow-purpose
    programs proposed for consolidation into the High School Intervention
    program. Activities supported by the GEAR UP program would be allowable
    under the new program if they can lead to improved student achievement.
        The administration wants all Federal programs to work better.
    Because agencies are committed to improving their programs, they have
    defined specific steps that address PART findings for all programs,
    even highly rated ones or those proposed for termination.

                NEW PRIVACY AND CIVIL LIBERTIES OVERSIGHT BOARD

        Question. As the Nation goes to new and greater lengths to fight
    terrorism, there is a simultaneous and growing concern over the
    protection of the civil liberties of our citizens. The Intelligence
    Bill that the President signed into law in December sought to address
    this issue by creating a Board that would be responsible for ensuring
    that privacy and civil liberty concerns are appropriately considered in
    all Executive Branch policies and practices across the entire Federal
    Government. My subcommittee colleague, Senator Durbin, was instrumental
    in authorizing the provision in law that requires the establishment of
    the new Privacy and Civil Liberties Oversight Board. That Board is to
    be composed of five members and staff to support it. Yet, the Executive
    Office of the President is only requesting $750,000 to support two FTEs
    for the new Board.
        How effective can this Board be with only two FTEs?
        How did you decide, with a Federal workforce of 4.1 million
    military and civilian Federal employees, that the protection of civil
    liberties only requires two employees?
        What are your long-term staffing plans for the Board?
        The legislation that created this Board is the same legislation
    that created the National Director of Intelligence, and his nomination
    is currently pending in the Senate. Where are the nominees for this
    Board? When should we expect to see nominations submitted to the
    Senate?
        Answer. The President is committed to protecting the legal rights
    of all Americans, including freedoms, civil liberties, and information
    privacy guaranteed by Federal law, in the effective performance of
    national security and homeland security functions. In his Executive
    Order of August 27, 2004, the President created a Presidential board of
    senior agency officials to advance this commitment and to advise him on
    new and ongoing efforts to safeguard these legal rights. The Privacy
    and Civil Liberties Board subsequently established by the Intelligence
    Reform and Terrorism Prevention Act of 2004 (Act) will build on this
    important effort.
        The administration's proposal for funding the Privacy and Civil
    Liberties Board established by the Act envisions a Board whose members
    carry out their functions for the government on a part-time basis, with
    a full-time Executive Director. In addition, the Act authorizes the use
    of agency detailees on a non-reimbursable basis. A Board composed of
    part-time members was envisioned by the Act--which authorized the Chair
    of the Board to serve on either a full-or part-time basis, but
    specified that remaining Board members would serve part-time. Thus,
    with part-time members, the equivalent number of FTEs for the board is
    two.
        This arrangement will help ensure that the Board is staffed with
    people with the right type of expertise because it permits members to
    be appointed who will not have to leave their jobs in order to carry
    out this important function. In addition, if the administration draws
    on the staff of various agencies, the Board's activities would be
    augmented without adding to the cost of its function, promoting
    efficiencies within a tight budget climate. Agency staff would carry
    out the day-to-day activities and research for the Board, while leaving
    the results of that research, and advising and counseling on
    development and implementation of policy, to Board members.
        Finally, the funding level in the administration's proposal is very
    similar to that provided historically for the President's Foreign
    Intelligence Advisory Board, which operates with a modest budget and
    whose members serve without compensation.
        The administration believes that this arrangement will be most
    beneficial to the Federal Government--drawing on the right type of
    expertise, and promoting efficient use of existing government
    resources. Once the Board is up and running, its progress and
    performance will be examined to determine whether this model continues
    to be appropriate.
        On June 10, 2005, the President announced his intent to nominate
    Carol E. Dinkins to be the Chairman of the Board, and Alan Charles Raul
    to be the Vice Chairman. Additionally, the President appointed Lanny J.
    Davis, Theodore B. Olson and Francis X. Taylor as members of the Board.

                            A RECORD NUMBER OF FEES?

        Question. Your budget this year includes a very large number of new
    user fees. It can be argued that, with the exception of National
    Defense, there are designated ``users'' for just about every government
    service. For example, the government could require that the cost of
    wheat subsidies only be paid by people that buy bread and cereal. The
    government could require that only small businesses pay the costs of
    the Small Business Administration.
        How does this administration decide which services should be paid
    for through general revenues versus user fees? Does the administration
    concede that there is any limit to the number of new user fees you
    should propose?
        Many have criticized the administration's user fee proposals as
    just more taxes.
        Would you agree that there should be some relationship between the
    fees that are charged and actual cost of providing the government
    service?
        I am concerned about one area new user fees; namely, the fees you
    want to impose on small wineries in Washington State. In one small
    agency alone in this bill--the Alcohol, Tobacco Tax and Trade Bureau--
    five new or increased fees are being proposed equaling 31 percent of
    the TTB fiscal year 2006 budget request. I am told that there is no
    relationship between the actual services the wineries receive from TTB
    and the fees you now want to impose.
        How did you decide that an industry that already pays nearly $550
    million in Federal excise taxes needs to pay new fees?
        Why is there no correlation between the fees you want to propose
    and the services these wineries receive?
        Answer. In general, the administration uses Circular A-25 on User
    Charges, to develop its user fee proposals. Circular A-25 provides as a
    general policy that user charges should be designed to recover the full
    cost of Federal activities that provide special benefits beyond those
    received by the general public. Under current law, the Federal
    Government already recovers the full cost for the activities of
    agencies such as the Federal Energy Regulatory Commission, the
    Securities Exchange Commission, and the Patent and Trademark Office.
        In the case of the Alcohol and Tobacco Tax and Trade Bureau (TTB),
    the proposed user fees reflect the agency's best current estimates of
    the charges necessary to transfer full costs to the direct
    beneficiaries of the agency's services and to limit use of those
    services when not required. The services provided by TTB ultimately
    protect the public against misleading labels, adulterated alcohol,
    protect against dishonest persons entering the alcohol business, and
    promote fair competition among industry members. TTB's regulatory
    efforts provide value to the industry and the industry should pay for
    the benefits it receives from these efforts.
        For small wineries, at least four of the following five user fees
    would apply depending on the activity:
      --New Permit Applications.--$500 minimum fee. Applies to all
            wineries, as well as other businesses. TTB must review and
            investigate the qualifications of the applicant, including the
            applicant's criminal background and whether he or she is likely
            to operate in conformity with Federal law.
      --Certificates of Label Approval/Certificates of Exemption.--$100
            minimum fee for paper filing, $50 minimum fee for electronic
            filing. Applies to all alcohol beverage products. A key feature
            of the user fee proposal is to encourage businesses to file
            their applications electronically.
      --Formula Review with No Laboratory Analysis.--$200 minimum fee.
            Wineries must submit formulas only if product evaluation is
            required by regulation (e.g., for flavored wine). Formula
            review is necessary to ensure the proper labeling
            classification of products.
      --Formula Review with Laboratory Analysis.--$600 minimum fee. If a
            winery wants a label approved without the sulfite declaration,
            a lab analysis and report is required, which would be covered
            by the proposed user fee. However, the lab analysis need not be
            conducted by the TTB lab.
      --American Viticultural Area Petitions.--$3,000 minimum fee. This fee
            applies only on petitions that wineries choose to submit for
            recognition of new viticultural areas, and covers the cost of
            reviewing the petition and submitting it for formal rulemaking.
                 competitive sourcing--disabled and health care
        Question. In 2001, President Bush announced his New Freedom
    Initiative, which involves ``tearing down the remaining barriers to
    equality'' that face Americans with disabilities. At the time, he noted
    that the unemployment rate for Americans with disabilities is about 70
    percent. The President says he cares about the disabled, but the
    disabled can lose their Federal jobs if those jobs are subjected to
    competitive sourcing.
        In February of this year, OMB reportedly prepared draft guidance
    for the 2005 competitive sourcing inventories. This draft guidance was
    never released. It advised agencies that, as part of the competitive
    sourcing process, they could ``set aside FTEs for the employment of
    physically- and/or mentally-challenged individuals.''
        Why wasn't this memo finalized and sent out to all Federal
    agencies? Is it possible that certain disabled individuals have already
    lost their Federal job as a result of OMB's failure to disseminate this
    guidance?
        The administration has stated numerous times that they are
    concerned about the number of Americans that are without health
    insurance. Yet, your competitive sourcing rules penalize Federal
    employees that want to compete to keep their jobs because they have a
    responsible employer that provides health insurance. The cost of their
    Federal health insurance often works to their disadvantage when they
    compete against private vendors that do not offer it.
        Is this policy consistent with the administration's stated concern
    for the uninsured? Why aren't you requiring all contractors to provide
    insurance commensurate with the Federal benefits? Why aren't you at
    least requiring all contractors to provide some minimal level of health
    insurance?
        Currently, the DOD Appropriations Bill requires you to ignore the
    added costs of Federal health insurance when conducting a competition
    between private vendors and Federal employees that are trying to keep
    their jobs at DOD.
        Do you believe it makes sense to have this policy only for
    competitions within the Defense Department but not the other Federal
    agencies? Why?
        Answer. On May 23, 2005, OMB issued government-wide guidance to
    help agencies prepare their inventories of commercial inventories (see
    OMB Memorandum M-05-12, available on www.omb.gov). The guidance
    includes an example of the rationale an agency could use to justify
    exempting positions held by individuals with disabilities from
    competition. The example explains that an agency may set aside
    positions for the larger governmental purpose of providing gainful
    employment for those individuals who, as a result of their disability,
    have limited employment options in the private sector. The guidance,
    which addresses a wide range of issues to improve the accuracy and
    overall quality of inventories, was subject to a lengthy agency review
    and comment process. The sample rationale described in the final
    guidance reflects a best practice that is already being used by
    agencies to exempt individuals with disabilities from competition--
    i.e., the guidance neither creates a new requirement nor allows for an
    exclusion that had formerly been prohibited.
        We do not believe that Federal employees are disadvantaged in
    public-private competitions. Just as we would not penalize a private
    entity specifically if they offered better health benefits to their
    employees than the Federal entity, neither do we penalize Federal
    agencies that offer health benefits that a private competitor does not
    offer. In fact, Federal employees are generally given a 10 percent
    price advantage over their private sector counterparts. For work to be
    converted from public to private sector performance, a contractor must
    propose to perform at a cost which is at least 10 percent lower than
    that proposed by the in-house offeror. Federal employees have performed
    well in public-private competitions. They have been selected as the
    best value provider to perform work representing approximately 90
    percent of the positions competed in fiscal years 2003 and 2004 and,
    thanks to competition, they have developed more efficient and cost-
    effective methods to serve our taxpayers.
        The administration believes that Section 8014 of the fiscal year
    2005 Defense Appropriations Act unnecessarily subjects private sector
    bidders to intrusive data requirements concerning the provision of
    health benefits to their employees. While well intentioned, this
    provision ultimately undermines the efficiencies in private health
    plans and provides another disincentive for the private sector to
    participate in DOD's competitions. Further, by discouraging private
    sector interest in competitive sourcing, this provision places at risk
    significant savings--estimated to be $6 billion from fiscal year 2001
    to 2006--generated by the Competitive Sourcing initiative of the
    President's Management Agenda. Small business participation in
    competitions will be severely undermined since this provision makes it
    particularly burdensome to assemble competitive offers.

                              COMPETITIVE SOURCING

        Question. Director Bolten, in your answers to post-confirmation
    hearing questions, you told the Congress, ``If confirmed, I will ask
    the Administrator for Federal Procurement to recommend ways to improve
    opportunities for federal employees to compete for new work and for
    work currently performed by contractors.'' Please provide the committee
    with a list of those recommendations and please identify specific
    instances in specific agencies in which Federal employees have been
    allowed to compete for new work and contractor work.
        Please provide a list of specific instances in which OMB has given
    credit to agencies towards the achievement of the goals included in
    their ``competitive sourcing'' plans for using alternatives to public-
    private competition for the generation of efficiencies in the delivery
    of services.
        The Administrator of the Office of Federal Procurement Policy, in
    his responses to pre-confirmation hearing questions last year, said
    that he, ``would encourage in-house service providers to develop most
    efficient organizations as a matter of routine, including for
    streamlined competitions.'' Why has OMB strenuously opposed any
    legislation that would ensure that in-house service providers are
    always allowed to develop most efficient organizations as part of any
    public-private competitions?
        Further, the Administrator of the Office of Federal Procurement
    Policy, in his responses to pre-confirmation hearing questions said
    that he, ``would not object to removing the five-year recompetition
    provision from the Circular and relying on agencies to determine
    appropriate performance periods based on the nature and risk associated
    with the services to be provided.'' Has this change been made? If not,
    why?
        According to a May 30, 2003, posting on GovExec.com, ``In a late
    April interview with Government Executive, Angela Styles, the director
    of the Office of Federal Procurement Policy, said curbing direct
    conversions was part of OMB's effort to prove that competitive sourcing
    is about competition, and not shifting contracts to private firms.
    `People have criticized us for this being an outsourcing initiative and
    I've been trying to tell them that it's really not, that what we want
    is competition and the best value for the taxpayer at the lowest cost.
    I think this adds a little more meat to what we're saying,' Styles
    said. On Wednesday, an OMB official said the idea of banning direct
    conversions was `presented to OMB by federal employee organizations and
    their members, and we listened to them. Direct conversions for under 10
    [full-time equivalent] employees are now a thing of the past. We
    believe that fiscal responsibility demands that decisions be made by
    facts, and the new streamlined approach requires knowledge of the costs
    and agency accountability.' '' However, the Administrator of the Office
    of Federal Procurement Policy, in an article posted on GovExec.com on
    January 14, 2005, said he was considering allowing agencies to shift
    work to contractors without competition, a practice known as direct
    conversion. Please indicate why OMB's thinking may have changed,
    providing any relevant research, and provide an update as to OMB's
    intentions with regard to its support for reviving the practice of
    direct conversion.
        Answer. The OFPP Administrator has reviewed the A-76 Circular's
    provisions for Federal employee performance of new work and contracted
    work and concluded that these provisions are fair and reasonable. The
    circular permits agencies to consider in-sourcing or performing new
    work by demonstrating through competition that this action will achieve
    the best value for the taxpayer.
        Agencies that have developed highly efficient internal operations
    and have the capacity to handle common support functions for multiple
    agencies will soon have the opportunity to compete for this work from
    other agencies, beginning with financial management and human
    resources, as part of OMB's efforts to reduce duplication in lines of
    business through cost-effective migration and consolidation. If a
    private sector source wins a competition, the government providers will
    have another opportunity to compete when the work comes up for
    recompetition.
        Regarding alternatives for public-private competition, agencies are
    always encouraged to find efficiencies and better ways to perform their
    mission. However, credit in the competitive sourcing scorecard is
    directly tied to those management efforts involving the use of
    competition since the initiative focuses on how well agencies use
    competition as a management tool to reduce costs, increase
    efficiencies, and eliminate waste.
        OMB recognizes that public-private competition is just one of a
    number of management tools, and not all commercial activities are
    suitable for competition (e.g., perhaps because there is no private
    sector interest in the work or the activity is core to the mission and
    potential conversions to the private sector would subject the mission
    to undue risk). OFPP will continue to work with agencies' Competitive
    Sourcing Officials (CSOs) on guidance to determine how agencies might
    develop ``high performing organizations'' where competition isn't
    appropriate.
        OMB has opposed calling for the development of most efficient
    organizations (MEOs) because they have typically has been coupled with
    objectionable provisions, such as requirements that agencies choose the
    cheapest provider rather than the one that offers the best value to the
    taxpayer. In addition, statutory language is unnecessary because
    Circular A-76 already provides a strong foundation for the development
    of MEOs: the Circular requires MEOs for all standard competitions and
    encourages MEOs for all streamlined competitions. Fiscal year 2004 data
    from the agencies shows a trend towards greater use of standard
    competitions and streamlined competitions with MEOs.
        With regard to the 5-year recompetition provision in Circular A-76,
    a change has been made. In April 2004, OMB issued a memorandum to
    advise agency heads that the 5-year performance limitation no longer
    applies. The memorandum vests agencies with the discretion to determine
    an appropriate performance period considering the nature and risk of
    the service.
        Generally, we will expect agencies to continue using public-private
    competitions that take cost into careful consideration when deciding
    whether work should be converted from public to private sector
    performance. At the same time, there may be cases where direct
    conversions of small numbers of positions may make sense (e.g., clearly
    commercial, non-core work) where such conversions may help the agency
    expeditiously redirect its workforce to mission critical activities
    that are not suitable for private sector performance.

                              SUBCOMMITTEE RECESS

        Senator Bond. Thank you, Director Bolten. It has certainly
    been an interesting exercise. We appreciate your coming before
    us. We have many things that we look forward to working with
    you on.
        This hearing is recessed.
        [Whereupon, at 11:15 a.m., Thursday, April 21, 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
                                      2006

                                  ----------

                            TUESDAY, APRIL 26, 2005

                                           U.S. Senate,
               Subcommittee of the Committee on Appropriations,
                                                        Washington, DC.
        The subcommittee met at 9:34 a.m., in room SD-138, Dirksen
    Senate Office Building, Hon. Christopher S. Bond (chairman)
    presiding.
        Present: Senators Bond, Murray, Byrd, 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 Senate Appropriations
    Subcommittee on Transportation, Treasury, the Judiciary, HUD,
    and Related Agencies will come to order. Thus far, this new
    subcommittee has met to discuss the fiscal year 2006 budgets of
    the Departments of Transportation and Housing and Urban
    Development, as well as the IRS.
        This morning we meet to discuss budgetary and policy
    matters related to the third and final Department under the
    subcommittee's jurisdiction, the Department of the Treasury.
    I'm pleased to welcome Secretary John Snow before this
    subcommittee and look forward to hearing your perspective on
    the accomplishments and challenges facing one of the Nation's
    oldest Cabinet Departments.
        The President has set out an ambitious economic agenda for
    his second term, including reforming the Social Security
    system, overhauling the tax code, and halving the deficit. The
    Treasury needs to take charge of all these issues. In
    particular, Secretary Snow, you have a very important and high
    profile leadership role in promoting and explaining the
    administration's Social Security reform plan to the Nation.
        I think we all agree that reform of Social Security is
    critical to the future economic well-being of our Nation.
    Nevertheless, while I understand your involvement with the 60
    stops in 60 days tour, I'm concerned that taking a criss-
    crossing tour of the country while most senior level positions
    in the Treasury are vacant has left a void of leadership at the
    Department.
        This may not only undermine effective management of the
    Department, it also diminishes the role of the Treasury in
    formulating policy and stewardship of economic and financial
    systems. Furthermore, Treasury is often left without a notable
    representative during interagency meetings, thereby risking
    losing its core responsibilities and authorities to other
    agencies.
        The list of vacant positions reads like a social register
    of Federal economic policy. It includes a Deputy Secretary, two
    Under Secretaries, six Assistant Secretaries, and a number of
    other key positions. More than one-third of Treasury's main
    jobs are either vacant or filled by acting appointees. I am
    especially discouraged that in most cases, to our knowledge, no
    potential nominee is even in the pipeline. Someday there could
    be a financial crisis that requires Treasury's immediate
    expertise, and right now I'm not sure who would answer the
    call.
        You've got a lot of fish to fry, Mr. Secretary, and I know
    you can fry those fish well. But when you're cooking that many
    fish, you've got to have some help. And I hope that we can do
    more than just cross our fingers that you won't be called on to
    be in three places at once without the Deputy and the Under
    Secretaries and Assistant Secretaries.
        At its peak, the Treasury was the second largest law
    enforcement Department of the Federal Government. But since the
    Homeland Security Act, most of Treasury's law enforcement
    bureaus and capabilities have been transferred. Now, as
    Treasury reestablishes its enforcement capabilities and
    reasserts its proper role as the leader of government's efforts
    to fight terrorist financing, I'm troubled by the
    implementation of the statute establishing the Office of
    Terrorism and Financial Intelligence, or TFI, and the
    realignment of resources from Office of Foreign Assets Control
    to TFI, and more specifically, to the Office of Intelligence
    and Analysis, OIA, within TFI.
        The principal reason Congress established TFI is to assure
    aggressive policy formulation, planning, and coordination over
    the Treasury's efforts to thwart terrorist financing, and
    enforcement of money laundering and other financial crimes. It
    appears that the office is becoming instead an operational unit
    at Treasury that replicates the capabilities of the Financial
    Crimes Enforcement Network Bureau, or FinCEN, and OFAC.
        The decision to transfer 23 analysts from OFAC's foreign
    terrorist division to OIA, which will assume responsibility for
    that function, is evidence of the desire to form TFI into an
    operational unit. I think that's a questionable move. It's
    wasteful to reproduce capabilities that already exist, and it
    perhaps weakens the enforcement of the Nation's economic
    sanctions program and the Bank Secrecy Act, the very foundation
    of Treasury's efforts to counter terrorism financing.
        More important, the Congress established the Office of
    Intelligence and Analysis at Treasury to empower the Department
    to be the leader of the Federal Government's effort in
    combating terrorist financing. At a time when Treasury needs to
    take bold actions, Treasury instead has not yet submitted a
    nominee to lead the office and has staffed the office with
    detailees, has failed to build a unique, organic intelligence
    capability, and has been mired in internal resource
    realignments. I don't believe that's acceptable.
        Another major area of concern for me is information
    security. It was really disturbing to read a recent report
    issued by the GAO that found that the lack of major security
    controls jeopardized the taxpayer and law enforcement data
    collected and processed by two Treasury bureaus: IRS and
    FinCEN. GAO's April 15 report, titled ``Information Security:
    Internal Revenue Service Needs to Remedy Serious Weaknesses
    Over Taxpayer and Bank Secrecy Act Data,'' found that sensitive
    taxpayer and law enforcement data is at risk of unauthorized
    use, possibly without detection.
        While IRS has made some progress in correcting 32 of 53
    previously reported information security weaknesses, GAO
    identified 30 new weaknesses. To me, it sounds like while locks
    were being installed on the front door, the windows and the
    back door were left open. And with some 7,400 possible users
    with access to the data, I believe the risk is extremely high
    and is potentially disastrous.
        With the recent media stories on identify theft and
    breaches of personal information by private data collection
    agencies, the Department must make information security a
    priority immediately. I urge you, Mr. Secretary, to personally
    oversee this area because of the extreme consequences of the
    problem. Our ability to collect taxes and fight terrorism and
    crime are jeopardized by the lack of security controls.
        What bothers me most is that IRS and FinCEN data may
    already have been compromised, and are being used or plan to be
    used for criminal use, and we may not even know the information
    has been misappropriated. I hope it's not too late and you can
    provide me and the committee your personal commitment that you
    will resolve this issue quickly.
        Last year, this committee added $5 million for FinCEN to
    develop the first phase of its BSA Direct project, an IT system
    that will enable FinCEN to become the repository for Bank
    Secrecy Act data. Considering the risk of unauthorized
    disclosure, modification, or destruction of the data stored at
    the Detroit Computing Center, as noted by GAO and years of
    audit work by TIGTA, I hope you'll give us your commitment to
    this project and we'll charge FinCEN rather than the IRS with
    collecting and storing Bank Secrecy Act data. This would
    streamline administration of the Bank Secrecy Act at FinCEN,
    thereby making one bureau at Treasury clearly responsible and
    accountable to you for enforcement of the Act.
        Mr. Secretary, let me also raise concerns with the 2006
    budget request. The administration is proposing to eliminate
    the Community Development Financial Institutions program, CDFI,
    and the Bank Enterprise Act, which were funded at $31.4 million
    and $11.4 million respectively in 2005. These programs, in my
    view, in my experience in other committees, have been very
    important in expanding the availability of financial services
    in rural and urban areas that are underserved by financial
    institutions.
        Instead, the administration is proposing that both programs
    be eligible for funding through the Strengthening America's
    Communities initiative, an administration-proposed block grant
    program that is designed to be administered by the Commerce
    Department. Both programs work very well, but more importantly,
    it's hard to envision any State or community awarding scarce
    block grant funds to financial institutions, no matter how well
    they serve financially underserved areas.
        As I've stated in other hearings, I just do not believe
    that that transfer of these important programs to the new block
    grant makes any sense.
        Another bad idea is the budget request to establish new
    user fees of $28 million at the Alcohol and Tobacco Tax and
    Trade Bureau. I appreciate that, unlike other areas of the
    budget request, these proposed user fees do not dig funding
    holes for the subcommittee, and that the budget includes
    funding to cover any shortfall in the revenue from these fees.
    I am imposed--I am opposed nevertheless to the proposed fees,
    because they disproportionately impact small businesses,
    especially those involved in the legal distribution of alcohol
    and tobacco products.
        Congress just suspended collection of the special
    occupational tax for alcohol and tobacco because of its burden
    on small businesses. And I believe it would be ill-advised and
    ill-timed to levy another tax through this user fee proposal on
    the same small businesses. I understand that these user fees
    have been proposed previously, but have been killed within the
    administration. I think that was a good idea, and I would not
    be at all surprised if these user fees meet the same fate in
    Congress this year.
        Finally, I have concerns about the IRS Business Systems
    Modernization (BSM) program, which I discussed previously with
    the IRS Commissioner. Replacement of antiquated computer
    systems to perform basic tax administration is critical for
    improving the level of service that taxpayers justifiably
    expect, and for closing the tax gap.
        Sadly, virtually every procurement activity in BSM is
    behind schedule, over budget, and when the contractor provides
    software and hardware to the IRS, it does not meet the
    performance requirements. After spending nearly $2 billion, the
    IRS will be able to process the most basic 1040-EZ returns
    during this tax filing season. There are few calculations on
    the 1040-EZ form, and the IRS and the contractor are a long way
    from being able to process complex returns and schedules filed
    by most Americans.
        I am curious to hear your views, Mr. Secretary, as someone
    who's had a career in the private sector, on whether the IRS
    and American taxpayers have received our money's worth on BSM.
        In closing, as I've highlighted, there are some serious
    issues that need your immediate and full attention. I have the
    greatest faith in you personally, Mr. Secretary, with your
    intelligence, capability, and aggressiveness. I look forward to
    working with you. However, neither you nor I nor the Congress
    can do all this by ourselves, because of the scope and
    complexity of the problems.
        I strongly urge you to get your senior positions filled in
    the Department. Otherwise, it's going to be very difficult for
    you to ensure accountability and oversight of the Department.
    Until you do so, it will be difficult at best to assure me,
    this committee, and the public that the Treasury is performing
    its responsibilities and protecting its citizens.

                               PREPARED STATEMENT

        I thank you for your appearance and look forward to working
    with you on these very challenging issues. And I now turn to my
    ranking member, Senator Murray, for her opening statement.
        [The statement follows:]

               Prepared Statement of Senator Christopher S. Bond

        Good morning, the Senate Appropriations Subcommittee on
    Transportation, Treasury, the Judiciary, HUD, and Related Agencies will
    come to order. Thus far this new subcommittee has met to discuss the
    fiscal year 2006 budgets of the Department of Transportation and the
    Department of Housing and Urban Development. This morning we meet to
    discuss budgetary and policy matters related to the third and final
    department under the subcommittee's jurisdiction, the Department of the
    Treasury. I am pleased to welcome Secretary John Snow before the
    subcommittee and look forward to hearing your perspective on the
    accomplishments and the challenges facing one of the Nation's oldest
    cabinet departments.
        The President has set out an ambitious economic agenda for his
    second term, including reforming the Social Security system,
    overhauling the tax code, and halving the deficit. The Treasury needs
    to take charge of all these issues. In particular, Secretary Snow, you
    have a very important and high-profile leadership role in promoting and
    explaining the administration's Social Security reform plan to the
    Nation. And I think we all agree that the reform of Social Security is
    critical to the future economic well-being of our Nation.
        Nevertheless, while I do not object to your involvement with the
    ``60 Stops in 60 Days Tour,'' I am concerned that taking a
    crisscrossing tour of the country while most senior-level positions at
    the Treasury are vacant has left a void of leadership at the
    Department. This not only undermines effective management of the
    Department, it also diminishes the role of the Treasury in formulating
    policy and stewardship of economic and financial systems. Furthermore,
    Treasury is often left without a notable representative during
    interagency meetings, thereby risking losing its core responsibilities
    and authorities to other agencies. The list of vacant positions reads
    like a social register of Federal economic policy and includes the
    Deputy Secretary, two undersecretaries, six assistant secretaries, and
    a number of other key positions. More than one-third of Treasury's main
    jobs are either vacant or filled by acting appointees. I am especially
    discouraged that, in most cases, no potential nominee is even in the
    pipeline. Some day there could be a financial crisis that requires
    Treasury's immediate expertise, and right now, I'm not sure who would
    answer the call--we should do more than just cross our fingers.
        At its peak, the Treasury was the second-largest law enforcement
    department of the Federal Government. Since the Homeland Security Act
    of 2002, most of Treasury's law enforcement bureaus and capabilities
    were transferred. Now, as Treasury reestablishes its enforcement
    capabilities and reasserts its proper role as the leader of
    government's efforts to fight terrorist financing, I am troubled by the
    implementation of the statute establishing the Office of Terrorism and
    Financial Intelligence (TFI) and by the realignment of resources from
    Office of Foreign Assets Control to TFI and, more specifically, to the
    Office of Intelligence and Analysis (OIA) within TFI.
        The principle reason that Congress established TFI is to ensure
    aggressive policy formulation, planning, and coordination over the
    Treasury's efforts to thwart terrorist financing and enforcement of
    anti-money laundering and other financial crimes. It appears that the
    office is becoming instead an operational unit at Treasury that
    replicates the capabilities of the Financial Crimes Enforcement Network
    Bureau or ``FinCEN'' and OFAC. The decision to transfer 23 analysts
    from OFAC's foreign terrorist division to OIA, which will assume
    responsibility for that function, is evidence of the desire to form TFI
    into an operational unit. This is a highly questionable move. It is
    wasteful to reproduce capabilities that already exist, and it weakens
    the enforcement of the Nation's economic sanctions programs and the
    Bank Secrecy Act--the very foundation of Treasury's efforts to counter
    terrorists' financing. More importantly, the Congress established the
    Office of Intelligence and Analysis at Treasury to empower the
    Department to be the leader of the Federal Government's efforts in
    combating terrorist financing. At a time when Treasury needs to take
    bold actions, Treasury instead has not yet submitted a nominee to lead
    the office, has staffed the office with detailees, has failed to build
    a unique organic intelligence capability, and has been mired in
    internal resource realignments. Mr. Secretary, this is simply
    unacceptable.
        Another major area of concern for me is information security. I was
    extremely disturbed to read a recent report issued by the Government
    Accountability Office that found that the lack of major security
    controls jeopardized taxpayer and law enforcement data collected and
    processed by two Treasury bureaus--the IRS and FinCEN. GAO's April 15,
    2005 report titled ``Information Security: Internal Revenue Service
    Needs to Remedy Serious Weaknesses over Taxpayer and Bank Secrecy Act
    Data'' found that sensitive taxpayer and law enforcement data is at
    risk of unauthorized use--possibly without detection. While IRS has
    made some progress in correcting 32 of 53 previously reported
    information security weaknesses, GAO identified 39 new weaknesses. To
    me, it sounds like while locks were being installed on the front door,
    your windows and back door were open. And with some 7,400 possible
    users with access to these data, I believe the risk is extremely high
    and potentially disastrous.
        With the recent media stories on identity theft and breaches of
    personal information by private data collection agencies, the
    Department must make information security a priority immediately. I
    strongly urge you, Mr. Secretary, to oversee personally this area
    because of the extreme consequences of this problem. Our ability to
    collect taxes and fight terrorism and crime are jeopardized by the lack
    of security controls. What bothers me the most is that IRS and FinCEN
    data may already have been compromised and are being used or planned to
    be used for criminal use, and you may not even know the information has
    been misappropriated. I hope it is not too late and you can provide me
    and this committee your personal commitment that you will quickly
    resolve this serious issue.
        Last year, this committee added $5 million for FinCEN to develop
    the first phase of its ``BSA Direct'' project, an IT system that will
    enable FinCEN to become the repository for Bank Secrecy Act data.
    Considering the risk of unauthorized disclosure, modification, or
    destruction of the data stored at the Detroit Computing Center as noted
    by the GAO and years of audit work by TIGTA, I hope you will give us
    your commitment to this project and will charge FinCEN, rather than the
    IRS, with collecting and storing Bank Secrecy Act data. This would
    streamline administration of the Bank Secrecy Act at FinCEN, thereby
    making one bureau at Treasury clearly responsible and accountable to
    you for enforcement of that Act.
        Mr. Secretary, let me also raise several concerns with the fiscal
    year 2006 budget request. The administration is proposing to eliminate
    the Community Development Financial Institutions program and the Bank
    Enterprise Act program which were funded at $31.4 million and $11.4
    million in fiscal year 2005, respectively. These programs have been
    very important in expanding the availability of financial services in
    rural and urban areas that are underserved by financial institutions.
    Instead, the administration is proposing that both programs be eligible
    for funding through the Strengthening America's Communities initiative,
    an administration proposed block grant program that is designed to be
    administered by the Department of Commerce. Both programs work very
    well, but, more importantly, it is hard to envision any State or
    community awarding scarce block grant funds to financial institutions,
    no matter how well they serve financially underserved areas.
        Another bad idea in the budget request is the proposal to establish
    new user fees at the Alcohol and Tobacco Tax and Trade Bureau. I
    appreciate that, unlike other areas of the budget request, these
    proposed user fees do not dig funding holes for the subcommittee and
    that the budget includes funding to cover any shortfall in revenue from
    these fees. I am opposed, nevertheless, to the proposed user fees
    because they disproportionately impact small businesses, especially
    those involved in the legal distribution of alcohol and tobacco
    products. Congress just suspended collection of the Special
    Occupational Tax for alcohol and tobacco because of its burden on small
    businesses, and I believe it would be ill-advised and ill-timed to levy
    another tax through this user fee proposal on the same small
    businesses.
        I understand that these user fees been proposed previously, but
    have been killed within the administration. I would not be at all
    surprised if these user fees met the same fate in Congress this year.
        Finally, I raise concerns with the IRS's Business Systems
    Modernization program, which I discussed in great detail with the IRS
    Commissioner earlier this year. Replacement of the antiquated computer
    systems to perform basic tax administration is critical for improving
    the level of service that taxpayers justifiably expect and for closing
    the tax gap. Sadly, virtually every procurement activity in BSM is
    behind schedule, over budget, and when the contractor provides software
    and hardware to the IRS, it does not meet the performance requirements.
    After spending nearly $2 billion, the IRS will be able to process the
    most basic 1040 EZ returns during this tax filing season. There are few
    calculations on the 1040 EZ form and the IRS and the contractor are is
    long way from being able to process the complex returns and schedules
    filed my most Americans.
        Mr. Secretary, I am curious to hear your views, as Secretary and as
    someone who had a career in the private sector, on whether the IRS and
    American taxpayer has gotten its money's worth on BSM.
        In closing, as I have highlighted, there are some serious issues
    that need your immediate and full attention. I have faith in you
    personally, Mr. Secretary. You are smart, capable and aggressive. I
    also look forward to working with you. However, neither you nor I nor
    the Congress can do all this by ourselves. Because of the scope and
    complexity of these problems, I strongly urge you to get your
    Department's senior positions filled. Otherwise, it will be difficult,
    if not impossible, for you to ensure accountability and oversight of
    the Department. Until you do so, it will be difficult at best to assure
    me, this committee, and the public that the Treasury is performing its
    responsibilities in protecting its citizens.
        Thank you. I look forward to working with you on these very
    challenging issues and I now turn to my ranking member, Senator Murray,
    for her opening statement.

                       STATEMENT OF SENATOR PATTY MURRAY

        Senator Murray. Thank you very much, Mr. Chairman.
    Secretary Snow, welcome back to the subcommittee.
        Secretary Snow. Thank you.
        Senator Murray. Since your last appearance, we've expanded
    our jurisdiction just a bit on this subcommittee. But I want
    you to know that your Department does remain a priority and an
    area of deep concern.
        I know you have been traveling around the country trying to
    drum up support for the President's effort to privatize Social
    Security, and, to me, breaking the promise of Social Security
    and putting millions of Americans at risk is wrong. I know that
    you and I are not going to reach agreement on that today. But I
    think we can both agree that this national conversation has
    shown many Americans just how important Social Security is.
        Today, more Americans understand how important Social
    Security's guaranteed benefit is. More Americans know that
    Social Security helps not just the retired, but provides
    critical income for the disabled, for widows, and surviving
    children. And I think more Americans appreciate the stability
    and certainty of their Social Security checks as we've seen the
    stock market rise and fall like a roller coaster lately.
        While I know we will have a chance to talk about Social
    Security and issues like the health of our economy and the
    strength of the dollar, I want to make sure that this
    subcommittee attends to its central responsibility, reviewing
    the President's budget for your Department and reviewing how
    your Department has spent the money Congress has appropriated.
        So today I want to discuss what's in this budget, including
    the new initiatives the Secretary wants to launch, and I also
    want to talk about what's not in this budget, the things the
    Secretary wants to terminate and the user fees the
    administration wants to impose on American families and small
    businesses. I especially want to discuss the Department's
    continuing problems in managing major procurements.
        While it comes to addressing the agency's physical and IT
    infrastructure, it's clear that Treasury needs to do a better
    job in how it spends the dollars it collects from taxpayers.
        Let me start with what is in this budget request. The
    administration is requesting a boost of more than $446 million
    for tax law enforcement activities. However, this boost will
    not signal a new historic high in IRS enforcement activities,
    far from it. As the IRS Commissioner told this subcommittee
    recently, the agency's enforcement efforts have been allowed to
    wane in the last few years. I'm encouraged that the agency now
    wants to reverse that trend, and since the IRS fails to collect
    between $250 billion and $330 billion each year from tax
    cheats, I would say that this reversal could not happen soon
    enough.
        While the agency is finally addressing something it's
    allowed to languish for years, the way it's addressing it does
    trouble me. The administration wants to pay for more
    enforcement by cutting direct service to taxpayers. The
    President's budget would cut services that are essential in
    helping citizens comply with our tax laws.
        For example, your budget proposal would: close as many as
    one out of every four taxpayer assistance centers across the
    country; eliminate phone tax filing, which is used by more than
    5 million individuals and businesses each year; shorten the
    number of phone hours that IRS personnel are available to
    answer taxpayers' questions; discontinue tax law assistance
    through the Internet; and cut outreach efforts to high-risk
    taxpayer groups.
        I don't believe these cuts are merited if they will only
    heighten confusion and hassle for taxpayers, and perhaps even
    make the compliance problem worse.
        Unfortunately, funding for these basic taxpayer service
    functions is not the only thing missing from this budget. I am
    very concerned about the Secretary's proposals to eliminate
    funding for many essential functions in the Alcohol and Tobacco
    Tax and Trade Bureau. Instead of continuing to provide
    appropriated funding, the Secretary would impose new taxes on
    industry to pay for these functions.
        Let me give you one example of great importance to families
    in my home State. Over the past few years, the people in
    Washington State have built a world-renowned wine industry
    through hard work, research, and creativity. These vineyards
    are providing jobs for communities that have struggled. They're
    bringing tourists to many parts of my state and they're helping
    our economy.
        Over the past decade, wine has become a $2.4 billion
    industry in my State. Production has doubled, and now wine
    grapes are the State's fourth-largest fruit crop. Today there
    are more than 300 wineries in my State, nearly double the
    number in 2000, and Washington's wine industry supports more
    than 11,000 related jobs. Mr. Chairman, I'd love to have you
    come and visit sometime.
        Senator Bond. If you want to visit the Missouri wineries,
    we'll make a----
        Senator Murray. Deal.
        Road trip. Many of our wine producers are small, family-run
    vineyards, and they should be encouraged and supported for the
    progress they've built with their own hands. Instead, this
    administration wants to hit them with more taxes in the form of
    new user fees.
        Mr. Secretary, I can tell you that your proposal to fund
    the Alcohol and Tobacco Tax and Trade Bureau with user fees is
    going to impose a tremendous hardship on our small family-owned
    vineyards. Forcing vineyards to pay a fee just to get their
    labels approved will hurt new entrants into this promising
    market. We should be encouraging their success instead of
    putting more barriers to their viability. This proposal is
    especially puzzling coming from an administration that claims
    to encourage entrepreneurship and reduced tax burdens.
        Finally, Mr. Secretary, I want to raise my concerns
    regarding the Treasury Department's deeply troubled record in
    handling major procurements, especially IT services. We receive
    a continuing stream of reports from the GAO and the Inspector
    General regarding projects that are way behind schedule, cost
    more than they should, or are not adequately secure.
        The Treasury Department has finally established its new
    human resource information system known as HR Connect. That
    system cost taxpayers $173 million. A similar system at the
    Coast Guard cost one-seventh of that amount. A similar system
    at the Agricultural Department cost less than one-tenth that
    amount.
        The Department's renovation activities are also a concern.
    The initiative to repair and restore the Treasury building and
    its Annex have been badly mismanaged. The cost so far will soon
    top a quarter of a billion dollars, but for all that money,
    work on the Treasury building is still not complete, and the
    Treasury Annex has not yet been touched.
        Other examples of Treasury's poor management of major
    projects abound. Just last week, we read in the paper about an
    employee tuition assistance program at the IRS. More than 60
    percent of the funding has gone to overhead, and less than 40
    percent went to actual tuition assistance. Treasury's efforts
    to procure a new secure communications system was recently
    slowed down because the agency failed to grant all the bidders
    access to relevant information. As a result, the GAO sustained
    a bid protest.
        And speaking of the GAO, that agency informed us that
    despite the progress the IRS has made in correcting information
    security weaknesses, more than half of the deficiencies
    identified 3 years ago are not fixed. Let me say that again.
    It's been 3 years and half the improvements still have not been
    made.
        And these are not minor issues. Some of the vulnerabilities
    that still exist include the opportunity for any employee at
    the IRS and elsewhere in the Treasury to have easy,
    unauthorized access to sensitive information, including filings
    under the Bank Secrecy Act. In terms of the largest amount of
    taxpayer dollars lost, we could hold several days of hearings
    on the Business Systems Modernization program at the IRS. It
    might take that long to compare what has been delivered under
    that program compared to what was originally promised.
        Mr. Secretary, I recognize that you personally cannot stay
    on top of each and every one of these programs. But when I look
    at these persistent management problems at your agency, when I
    look at the tax dollars being wasted, when I look at the rapid
    turnover and high number of vacancies at your agency, I have to
    worry whether there's anyone at home minding the store.

                               PREPARED STATEMENT

        I know we both agree taxpayers deserve better. I hope as we
    discuss some of these problems this morning you will be frank
    with us on how we can help you get some of these troubled
    programs under control.
        Thank you, Mr. Chairman.
        [The statement follows:]

                   Prepared Statement of Senator Patty Murray

        Secretary Snow, I want to welcome you back to this subcommittee.
    Since your last appearance, we've expanded our jurisdiction a bit, but
    I want you to know that your Department remains a priority for us and
    an area of deep concern.

                    THE PRESIDENT'S SOCIAL SECURITY PROPOSAL

        I know that you've been traveling around the country trying to drum
    up support for the President's proposal to privatize Social Security.
    To me, breaking the promise of Social Security and putting millions of
    Americans at risk is wrong. I know that you and I aren't going to reach
    an agreement on that today.
        But I think we can both agree that this national conversation has
    shown many Americans just how important Social Security is. Today, more
    Americans understand how important Social Security's guaranteed benefit
    is. More Americans know that Social Security helps--not just the
    retired--but also provides critical income for the disabled, for widows
    and for surviving children. And I think more Americans appreciate the
    stability and certainty of their Social Security checks as we've seen
    the stock market rise and fall like a roller coaster lately.
        While I know we'll have a chance to talk about Social Security and
    issues like the health of our economy and the strength of the dollar, I
    want to make sure this subcommittee attends to its central
    responsibility--reviewing the President's budget for your department
    and reviewing how your department has spent the money Congress has
    appropriated.
        So today I want to discuss what's in this budget, including the new
    initiatives the Secretary wants to launch. I also want to talk about
    what's not in this budget--the things the Secretary wants to terminate
    and the user fees the administration wants to impose on American
    families and small businesses.
        I especially want to discuss the Department's continuing problems
    in managing major procurements. When it comes to addressing the
    agency's physical and IT infrastructure, it's clear that Treasury needs
    to do a better job in how it spends the dollars it collects from
    taxpayers.

                          BOOSTING TAX LAW ENFORCEMENT

        Let me start with what is in this budget request. The
    administration is requesting a boost of more than $446 million for tax
    law enforcement activities. However, this boost will not signal a new
    historic high in IRS enforcement activities--far from it. As the IRS
    Commissioner told this committee recently, the agency's enforcement
    efforts have been allowed to wane in the last few years. I'm encouraged
    that the agency now wants to reverse that trend. And since the IRS
    fails to collect between $250 billion to $330 billion each year from
    tax cheats, I would say that this reversal couldn't happen soon enough.

                         CUTTING SERVICES TO TAXPAYERS

        While the agency is finally addressing something it's allowed to
    languish for years, the way it's addressing it troubles me. The
    administration wants to pay for more enforcement by cutting direct
    services to taxpayers. The President's budget would cut services that
    are essential in helping citizens comply with the tax laws. For
    example, your budget proposal would close as many as one out of every
    four Taxpayer Assistance Centers across the country; eliminate phone
    tax filing, which is used by more than 5 million individuals and
    businesses each year; shorten the number of phone hours that IRS
    personnel are available to answer taxpayers' questions; discontinue tax
    law assistance through the internet; and cut outreach efforts to high-
    risk taxpayer groups. I don't believe that these cuts are merited if
    they will only heighten confusion and hassle for taxpayers and,
    perhaps, even make the compliance problem worse.

                IMPOSING NEW FEES ON WASHINGTON'S WINE INDUSTRY

        Unfortunately, funding for these basic taxpayer service functions
    is not the only thing missing from this budget. I am very concerned
    about the Secretary's proposals to eliminate funding for many essential
    functions in the Alcohol and Tobacco Tax and Trade Bureau. Instead of
    continuing to provide appropriated funding, the Secretary would impose
    new taxes on industry to pay for these functions.
        Let me give you one example of great importance to families in my
    State. Over the past few years, the people in Washington State have
    built a world-renowned wine industry through hard work, research, and
    creativity. These vineyards are providing jobs for communities that
    have struggled. They're bringing tourists to many parts of our State,
    and they are helping our economy.
        Over the past decade, wine has become a $2.4 billion industry to my
    State. Production has doubled, and now wine grapes are the State's 4th
    largest fruit crop. Today there are more than 300 wineries throughout
    the State--nearly double the number in 2000. And Washington's wine
    industry supports more than 11,000 related jobs.
        Many of our wine producers are small, family-run vineyards. They
    should be encouraged and supported for the progress they've built with
    their own hands. Instead, this administration wants to hit them with
    more taxes in the form of new user fees. Mr. Secretary, I can tell you
    that your proposal to fund the alcohol tax bureau with ``user fees'' is
    going to impose a hardship our small family-owned vineyards. Forcing
    vineyards to pay a fee just to get their labels approved will hurt new
    entrants into this promising market. We should be encouraging their
    success instead of putting up more barriers to their viability. This
    proposal is especially puzzling coming from an administration that
    claims to encourage entrepreneurship and reduced tax burdens.

                           MAJOR PROCUREMENT PROBLEMS

        Finally, Mr. Secretary, I want to raise my concerns regarding the
    Treasury Department's deeply troubled record in handling major
    procurements, especially IT services. We receive a continuing stream of
    reports from the GAO and the Inspector General regarding projects that
    are way behind schedule, that cost more than they should, or that are
    not adequately secure.
        The Treasury Department has finally established its new human
    resource information system--known as ``HR Connect.'' That system cost
    taxpayers $173 million. A similar system at the Coast Guard cost one-
    seventh that amount. A similar system at the Agriculture Department
    cost less than one-tenth that amount.
        The Department's renovation activities are also a concern. The
    initiative to repair and restore the Treasury Building and its Annex
    has been badly mismanaged. The cost so far will soon top $250 million.
    But for all that money work on the Treasury Building is still not
    complete, and the Treasury Annex has not yet been touched.
        Other examples of Treasury's poor management of major projects
    abound. Just last week, we read in the paper about an employee tuition
    assistance program at the IRS. More than 60 percent of the funding has
    gone to overhead, and less than 40 percent went to actual tuition
    assistance.
        Treasury's efforts to procure a new secure communications system
    was recently slowed down because the agency failed to grant all the
    bidders access to the relevant information. As a result, the GAO
    sustained a bid protest.
        And, speaking of the GAO, that agency informed us that, despite the
    progress the IRS has made in correcting information security
    weaknesses, more than half of the deficiencies identified 3 years ago
    are still not fixed. It's been 3 years, and half the improvements still
    haven't been made. And these aren't minor issues. Some of the
    vulnerabilities that still exist include the opportunity for any
    employee at the IRS and elsewhere in Treasury to have easy,
    unauthorized access to sensitive information including filings under
    the Bank Secrecy Act.
        In terms of the largest amount of taxpayer dollars lost, we could
    hold several days of hearings on the Business Systems Modernization
    program at the IRS. It might take that long to compare what has been
    delivered under that program compared to what was originally promised.
        Mr. Secretary, I recognize that you personally cannot stay on top
    of each and every one of these programs. But when I look at these
    persistent management problems at your agency, when I look at taxpayer
    dollars being wasted, when I look at the rapid turnover and high number
    of vacancies at your agency, I have to worry whether there is anyone at
    home minding the store.
        I know that we both agree that taxpayers deserve better. I hope
    that as we discuss some of these problems this morning you will be
    frank with us on how we can help you get some of these troubled
    programs under control.
        Thank you, Mr. Chairman.

        Senator Bond. Thank you very much, Senator Murray. Senator
    Byrd.
        Senator Byrd. Mr. Chairman, I hope you're recuperating
    well.
        Senator Bond. Just mean.
        Senator Byrd. Mean? Why, you've been that way all the time.
        You just broke your shoulder, you just hurt your shoulder a
    few days ago.
        Senator Bond. That just gives me an excuse.
        Senator Byrd. Does your wife accept that?
        Senator Bond. I have--there is a mad orthopedic surgeon who
    did me in.
        Senator Byrd. Okay. Well, now, are you calling on me for an
    opening statement or for questions?
        Senator Bond. We would like to be enlightened by your
    opening statement. We have not heard the Secretary's initial
    statement.
        Senator Byrd. Yes. Well, I don't believe I'll make an
    opening statement. I hope I can get out before 10:30 or 10:45
    for another appointment. I do have some questions.
        Senator Bond. Well, we will have 5-minute questions, and as
    always, we ask the Secretary to submit his full statement for
    the record and to give us the highlights that he thinks are
    most important, and then we'll go on the rapid-fire question.
        Senator Byrd. May I then retract my statement that I don't
    want to make an opening statement? I'll be very brief.
        Senator Bond. All right, sir.

                      STATEMENT OF SENATOR ROBERT C. BYRD

        Senator Byrd. Mr. Secretary, good morning to you.
        Secretary Snow. Good morning, Senator.
        Senator Byrd. You're one of my favorite Cabinet members.
        Secretary Snow. Thank you.
        Senator Byrd. I submitted a number of questions for the
    record when you testified before the Senate Budget Committee
    last February. I received your responses yesterday. I was
    alarmed by the vague answers you provided to some very
    straightforward questions.
        You have been traveling around the country, as has the
    President, touting a plan to change Social Security. But here
    we are nearing the midpoint in the congressional calendar. The
    Finance Committee is holding hearings today and reportedly is
    preparing to draft legislation soon. The public still does not
    know how much the President's plan will cost or how it will
    affect their benefits.
        Now, as a child of that generation that's been talked about
    a good bit recently, I can remember when the old people down in
    Raleigh County, West Virginia, didn't have anything to help
    them when they became too old to work. The only place they had
    left to go was over the hill to the poorhouse. They could stand
    at the gates of their children's homes with their hats in their
    hands and beg to be taken in, but, oftentimes, the children
    were not able to help them.
        I can remember when the Social Security check was referred
    to as the old-age pension check. It came to my wonderful mom
    and dad, who are in heaven today. These old people raised me.
    They were not my biological father and mother, but they raised
    me. They were honest; they were religious. They didn't wear
    their religion on their sleeves; they didn't make a big hoopty-
    doo about it. But they were truly, truly religious.
        I can remember the first Social Security checks they got.
    My, what a beacon of hope those Social Security checks were.
    And so, I have a deep-rooted respect and gratification for
    Social Security. I'm very concerned about Social Security.
        I won't ask any questions right now, but I thank you for
    your appearance. I always have had a tremendous respect for
    you, and I like you personally. I will have a few questions for
    you later. Thank you, Mr. Chairman. Thank you, Mrs. Murray.
        Senator Bond. Thank you very much, Senator Byrd. I believe
    you have had some dealings with West Virginia in your prior
    occupation, and obviously they were very satisfactory, and
    we've all appreciated those.
        Mr. Secretary.

                      STATEMENT OF SECRETARY JOHN W. SNOW

        Secretary Snow. Thank you very much, Mr. Chairman, Senator
    Murray, Senator Byrd. Yes, I've had many dealings with West
    Virginia and the esteemed senior Senator over a long, long
    time, and I admire him deeply.
        Thank you for the chance to come up today and talk about
    the Treasury 2006 budget request. We're still hoping to get the
    2005 reprogramming approval as well. And you asked me what
    might be helpful in the Department moving forward with some of
    these initiatives. That's one thing, Mr. Chairman, that would
    be helpful.
        Because of the homeland security issues that arose after 9/
    11, the Treasury Department is a very different place today
    than the place it was at the beginning of this administration.
    A large number, as you know, of law enforcement functions, have
    been taken from the Department and located elsewhere, primarily
    in the Department of Homeland Security, but some in the Justice
    Department. And the restructuring of the Department probably
    represents the largest governmental restructuring of any agency
    in modern times, as we lost some 35,000 people who went off to
    other agencies.
        As a result, the Department is a very different place
    today. Its mission is in some ways more coherent. We're focused
    primarily on economic matters and finance matters, economic
    policy, advice to the President on economic issues is a primary
    function. Another function is collecting the revenues, as you
    know, and that's the single biggest part of the Department in
    terms of people, about 100,000 out of the 110,000 or 115,000
    people are in the tax collection, tax administration, tax
    enforcement set of activities.
        The Department is also responsible for collecting the bills
    and being the paymaster for the country, and managing the
    finances, issuing the debt, and managing the overall financial
    condition of the country.
        In terms of economic policy, the issue we're most directly
    involved in now, as has been said, is Social Security. I know
    we'll have a good discussion on that as we proceed. The
    President's objective there, I think, is simply to have this
    dialogue with the country, to lay out the issues, and engender
    a better understanding of what's at stake here.
        And what's at stake is awfully important. I agree with
    Senator Byrd. This is a system that millions of Americans
    depend on. I think some 45 million Americans receive Social
    Security checks today, of which--and this is the important
    point--a very high percent depend on that for their entire
    subsistence. This is a noble initiative of the American
    government. It's one of the most important programs that
    government ever undertook. It's served our Nation well for
    seven decades, and we need to take steps to make sure it serves
    us well going forward. So preserving and protecting Social
    Security has to be the major focus of that initiative, and
    putting it on a sustainable course.
        We're also engaged in efforts to rethink the code and make
    sure that the Internal Revenue system is administered well, is
    simpler, is less complex, less burdensome, and is fair and
    encourages good behavior on the part of businesses and
    taxpayers so the economy continues to grow. You know the
    President appointed a panel co-chaired by two of your former
    colleagues, former Senator Connie Mack of Florida and former
    Senator John Breaux, with a number of other very highly thought
    of and distinguished people.
        We've asked the panel to report back to us by the end of
    July. I'm in continuous contact with the co-chairs, and they're
    making a lot of good progress. And I look forward to getting
    their report at the end of July and then working with them and
    sending forward recommendations to the President, which I hope
    will lead to legislative proposals later this year coming up to
    the Congress.
        We're also focused on the deficits. The deficits are too
    large. The debt levels and the deficits are too large. We need
    to continue to find ways to rein them in and to pursue fiscally
    responsible policies. That's an issue I know is very much on
    the minds of the committee as you oversee our activities.

                               PREPARED STATEMENT

        You have mentioned the vacancies. We can talk about that.
    There are too many vacancies at the Department today, I
    acknowledge that. I also acknowledge the need to do better in
    this information technology arena, both at FinCEN and at the
    IRS. And I look forward to working with the committee as we
    continue to focus on how to make sure that the Department
    carries on its activities in ways that follow your directions
    and well serve the taxpayers of America.
        And with that, I thank you.
        [The statement follows:]

                  Prepared Statement of Secretary 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 2006 budget for the Department of the Treasury.
        The Department's budget reflects the President's top priorities for
    fiscal year 2006: fighting the financial war on terror while ensuring
    America's economic strength, and demonstrating the fiscal
    responsibility necessary to reduce the deficit. The fiscal year 2006
    request of $11.6 billion also supports Treasury's longer term core
    strategic missions: promoting national prosperity through economic
    growth and job creation; maintaining public trust and confidence in our
    economic and financial systems; and ensuring the Treasury organization
    has the workforce, technology, and business practices to meet the
    Nation's needs effectively and efficiently. This budget request focuses
    on the President's belief that the budget be fair while holding the
    government accountable. It adheres to the principle that ``taxpayer
    dollars must be spent wisely, or not at all.''
        Mr. Chairman, we provided the committee with a detailed breakdown
    and justification for President's fiscal year 2006 budget request for
    Treasury. I would like to take the opportunity today to point out some
    highlights of our request and then I'd be happy to take any questions
    you may have.

                          STRENGTHEN NATIONAL SECURITY

        Treasury's budget reinforces the President's commitment to
    combating terrorist financing and safeguarding the U.S. financial
    system. Since September 11, we have leveraged the relationships,
    resources, and expertise that we have acquired over the past several
    years in combating money laundering to address terrorist financing and
    protecting our financial systems. Our efforts in both attacking
    terrorist financing and protecting the financial system are
    complementary and are effecting the changes required to protect the
    integrity of our financial systems by identifying, disrupting and
    dismantling sources, flows, and uses of tainted capital within those
    systems. To support these efforts, the President requests $351.3
    million for fiscal year 2006.
        The Office of Terrorism and Financial Intelligence (TFI) leads
    Treasury's efforts to sever the lines of financial support to
    international terrorists and serves as a critical component of the
    administration's overall effort to keep America safe from terrorist
    plots. The establishment of TFI unifies leadership for the functions of
    the Office of Intelligence 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
    Treasury Executive Office for Asset Forfeiture (TEOAF). The objectives
    of unifying this leadership are better coordination of Treasury's array
    of economic tools against terrorist and national security threats. To
    safeguard financial systems both at home and abroad, TFI draws upon a
    range of capabilities that cut across various categories, including
    financial sanctions, financial regulation and supervision,
    international initiatives, private sector outreach, and law enforcement
    support. TFI consolidates the policy, enforcement, regulatory,
    international, and analytical functions of the Treasury and adds to
    them critical intelligence components. OIA provides focused and
    operable intelligence in support of the Department's mission and
    policies. TFI's enforcement responsibilities are executed by the TFFC,
    OFAC, and FinCEN. Finally, TFI provides policy guidance for the IRS-
    Criminal Investigation Division (IRS-CI) in their anti-money
    laundering, terrorist financing, and financial crimes cases.
        Since September 2001, the United States and its allies have
    designated 399 terrorist related entities and frozen over $147 million
    in terrorist assets. TFI has designated and frozen the assets of
    prominent terrorist financiers and organizations, including Adel
    Batterjee, a Saudi financier of al Qaida, and the Islamic African
    Relief Agency, a corrupt global charity that supported Usama bin Laden
    and HAMAS. Thanks to collaborative efforts by TFI and other agencies,
    the United States has facilitated the finding and freezing of nearly $6
    billion in Iraqi assets outside of Iraq, the return of over $2.7
    billion of those funds, and the recovery of more than $1 billion in
    cash inside Iraq.
        Treasury's fiscal year 2006 request includes increases for
    resources to enhance Treasury's analytical capability so that senior
    officials have access to actionable financial intelligence. The request
    also supports TFI creating a 21st century information technology
    infrastructure to assist in the global fight against terror.
        The Financial Crimes Enforcement Network has a major role in
    supporting TFI's enforcement responsibilities. The President's request
    includes $73.6 million for FinCEN to support its mission to safeguard
    the financial system from abuses of financial crime, including
    terrorist financing, money laundering and other illicit activity. This
    increase will provide FinCEN with the funding needed to enhance its
    outreach efforts to financial institutions newly covered by Bank
    Secrecy Act regulations and strengthen examination and enforcement
    activities; strengthen analytical support services; and expand FinCEN's
    support to other international financial intelligence units to
    facilitate information exchange.
        The IRS-CI also plays a key role in investigating financial crimes.
    The request supports the unique skills and expertise of IRS-CI agents
    in investigating tax fraud and financial crimes not only to support tax
    compliance, but also benefit the war on terror and our efforts to root
    out financial crimes. These agents apply their training, skills, and
    expertise to support the national effort to combat terrorism and
    participate in the Joint Terrorism Task Force and other similar
    interagency efforts focused on disrupting and dismantling terrorist
    financing.
        In addition, the Office of Critical Infrastructure Protection and
    Compliance Policy leads our efforts to safeguard the financial
    infrastructure. This Office works closely with other Federal agencies
    and the private sector to safeguard our infrastructure. That is
    essential, given that the majority of the critical financial
    infrastructure of the United States is owned and operated by the
    private sector.
        Finally, an essential aspect of ensuring our national security is
    to secure fragile states and foster sustainable development in the
    world's poorest nations. The Office of International Affairs uses
    bilateral diplomacy and its role as steward of the international
    financial institutions, including the World Bank and International
    Monetary Fund--to create the economic growth that will reduce conflict
    and the conditions that favor terrorism in the developing world.

                           ENSURE FINANCIAL SECURITY

        Treasury's strategic goal to manage the U.S. Government's finances
    effectively is the largest part of the President's fiscal year 2006
    request for the Department. The budget request of $11 billion--the
    majority of which is for the Internal Revenue Service--underscores our
    commitment to provide quality service to taxpayers and enforce
    America's tax laws in a balanced manner. The request includes a 7.8
    percent increase in enforcement funding over fiscal year 2005. The
    increase will provide additional resources to examine more tax returns,
    collect past due taxes and investigate cases of tax evasion.
        It is important that these enforcement investments be fully funded,
    therefore the administration proposes to employ a budget enforcement
    mechanism used commonly in the 1990's for spending items that
    contribute to increased revenues or reductions in improper payments.
    Under the proposal, an adjustment for IRS enforcement would be made by
    the Budget Committees to the section 302(a) allocation to the
    Appropriations Committees found in the concurrent resolution on the
    budget. In addition, the administration will also seek to establish
    statutory spending limits, as defined by section 251 of the Balanced
    Budget and Emergency Deficit Control Act of 1985, and to adjust them
    for this purpose. To ensure full funding of the program and
    inflationary cost increases, either of these adjustments would only be
    permissible if the Congress funded the base level for IRS enforcement
    at $6.4 billion and restricted the use of the funds. The maximum
    allowable adjustment to the 302(a) allocation and/or the statutory
    spending limit would be $446 million for fiscal year 2006, bringing the
    total enforcement level in the IRS to $6.9 billion. This entire amount
    is included in the overall discretionary spending total sought by the
    administration and is fully accounted for in the budget.
        The proposed fiscal year 2006 budget makes a strong commitment to a
    sound system of tax administration. The IRS collects $2 trillion
    annually; however, billions continue to go uncollected every year. The
    increase in enforcement funding will be used to bolster audit coverage
    of corporations and high-income individuals who try to evade taxes as
    well as to expand collection and criminal investigation efforts. These
    investments will pay for themselves several times over.
        The President's request also provides $199 million to continue
    efforts to modernize the tax system through investments in IRS's
    Business Systems Modernization (BSM). The modernization program is
    providing real business benefits to taxpayers and IRS employees by
    delivering several modernized systems. For example, the Service
    implemented the Integrated Financial System that replaces its
    administrative accounting system. BSM funding allowed IRS to fully
    deploy online e-Services functionality for tax practitioners and other
    third parties, such as banks and brokerage firms allowing improved and
    faster interactions for transactions such as the application for e-
    filing, requests for Preparer Tax Information Number and Secure
    Electronic Return Originator applications, among many other products.
    The IRS also deployed Modernized e-File, which provides e-filing for
    the first time to large corporations and tax-exempt organizations.
    Replacing the outdated legacy system, the Customer Account Data Engine,
    which began processing the simplest 1040 EZ returns in July of last
    year, is a modern database that will eventually house tax information
    for more than 200 million tax returns per year.
        The IRS also administers a refundable tax credit for the cost of
    health insurance for both qualified individual and family members. The
    request provides $20.2 million to continue implementation and operation
    of the Health Insurance Tax Credit Program. The annual cost of this
    program is reduced by over $15 million due to IRS's active program
    oversight and cost-cutting initiatives.
        The Alcohol and Tobacco Tax and Trade Bureau (TTB) is responsible
    for the regulation of the alcohol and tobacco industries, and the
    collection of $14.7 billion annually in alcohol, tobacco, firearms, and
    ammunition excise taxes at a cost of $1 for every $368 collected. Our
    fiscal year 2006 request includes $91.1 million for TTB. The budget
    proposes to establish user fees to cover a portion of the costs of
    TTB's regulatory functions under its Protect the Public line-of-
    business.
        The budget also includes a $236.2 million request for the Financial
    Management Service (FMS), which administers the government's payments
    and collections systems. In fiscal year 2004, FMS issued more than 940
    million non-Defense payments, 705 million electronic payments and 235
    million paper checks, FMS annually issues more than 940 million non-
    Defense payments valued at $1.5 trillion. The Budget provides funding
    for FMS's electronic initiatives, such as: Pay.gov, which is a
    Government-wide web portal to collect non-tax revenue electronically;
    Paper Check Conversion, which converts checks into electronic debits
    thereby moving funds more quickly; and Stored Value Cards, which
    directly support military operations overseas. The fiscal year 2006
    request also includes legislative proposals to improve and enhance
    opportunities to collect delinquent debt through FMS's debt collection
    program.
        The Bureau of the Public Debt (BPD) continues its management and
    improvement of Federal borrowing and debt accounting processes. The
    budget requests $179.9 million in direct appropriations for BPD which
    includes $3 million in user fees. The funding will allow BPD to
    continue improving the efficiency of the securities services to
    customers by expanding TreasuryDirect, an investment system that will
    enable Treasury customers to manage their investment accounts online.
        The functions of the United States Mint and the Bureau of Engraving
    and Printing (BEP) are vital to the health of our Nation's economy.
    These two agencies fulfill the Treasury Department's responsibility of
    meeting global demand for the world's most accepted coins and currency.
    The United States Mint also continues to manufacture and market popular
    numismatic products, while BEP also continues to develop new designs of
    next generation currency to guard against counterfeiting.

                          PROMOTE ECONOMIC OPPORTUNITY

        The Treasury Department works to ensure that U.S. and world
    economies perform at full economic potential. To reach this 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 rules and regulations.
        Our budget requests $1.6 billion to support these strategic goals.
    The request includes funds for policy offices that guide domestic
    economic development, tax programs, financial institutions and other
    fiscal matters. These policies are essential as Treasury works to
    simplify the U.S. tax code and create a legal and regulatory framework
    that allows the Nation's businesses to thrive.
        Treasury's international programs and three Treasury bureaus, the
    Community Development Financial Institutions Fund, the Office of the
    Comptroller of Currency and the Office of Thrift Supervision play
    diverse roles in fostering economic growth and prosperity. From serving
    as the President's principal economic advisor to maintaining the health
    of the national banking and thrift system, the Treasury has a
    significant influence on creating the conditions for a robust economy.
    Through the Office of International Affairs, the Treasury also pursues
    diplomacy to create the conditions for global growth, which creates
    economic opportunity at home and overseas, by a range of actions,
    including the reduction of undue barriers to trade and investment and
    the establishment of stability in the international financial system.
        Treasury's international assistance programs request of $1.5
    billion for fiscal year 2006 is part of the Foreign Operations, Export
    Financing, and Related Program Appropriations Act. These programs
    include multilateral development banks (MDBs), debt reduction, and
    technical assistance--all critical instruments to promote the
    administration's international economic agenda. MDBs promote global
    economic growth and poverty reduction, and help create stronger markets
    for U.S. goods and services. Debt reduction helps poor countries move
    to a sustainable level of debt and remove debt overhang that inhibits
    growth. Our technical assistance programs help countries institute the
    sound budget and financial systems needed for economic growth.

                               MANAGE FOR RESULTS

        The President requests $211.8 million to protect the integrity and
    effectively manage the resources of the Department of Treasury, and
    ensure that it remains a world class organization. Included in this
    request is $16.7 million to fund the Department's Office of Inspector
    General (OIG) and augment audit and investigative capabilities.
        This portion of the budget also includes $133.3 million for the
    Inspector General for Tax Administration (TIGTA) and its efforts to
    oversee the Nation's tax administration. TIGTA continues to play a
    significant role in providing independent oversight, which promotes
    efficiency and integrity in the IRS's ability to collect $2 trillion
    annually. TIGTA aggressively combats any identified attempts to disrupt
    and/or interfere with tax administration. The Nation's voluntary tax
    compliance system is supported and protected by TIGTA agents who
    participate in the Joint Terrorism Task Force and proactively seek to
    identify individuals or groups who pose a threat to effective tax
    administration. Critical information is shared with the IRS and allows
    the leaders of the IRS to make effective business decisions, which
    promote efficient tax administration and support IRS employee safety.
        The proposed budget request includes $7.9 million in new funding to
    provide for an improved technology infrastructure, essential for
    keeping pace with the Department's needs to enhance productivity,
    improve communication, interact effectively with the world-wide
    financial community, and meet other management needs. Funding will be
    used to improve the Department's information technology infrastructure
    to ensure the effectiveness of the Department in managing Federal
    finances and combating financial crimes and terrorist financing. The
    request also ensures that the Department will continue its major
    facilities projects and services for the Main Treasury and Treasury
    Annex buildings to ensure the safety and health of occupants and
    perform structural repairs and improvements. Additional funds will
    allow Treasury to complete the project during fiscal year 2006 and
    reoccupy the restored office space.

                       THE PRESIDENT'S MANAGEMENT AGENDA

        Treasury has focused its management initiatives around the goals of
    the President's Management Agenda (PMA). Under guidance from the PMA,
    the Treasury has grasped tangible results in managing the Nation's
    finances, taking advantage of new opportunities and opposing threats.
    The Department is committed to defining desired results for each area
    and managing to achieve them, at acceptable cost levels.
        In fiscal year 2004, Treasury achieved significant milestones in
    implementing the President's Management Agenda, improving three of our
    five status scores for the PMA over the prior year.
        Treasury managed for results as we implemented a new performance
    appraisal system for our Senior Executive Service that links managers'
    performance assessments to accomplishing the Department's top
    priorities. We are also focusing on recruiting and retaining a world-
    class workforce, and have started implementing a new Human Capital
    Strategic Plan. This plan is the Department's roadmap for molding a
    workforce of engaged, highly competent, and business-aligned employees.
        The Department is making good progress on using competition to
    improve efficiency. This past year, we completed five public-private
    competitions, and as a result, expect savings of $200 million over the
    next 5 years. Our efficiency initiatives have received national
    recognition, winning the President's Quality Award for Management
    Innovation at the IRS for our Area Distribution Center competition.
        Treasury continues to be a leader in making financial information
    available in a timely manner through a 3-day close of its books at the
    end of each month, and for the fifth consecutive year we received a
    clean audit opinion. The Department continues to work at securing our
    information systems. Our systems are more secure now than at any other
    time, with 86 percent certified and accredited as secure at the end of
    2004.

                                   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 2006. 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 Treasury
    Department's budget today. I would be pleased to answer your questions.

                         TREASURY DEPARTMENT VACANCIES

        Senator Bond. Thank you very much, Mr. Secretary. We're
    talking about unfilled vacancies. The--I'm particularly
    troubled at key management positions, Deputy Secretary,
    Assistant Secretary for Management, Chief Financial Officer
    remain unfilled.
        How do you hold a staff accountable, how can you operate it
    when key people that should be in your organization are not
    there? What are the plans to get these positions filled?
        Secretary Snow. Well, Mr. Chairman, the work of the
    Department is getting done, but it sure would be desirable and
    helpful to have those vacancies filled. Several of those
    vacancies are standing in the nomination process awaiting
    hearings. More are awaiting clearance through the White House
    process. And I'm in continuous touch with the White House
    Personnel Office and Office of the Chief Counsel----
        Senator Bond. Please give them our best wishes, would you?
        Secretary Snow [continuing]. And urging them to move this
    process along. But in terms of the work of the Department,
    though, while it would greatly help us to have these people in
    place, the Department has a terrific group of hardworking civil
    servants and a good work of political people, small but able,
    and the work is getting done. It's a lot of overtime though for
    us these days.
        Senator Bond. But, Mr. Secretary, I mentioned the GAO
    reports that security weaknesses place sensitive taxpayer and
    Bank Secrecy Act information at risk, and TIGTA has also
    identified numerous problems with IRS information security.
    You, under the Federal Information and Security Management Act,
    are responsible for providing information security, and are you
    alarmed by the GAO's findings? And how and when are you going
    to resolve these problems?
        Secretary Snow. Senator, this is a serious issue and we
    take it seriously. We are committed to the information security
    of the systems we have at the Department, and pledge to you
    this will be a priority.
        I talked to the Acting Deputy Secretary this morning about
    it and the Chief of Staff, and we're all going to make every
    effort to close the gap. We know there's a gap here. We're also
    going to work closely with the Department's Inspector General,
    Harry Damelin, a position that was recently filled, I'm
    delighted to say, and with Russell George of TIGTA, the
    Inspector General for the IRS, both of whom are aware of these
    issues and will be very helpful in bringing them to closure. We
    recognize we have some distance to go here.

                              TERRORIST FINANCING

        Senator Bond. I--again, I'm concerned, as I mentioned
    earlier, about your work on terrorist financing. We created the
    Office of Intelligence and Analysis, but Treasury, it appears
    to us, has not stepped up to the plate. This seems to support
    the conclusions that OIA will merely become an operational
    unit, not adding any value or, even worse, assuming the role of
    the Treasury's current assets at OFAC and FinCEN.
        What will the roughly 25 analysts transferred from OFAC to
    OIA be doing that is different from what they were doing at
    OFAC? And how will this transfer impact the OFAC? And I'd just
    ask the general question, shouldn't the OIA serve the policy
    makers at Treasury and leave the operations to operational
    units? That's my concern.
        Secretary Snow. Right. Mr. Chairman, this is an issue that
    we spent a lot of time on thinking through and trying to get
    right. And the very able Under Secretary who is responsible for
    this whole collection of activities, anti-money laundering,
    terrorist finance, protecting the financial system against
    money laundering and terrorist finance, and leading the
    financial war on terror, came to the conclusion as he looked at
    his organization that the best way to fulfill the
    responsibilities, the critically important responsibility he
    has, is to take the intelligence function and concentrate it
    under the new Assistant Secretary for Intelligence and
    Analysis.
        As he's told me, these people, these--I think it's 23
    analysts who were in OFAC--even if there had been no resource
    constraints on the Department, are the very people you would
    want at the center of the intelligence-gathering activities to
    strengthen our ability to carry on these functions. And OFAC
    will be able to have full access to the intelligence that's
    gathered.
        His view, and I share it, is that our function will be
    strengthened by putting the intelligence under a very capable
    Assistant Secretary for Intelligence and Analysis, and then led
    by a person whose full-time job is intelligence.
        Senator Bond. Thank you, Mr. Secretary. I'll have further
    questions on that, but now I'll turn to Senator Murray.
        Senator Murray. Mr. Chairman, with your permission, I want
    to yield to Senator Byrd. He has a time commitment.

                                SOCIAL SECURITY

        Senator Byrd. I thank you, Mr. Chairman. I thank you,
    Senator Murray. Mr. Secretary, I only have 5 minutes. I have
    several questions. I'll try to ask only five. I hope we can
    limit them to 1 minute each.
        Mr. Secretary, Mr. Bush told workers in his State of the
    Union address that, with regard to personal accounts, your
    money will grow over time at a greater rate than anything the
    current system can deliver. Question No. 1: However, the stock
    market has ups and downs. If workers retire when the stock
    market is down, they're in deep trouble. They can't wait for
    the market to recover. What guarantee would the administration
    support to ensure a minimum benefit from an individual account?
        Secretary Snow. Senator, you're right. Markets go up and
    down, but over any long period of time, the evidence suggests
    that investments in the market over a working life will produce
    rates of return that are higher than what you could expect from
    Social Security. And while there's not a guarantee, there is
    this long history of the superior performance of markets.
        But taking your point, under the President's proposal, and
    we're continuing to think about how to put this forward in a
    way that's most effective, there is the suggestion that it--I
    think it's 47--when a person turns 47, their account would
    automatically shift heavily into fixed-income instruments,
    bonds, so the principal would be protected. But it's a good
    point and one we've been giving a lot of thought to.
        Senator Byrd. What happens if the checks that you mentioned
    prove insufficient? What happens when it comes time to retire
    and a worker discovers that he doesn't have enough saved away
    to ensure a decent, respectable living? What happens to that
    worker?
        Secretary Snow. Senator, the President recently indicated
    his support for a proposal associated with somebody named Bob
    Posen. And the Posen proposal is designed to make sure that
    nobody retires below the poverty level. That's a view I think
    that is widely held within the administration as well. And in
    the final legislation I'm confident that there would be
    language to assure that that outcome is achieved.
        Senator Byrd. Under the President's plan, what guarantee
    would workers have of receiving the level of benefits scheduled
    under current law?
        Secretary Snow. Senator, the Social Security Administration
    Actuary indicates that in--I think it's 2041--the benefits will
    fall to the level the trust fund can't afford to pay, which is
    their revenue stream, which is about 70 percent. The idea of
    the personal accounts is that you could do better with the
    personal accounts than you could do with Social Security alone.
    But the details of that have to await the discussion with you
    and the members of the Senate and the House.
        Senator Byrd. What happens to a worker whose account has
    not accrued enough to buy an annuity to guarantee a payment
    above the poverty line?
        Secretary Snow. Senator, as I said, the administration's
    view broadly stated, and the President indicated this in some
    comments he made recently, is that we need to assure people who
    have had a working life that they retire above the poverty
    line. And I think that idea will be incorporated in our final
    set of proposals.
        Senator Byrd. Mr. Secretary, we've heard a great deal about
    the President's ``plan''. When will the President submit his
    ``plan'' in detail, and with respect to a draft bill that would
    contain those details so that the Congress will know what is
    being suggested and how to respond to that?
        Secretary Snow. Well, the President has indicated, Senator,
    that he wants this broad dialogue and he thinks that out of the
    broad dialogue in which he's put some ideas forward and invited
    others to come back with other ideas, that that broad dialogue,
    that environment of open ideas, is better calculated to create
    a good result than now laying out a firm set of proposals.
        In part, I think it's because of the need for this
    education we talked about earlier. And I appreciate what
    Senator Murray said, that now because of this effort to go to
    the country, there is a better understanding of the importance
    of Social Security, the role it plays in our lives, and I think
    also of the need to find ways to put it on a financially
    sustainable course.
        Senator Byrd. I have one final question, Mr. Secretary. You
    say that we seek information, that we seek a dialogue, that the
    President seeks a dialogue. How can we have a dialogue, when we
    don't know what's in the details of the President's plan? We
    need to know the details of that, so that we can then have a
    real dialogue. Can you respond?
        Secretary Snow. Well, I'll try, Senator. The President has
    set up his proposal that's fairly detailed on the personal
    accounts and how those would work, setting aside up to 4
    percent of income, up to $1,000 growing at $100 a year plus the
    wage index, with a lot of other details.
        On the solvency side, the President has said we need to
    have a permanent solution. It has to be done in a way that
    doesn't adversely affect retirees or near-retirees. And he's
    sent up a number of proposals. I think this came out of the
    State of the Union message on ways that you might fix the
    sustainability, how you might put it on a solvent course. That
    included going to a price index versus a wage index and
    changing the formula for calculating inflation on benefits and
    changing wage indexing and some means-testing and so on.
        His point in sending that up was, these are good ideas. He
    subsequently said he sees merit in this Posen proposal I
    mentioned. And he's saying, if you, the Members of the
    Congress, the Republican side, Democratic side, like these
    ideas, I want to work with you, if you've got better ideas I
    want to work with you.
        And the President's view is that out of this dialogue about
    these proposals, having to find the problem will get the best
    result. At some point maybe it will be necessary to come
    forward with a more detailed proposal. But the current
    hypothesis the President's working under is that laying it out
    the way he has is best calculated to get good results in the
    end. People can disagree on that, I agree.
        Senator Byrd. Mr. Secretary, I thank you. I'll submit
    further questions. I don't think much of the idea of waiting
    beyond mid-term to let the Congress and the people of the
    country know what the details are of the President's plan.
    Let's hear it from the President.
        Thank you, Mr. Secretary. Thank you, Mr. Chairman, and
    thank you, Senator Murray.
        Senator Bond. Thank you, Senator Byrd. Senator Murray.
        Senator Murray. Thank you, Mr. Chairman. Mr. Secretary, I
    understand that the Treasury Department has reportedly formed a
    Social Security war room that included hiring five full-time
    employees. The stated purpose of the Social Security
    Information Center, as it's named, is to monitor political
    reaction to the administration's Social Security proposal, as
    well as to coordinate public affairs activities for it.
        Our appropriations bill has included a provision for dozens
    of years that states the following, and I want to read it out
    to you: ``No part of any funds appropriated in this or any
    other Act shall be used by an agency of the executive branch
    other than for normal and recognized executive/legislative
    relationships for publicity or propaganda purposes and for the
    preparation, distribution, or use of any kit, pamphlet,
    booklet, publication, radio, television, or film presentation
    designed to support or defeat legislation pending before the
    Congress, except in presentation to the Congress itself.''
        Mr. Secretary, do you have any reason to believe that any
    of the activities of this Social Security Information Center or
    any other part of your agency could be in violation of that
    provision?
        Secretary Snow. No, most definitely not, Senator. The
    President has identified Social Security as a priority. I serve
    as the managing director of the Social Security Trustees. The
    actuary of the Social Security system has pointed out in the
    reports and told the trustees that the system isn't
    sustainable.
        I think we have a responsibility, given the financial
    condition of Social Security, to talk to the country about it,
    inform the country, have the dialogue with the country, and lay
    the foundation through that dialogue of public information, and
    that's what this is, public information, lay the foundation
    through that broad-based public information dialogue to----
        Senator Murray. Well, Mr. Secretary----
        Secretary Snow [continuing]. To get some answers.
        Senator Murray. Is the Treasury Department engaged in
    providing funds in the form of compensation for any opinion
    leader or any media personality for the purpose of advancing
    the President's Social Security----
        Secretary Snow. No.
        Senator Murray. No? Okay.
        Secretary Snow. This office is four or five people. It's a
    normal public affairs function that serves under the Assistant
    Secretary for Public Affairs, Rob Nichols, who oversees the
    entire office, and it's funded entirely out of his executive
    budget.
        Senator Murray. Okay. Has the Department used any of those
    funds to produce television or radio segments that address the
    issue of Social Security that have been disseminated to media
    outlets?
        Secretary Snow. Not that I'm aware of, Senator. I'll check
    and see. I don't think so.
        Senator Murray. Okay. Have you taken any safeguards to
    ensure that any elements of your Department, especially the
    Social Security information center, are not in violation of the
    law as it relates to the promotion of legislation that's
    pending?
        Secretary Snow. Senator, the activities of this office are
    reviewed by the Inspector General and they're reviewed by the
    general counsel. Both parts of Treasury are peopled by very
    able staff, and they know our commitment to living within the
    rules of the law. So, no, I have no reason to be concerned
    there.

                                TAXPAYER SERVICE

        Senator Murray. Thank you very much. I appreciate that. Mr.
    Secretary, last year your Department testified that the key to
    getting greater compliance with our tax laws was through a
    combination of enforcement and taxpayer service. This year,
    however, you are poised to make significant cuts to taxpayer
    services in order to pay for your requested increase in
    enforcement. These cuts, as I had talked about, are closing
    taxpayer assistance centers, reducing telephone service,
    eliminating phone-routing sites, discontinuing filing by
    telephone. All of these are used by millions of taxpayers and
    businesses.
        And I wanted to ask you today why your agency abandoned its
    position regarding the important balance between taxpayer
    services and enforcement?
        Secretary Snow. Well, Senator, I don't think we have. It's
    a balance we always strive to reach. It's never easy, but it's
    certainly our objective to be balanced in law enforcement and
    in customer service.
        Senator Murray. Are you concerned that any of these
    reductions will result in less compliance with the tax code?
        Secretary Snow. Senator, I don't think so, but that's
    something that we will monitor. This is a running dialogue when
    I meet regularly with the IRS Commissioner, and he knows my
    deep concern in seeing that the IRS find that middle way where
    they're collecting the revenues, enforcing the law, creating an
    environment of law enforcement, but doing so in a way that
    respects the rights of taxpayers and treats them with dignity.
        On that very subject I had a long discussion yesterday with
    Nina Olson, the head of the taxpayer advocacy part of the IRS,
    and we do our best. I'm sure we make mistakes, but we do our
    best to try and find the middle ground. And with respect to the
    Taxpayer Assistance Centers, we're going to monitor that. We
    think that it's the right thing to do, but we're going to
    continue to monitor that to make sure that's the case.
        Senator Murray. Well, I hope we do monitor it. I'm worried
    that it will monitoring something that's already closed, it'll
    be too late to start it. But I did--you mentioned in your
    remarks at the beginning your reprogramming request for fiscal
    year 2005?
        Secretary Snow. Yes.
        Senator Murray. Well, given the priority that your budget
    places on tax and law enforcement, I'm kind of mystified as to
    why this reprogramming request asks us to transfer $11.5
    million out of tax law enforcement to Business Systems
    Modernization. Can you address that?
        Secretary Snow. Yeah. Again, we're just trying to get the
    balance right, and getting that balance right is something that
    sometimes requires some movement of funds from one pocket to
    another or one box to another box.
        Senator Murray. My time is up, Mr. Chairman.

                      OFFICE OF INTELLIGENCE AND ANALYSIS

        Senator Bond. Thank you, Senator Murray. Mr. Secretary,
    I've asked you about intelligence operations and I want to
    follow up. Can you explain to us in simple terms what you're
    doing with OIA and the relationship with OFAC and FinCEN. I'd
    like to know what you think OIA's appropriate role is,
    especially when it appears to be duplicating some of the work
    of OFAC and FinCEN? In addition, has OIA produced any analytic
    product for Treasury or the intelligence community?
        Secretary Snow. Yes, Senator, but it's a new part of the
    Treasury. It's going to be a very important part of Treasury.
    It's going to underpin the whole Department actually, because
    everything rests ultimately on good intelligence. Having a
    strong intelligence component of the Department means we get a
    seat at the table with the other intelligence agencies of the
    United States Government, and that seat at the table with real
    capacity, with real status and resources means that we're going
    to be much more effective in drawing information, sharing
    information, and having the confidence of others in the
    intelligence community.
        And that's really the objective here, having the confidence
    of others in the intelligence community, having a strong seat
    at the table, and being able to play effectively in the
    intelligence-sharing arena with the other 15 or 16 agencies of
    the Federal Government who were involved in intelligence.

                                   BSA DIRECT

        Senator Bond. You have delegated responsibility to
    administer the Bank Secrecy Act, or BSA, to FinCEN, and last
    year the committee provided $5 million over the President's
    request for FinCEN to complete the first phase of BSA Direct.
    Do you support the BSA Direct project, and what's its current
    status?
        Secretary Snow. Senator, I very much support it. I noted
    your comments in your opening statement on that. I share those
    views that it should be under TFI, it should be under FinCEN,
    and we hope to have that BSA Direct completed by, I think it's
    September or October of this year, where then FinCEN would have
    its own secure data system.
        Senator Bond. Do you think BSA Direct is going to improve
    the security gaps of BSA data as the GAO reported?
        Secretary Snow. Yes, absolutely. I think it will, and
    that's one of its key purposes.
        Senator Bond. What's the relationship between the IRS and
    FinCEN in the sharing of data, and what safeguards and
    firewalls are in place?
        Secretary Snow. Well, Senator, historically of course the
    Detroit Computing Center has been a source of substantial
    repository of data that was used. It was the principal data
    center. What we're doing is moving off of the dependence on the
    IRS data system to BSA Direct, which will then give FinCEN
    control over the data it needs to carry on its activities. I
    think it'll be a much better arrangement.

                                 CUBA SANCTIONS

        Senator Bond. Let me turn to trade. I'm a supporter of
    trade sanctions reform, the Export Promotion Act of 2000, and
    the Agricultural Export Facilitation Act. They first cleared
    the way for agriculture exports to Cuba. The second reforms the
    requirements of OFAC regulations that are frustrating farmers'
    efforts to sell in the market.
        Congress has spoken clearly that there's a significant
    growing market for U.S. agricultural goods in Cuba, which has
    grown to over $400 million a year. However, the OFAC rules
    requiring advance cash payment or a letter of credit are
    essentially frustrating the efforts of U.S. farmers ability to
    sell to Cuba. This has all the earmarks and as well as smelling
    like a regulatory effort to stop agriculture trade with Cuba.
        I don't think we can kick away a $400 million export
    market. If that is not the intent, what was the compelling need
    to issue the regulations? How are the concerns of farmers, the
    reason for passing the legislation, taken into account? And I'd
    like to hear an explanation of what's happening.
        Secretary Snow. Well, I understand this ruling has sparked
    some interest in the Congress.
        Senator Bond. A master of understatement, Mr. Secretary. I
    give you credit for that.
        Secretary Snow. And it came about, Mr. Chairman, because of
    a request from financial institutions for a clarification of
    the so-called cash in advance policy. And cash in advance is
    the term of art used in the statute, and the OFAC lawyers, when
    they looked into that request for clarification, determined
    that the best statutory construction was cash in advance of
    shipment.
        There had been some people in the trade who were complying
    with it through cash in advance of title transfer or cash in
    advance of lading transfer. And in looking into it and thinking
    about it, the lawyers at the Department, the lawyers at OFAC
    and then at the General Counsel's office, reached the
    conclusion that the better reading of cash in advance was that
    it meant cash in advance of shipment.
        Senator Bond. We'll have to help the lawyers understand
    that better. Senator Murray.

                              TAX AND TRADE BUREAU

        Senator Murray. Thank you, Mr. Chairman. Mr. Secretary, I
    talked a little bit about the wine industry in my State in my
    opening statement, and I wanted to ask you today about the
    large number of user fees you have in your budget request. In
    one small agency, the Alcohol and Tobacco Tax and Trade Bureau,
    you're asking to impose five new or increased fees equaling 31
    percent of the agency's budget.
        I'm told there's no direct relationship between the actual
    services the wine-making industry receives from TTB and the
    fees you now want to impose on them. And I want to know why
    there's no correlation. And wouldn't you agree that if there's
    no correlation that these really are new taxes and not user
    fees?
        Secretary Snow. Senator, I think the users, the people who
    get services from TTB, get something of value, and these
    charges or fees are designed to reflect some of the value that
    is received by the users back on to the users. The goal is to
    have the industry pay for some portion of the benefits that it
    gets.
        Senator Murray. Well, are you aware that the wine industry
    already pays $550 million in Federal excise taxes every year?
    How did you ever come to the conclusion they needed to pay
    more?
        Secretary Snow. Well, Senator, the banks fund the Federal
    Reserve and the thrifts fund OTS, the national banks fund the
    OCC. There's a well-established tradition in this country that
    if you're regulated, some portion of the costs of the
    regulatory activities should be borne by the regulatees.
        Senator Murray. Well, let me also ask you, I know your
    agency is planning to penalize vineyards that don't file their
    certifications electronically by charging a higher fee to use
    paper filing. But I'm told by the industry that they have a lot
    of problems with the electronic filing system. They have
    difficulty registering just to use it, it often rejects their
    label graphics, and when those labels are rejected, the system
    only cites the portion of the regulation the labels violated,
    which doesn't actually tell the vineyard what the problem is
    and how they can fix it.
        You know, I also should tell you that the paper processing
    system isn't much better. TTB claims to be processing labels in
    9 days, but I'm told it takes anywhere from 2 to 4 weeks. And I
    wondered if you considered improving the online processing
    system to make it workable for the industry before we started
    imposing fees.
        Secretary Snow. Well, Senator, I appreciate your comments.
    I will commit to you that I will look into that and get myself
    better informed about the paperwork burden and the feasibility
    of moving to electronic filing.
        Senator Murray. Do you know if there's any--are there any
    new initiatives to make them more user-friendly, or is--the
    only new initiative is user fees? That's what I'm hearing from
    the industry.
        Secretary Snow. Well, I think TTB gets pretty high marks
    from the industry by and large. I think they're thought to be a
    responsive agency that tries to do things in ways that are
    reasonable. But we have Harry Damelin, the very able new head
    of the Inspector General's office here. He's listening to this.
    I'm sure he's taking this in and he'll help us take a look at
    that.
        Senator Murray. Okay, very good. Well, I look forward to
    hearing more from you on that, because it really is concerning
    many of us. And I understand the chairman has a wine industry
    in his State as well, so I'm sure we'll be able to work on
    that.
        Senator Bond. Long before yours.
        Senator Murray. Long before mine, I'm told. Well, maybe we
    should compare. We can have a taste test. And professionally,
    of course.
        Let me ask one more quick question. In the interest of
    better isolating terrorist financing, your Department is
    considering a proposal to track financial wire transfers into
    and out of the United States. Those wire transfers represent
    more than $6 trillion worth of activity per day, and while some
    officials and experts believe that wire transfers might contain
    useful information to track down terrorists, others are very
    concerned that the volume might overwhelm any tracking system
    you can put in place. And others are worried that your efforts
    might invade the privacy rights of individuals and businesses.
        In my short time left, can you tell me how the Department
    can realistically monitor this, and how we're going to monitor
    the privacy of individuals?
        Secretary Snow. Senator, those are the very issues that are
    under review in this analysis that's been undertaken. And we
    will keep you posted as we move forward with our thoughts on
    that subject. But it is an issue that needs to be addressed.
        Senator Murray. Are you requesting additional funds to do
    that monitoring, or how is that going to----
        Secretary Snow. I think there's a study underway right now
    that's adequately funded.
        Senator Murray. So do you need--do you anticipate any new
    funding needed to monitor this, both for privacy and----
        Secretary Snow. Well, if there is one, we're some distance
    away from having a proposal on this, and as that is thought
    about and developed, we'll certainly think about the budgetary
    side of it and appropriations side of it as well. But I don't
    have an answer to you yet.
        Senator Murray. Thank you very much, Mr. Chairman.
        Senator Bond. Thank you, Senator Murray. Senator Dorgan.

                                 CUBA SANCTIONS

        Senator Dorgan. Mr. Chairman, thank you very much.
    Secretary Snow, I apologize for being late. I was over on the
    floor of the Senate. But I do have some questions, and I
    understand my colleagues have asked some of them. In fact, I
    was pleased to hear the question from the Senator from
    Missouri, the Chairman, about Cuba and family farmers.
        Let me just make a point on that. You know, the
    Congressional Research Service in writing says that it believes
    what the Treasury is doing here does not conform to the law. So
    I don't know what lawyers you have over in OFAC that are giving
    advice there, but at least the Congressional Research Service
    says they believe you've gone outside of the law to do this.
        Before I ask you about Cuba, I should tell you that
    Secretary O'Neill sat at that table before you, and I was
    chairing the subcommittee at that point, and I asked him
    repeatedly about Cuba and said, you know, just let me ask you a
    question, wouldn't you prefer to use the resources at OFAC, the
    Office of Foreign Assets Control, to track terrorist financing
    rather than track people who are under suspicion of vacationing
    in Cuba, or tracking Joan Scott, who delivered free Bibles in
    Cuba, tracking Joan Sloat, who took a bicycle trip with a
    Canadian bicycling group, or tracking the guy who took his
    dad's ashes to be distributed at the church his dad used to
    minister in.
        I asked Secretary O'Neill three times, wouldn't you really
    sooner use OFAC to track terrorist financing rather than go
    after these people who are suspected of taking a vacation in
    Cuba or whatever. And finally on the third or fourth time, he
    said, you know, of course, of course. And within hours, he was
    upbraided with a press release from the White House. So I'm not
    going to ask you a question that's going to get you in trouble.
    My intent isn't to ask you a question for that reason, but
    wouldn't you sooner use the assets of the----
        All right. Skip that question. You can put your answer in
    writing if you'd like and I promise I won't share it with
    anybody, Mr. Secretary.
        The Chairman asked the question about the issue of
    shipments to Cuba, the agriculture shipments, and we have
    something called the Trade Sanctions and Export Enhancement Act
    of 2000. I helped write it. And it was put in the bill--these
    are sanctions that--it says you cannot do anything to impede
    the movement of agricultural products unless there's a vote of
    both the House and the Senate to do so.
        And clearly this is a--what you have done is a prohibition
    or a condition or a restriction on the export of agricultural
    commodities. It is clearly done to impede the movement of
    agricultural commodities. Everyone understands that and
    believes that. And I would just ask, have you, Mr. Secretary,
    studied the Congressional Research Service report that says on
    its face they believe that what Treasury has done here is not
    legal?
        Secretary Snow. No, Senator. I haven't. But I'm sure the
    lawyers from Treasury have, but I have not.
        Senator Dorgan. All right. Do you know how many lawyers in
    OFAC are tracking vacationers to Cuba and tracking all these
    issues dealing with agricultural sales to Cuba? My
    understanding is it's something like 21, which is a multiple of
    4 of those who are tracking terrorist financing.
        Secretary Snow. Senator, I don't have that number in my
    head, but I will confirm----
        Senator Dorgan. Would you send that to me?
        Secretary Snow [continuing]. It for you. Yeah, I will send
    it to you.
        Senator Dorgan. I would hope that just behind the curtain
    you'll be a lonely voice in the administration saying, let's
    just stop the obsession here. We don't like Castro. The
    quickest way to get rid of Castro is through trade and tourism,
    just as we believe that engagement with communist China and
    communist Vietnam has enhanced--moving them in the right
    direction is enhanced by trade and tourism. We believe the same
    with respect to Cuba.

                               NEW HOMESTEAD ACT

        But let me ask you two other quick questions if I have the
    time, Mr. Chairman. One is I want to show you a chart. This
    chart shows the depopulation of the heartland. The red are the
    rural counties in America. As you can see, kind of an egg-
    shaped in the heartland of America that's being depopulated in
    the last quarter century or last half century.
        And Senator Hagel from Nebraska, Senator Brownback, myself,
    and others have introduced legislation called the New Homestead
    Act. We don't have land to give away anymore, but we clearly
    are seeing a relentless depopulation a century after we
    populated this through the Homestead Act. I'd like very much to
    visit with you at some point about the strategy here. It's
    bipartisan. We've had a big, broad bipartisan group put this
    together, and I'd like to talk to you about that.

                                   TAX HAVENS

        Finally, I want to ask you a question about tax havens. Let
    me express my concern. I think Senator Murray expressed concern
    about closing walk-in taxpayer assistance centers. I want to
    register on that. But I've introduced some legislation on tax
    havens. I read the other day that Exxon has the largest
    quarterly profit in the history of humankind, $8 billion for
    the quarter, and I know that Exxon has 11 tax haven
    subsidiaries in the Bahamas, not for the purpose of doing
    business there, but for the purpose of helping run the
    corporation out of a mailbox and reducing their tax burden in
    the United States.
        And I've introduced legislation that says, you know, if
    you're moving to tax havens not for the purpose of doing
    business there, but for the purpose of avoiding taxes, you're
    going to be taxed just as if you never left this country. And
    I'm wondering, give me your observation about that approach.
        Secretary Snow. Well, Senator if the activity is done
    primarily to avoid taxes and not for a profit undertaking,
    profit-making purpose, then it shouldn't enjoy the tax
    advantages. I mean, that's part of the policy that we're trying
    to see incorporated in the enforcement. It's the essence of
    this doctrine that lies behind so much of our enforcement. If
    it doesn't have a legitimate business purpose, then you're not
    going to get the tax advantage associated with it.
        Senator Dorgan. But I think you need a change in law to
    accomplish good enforcement here. And I think that when you
    take a look at all of these subsidiaries sort of being
    established, I mentioned Exxon, I mention Xerox, Halliburton,
    so many corporations have set up massive numbers of
    subsidiaries, not for the purposes of doing business, but for
    the purpose of avoiding taxation. I would fully support your
    increased enforcement efforts, but I think you need a change in
    legislation that would say, in those circumstances where they
    set it up exclusively to avoid paying U.S. taxes, they shall be
    taxed as if they had not left this country.
        Mr. Chairman, thank you. I apologize for being late to you
    and the ranking member.
        Senator Bond. Well, we missed you, Senator Dorgan. We're
    glad you could join us. Unfortunately, I'm going to have to
    turn the gavel over to my very capable ranking member because I
    have to go to the floor soon where I have a few things going on
    now.

                                   CDFI FUND

        But I want to ask you about two things, Mr. Secretary. I
    mentioned I'm very disappointed in the decision to--essentially
    to eviscerate CDFI. CDFI funds go to financial institutions
    that are serving areas that are underserved by financial
    institutions. And I, as a former Governor, can tell you there's
    a minimum amount of high enthusiasm for using a block grant to
    ensure that underserved areas have financial institutions. It
    just makes no sense.
        What's the administration going to do to ensure that
    financial institutions which are serving underserved areas will
    continue to have the incentive and capacity to continue to
    serve these areas?
        Secretary Snow. Well, Senator, I'm not real close to all
    that's going on in that arena. That's really Secretary Jackson
    and Secretary Gutierrez. But I am pleased that the most
    important single part of the Treasury programs in this area,
    something called the New Markets Tax Credit, will remain fully
    funded as part of the Treasury Department.
        With respect to the other consolidation of these programs,
    primarily in Commerce as I understand it, the view is that
    these programs will be more effective if they're streamlined
    and consolidated.
        Senator Bond. I just disagree on that. But since you
    mentioned New Markets, CDFI would be funded at only $7.9
    million. GAO found in a January 2004 report that under the New
    Market's formula, 39 percent of all census tracks qualify for
    these tax credits. I'm wondering if there's any effective
    administration in the Treasury Department to know that it's
    benefiting, truly benefiting economically distressed programs.
    What quantitative methods are used to determine if this program
    works? And what's the Treasury doing to ensure these tax
    credits are meeting benchmarks, and can you quantify the
    success or failure of the program?
        Secretary Snow. Mr. Chairman, that's a heck of a good
    question. This program----
        Senator Bond. I thought it was too.
        Secretary Snow. It's a heck of a good question.
        Senator Bond. Because I really--I have great questions
    about New Markets. I'm afraid it's just throwing money out the
    door.
        Secretary Snow. Well, it's the very question that I have
    put to the folks who oversee the program. Having participated
    in a number of these meetings though with local participants,
    you get a sense when you're out there and see a community--they
    only go to poor communities--that bringing private capital with
    the tax credits, with community leaders, produces some good
    results. Now, whether in the aggregate the benefits
    significantly or marginally or don't exceed the costs of the
    tax credits is something that we have to do more analysis on.
    It's probably too early to say. It would be too early to say.
        Senator Bond. I tell you what, I've never gone to a
    community that has gotten some Federal money, either from
    direct strategic investment or a program like this that doesn't
    turn out a bunch of people who are very happy and enthusiastic
    about the success of the program that's funding them. That's
    not hard to do.
        But I would--I'd welcome if you would provide for the
    record the benchmarks, how we know they're working, what you're
    doing as to oversight, what standards you expect them to meet,
    and how are you judging the effectiveness.

                         BUSINESS SYSTEMS MODERNIZATION

        Let me go back to one question that I am very much
    concerned about, which as I said, I raised with the
    Commissioner of the IRS; namely, the Business Systems
    Modernization. Two billion dollars going down a rat hole may be
    a little harsh, but almost every procurement activity is behind
    schedule, over budget, and when the contractor delivers
    software, we have been told it does not meet performance
    requirements.
        Since you've come from the private sector, Mr. Secretary,
    would you have spent $2 billion on the program? Do you believe
    the improvements are worth the money? And if you were directly
    in charge, would you consider pulling the plug, or what
    criteria would you establish to make sure it works?
        Secretary Snow. Mr. Chairman, like so many other large
    information systems projects, this one was probably overly
    grandiose at the beginning, promised too much and tried to do
    too much. I think the requirements were not adequately defined.
    They were poorly defined. I think the IRS was trying to do too
    much too fast, and the results show.
        Commissioner Everson is taking, I think, a very
    enlightened, intelligent, thoughtful view, let's try and set
    forth to targets for the BSM that are achievable, let's not
    overreach. And he and the very able CIO there, Todd Grams, are
    getting good results. I think last year was probably the best
    year ever in the history of the BSM initiative. I know that
    Commissioner Everson takes a direct personal interest in it. He
    knows that the story there is not a good one and that there's a
    lot of recouping to be done.
        But the updates of the Customer Account Data Engine are
    really showing good results. They've taken me through that. I'm
    very pleased. A long way to go, we can't declare victory. But I
    think sizing it better, having a better sense of requirements
    and milestones with a smaller budget actually is producing
    better results than the very large budget that formerly was
    standard operating practice.
        Senator Bond. Mr. Secretary, I had suggested to OMB
    Director Bolten that with some $60 billion going out to IT
    programs that I think OMB should have, in the past and
    certainly now, a real talent pool with high-class capabilities
    to make sure that we don't continue to run into the IT problems
    which we see throughout the government; problems we see at
    every agency and in every IT solicitation. Consequently, I
    believe we need a professional and expert IT solicitation panel
    that can ensure Federal agencies can adequately address their
    IT needs.
        With that, again, I apologize, I have to go to the floor,
    and I will now turn the hearing over to Senator Murray.
    Senator. Thank you, Mr. Secretary.
        Secretary Snow. Thank you, Mr. Chairman.

                                   HR CONNECT

        Senator Murray [presiding]. Thank you, Mr. Chairman. Mr.
    Secretary, in my opening statement I talked about the concern I
    had about the continuing reports we are getting regarding
    mismanaged and costly procurements at your Department, and I
    want to talk about one of them this morning in the hope that
    you'll tell us that the agency is implementing some lasting and
    effective improvements.
        Five years ago, the Treasury Department decided to expand
    IRS's effort to develop a new common human resource information
    system to all of Treasury's offices and bureaus. It's known as
    HR Connect, and it's gotten excessively expensive and it is not
    delivering on its original goals.
        Can you tell us why a similar human resources system at the
    Coast Guard and the Ag Department cost $24 million and $15
    million respectively, but HR Connect is costing you $173
    million?
        Secretary Snow. I'd want to talk to the people who were
    directly responsible for it to get a better feel for those
    numbers. HR Connect is, I understand, currently in operation.
    And--well, I would say it differently--it's in the operations
    and maintenance phase of its life cycle, and major systems
    development has been completed. The initiative though is far
    from complete in its totality, and the final steps of
    transition from development to operations and maintenance are
    expected to be completed for fiscal year 2006. And it's
    something that I'll have to look into to get you a more
    complete answer and I'll do that.
        [The information follows:]

        Senator Murray. I would like to know, the Inspector General
    reported recently that the IRS let the contractor for this
    system make decisions that the agency itself should have been
    making. The IG said that the IRS's oversight of this program
    has been weak to non-existent. In fact, when the Appropriations
    Committee noted the cost growth and asked for a report on the
    program, the IRS even let the contractor prepare that report
    for this committee. These problems are fairly similar to what
    we've seen with the IRS business system modernization.
        Can you share with this committee, is the Treasury
    Department and IRS incapable of conducting routine management
    and oversight of programs like these?
        Secretary Snow. Oh, I don't think so. I think that would
    overstate the case. From my experience in private life,
    difficulties with new information systems are not unknown to
    the best-run organizations. And I'll look forward to talking
    with the HR people and with the IG's office to get a better
    sense of this situation so I can talk to you more.
        Senator Murray. Are there any measures being implemented
    across the Department to improve management and contract
    execution that you can share with us?
        Secretary Snow. Well, yes, we talked about some of the
    major ones already, the BSM at the IRS is the biggest, most
    far-reaching. And I think because of the focus that's been
    brought to bear on it, we're seeing real results. We're seeing
    that setting up understandable requirements with reachable
    sorts of targets and goals with people directly accountable
    with milestones is producing results. That's the model that
    always produces results in the information systems arena, and
    it's the one we're going to be taking throughout the
    Department.

                                 TBARR PROJECT

        Senator Murray. Okay. Well, let me ask you about one other
    area, and that's the Treasury Department's modernization of its
    building. Since 1996, we've been doing this through a program
    called TBARR. After $237 million in appropriated funds and
    significant senior leadership turnover, the main Treasury
    building project still has not been completed and the Treasury
    Annex hasn't even been touched.
        The Treasury Inspector General noted that the direct
    involvement of the Deputy Secretary at one point in the
    building modernization helped improve the project, but now the
    Deputy Secretary has left, the acting Assistant Secretary for
    Management, who's been involved in this project has left, and
    so have quite a few other senior Treasury officials.
        With the record of mismanagement with this program and all
    the vacancies, how can we be assured that the remaining funds
    we're asking for this year, which is $10 million, will be
    managed properly?
        Secretary Snow. Well, the Deputy Secretary, of course, is
    now the Secretary of the Energy Department, so he's still part
    of the administration, somebody I----
        Senator Murray. But he doesn't have direct oversight of
    this program.
        Secretary Snow [continuing]. See regularly. And we've
    appointed a very able, very competent Acting Deputy Secretary
    to continue to oversee this initiative. We have in the
    pipeline, I hope receiving approval very shortly, a new
    Assistant Secretary for Management, who knows this is a
    priority to be overseen. And all I can do is tell you that we
    are committed to getting this project done with the $10 million
    that we've requested.
        Senator Murray. Well, am I correct that fiscal year 2006 is
    the final year you're going to be requesting funds for TBARR,
    even though there's been no work done yet on the Treasury
    Annex?
        Secretary Snow. Yeah. The focus here is on the main
    building, the main Treasury building, which really is a
    treasure. But as with all buildings that go back a century
    plus, it's got to be modernized and updated, and that's costly.
    But it's an appropriate investment in the Treasury building
    which I think is the third oldest building in continuous
    operation. Abraham Lincoln once walked the halls. It's historic
    and we need to preserve its historic role in our country's
    history.
        Senator Murray. Do you anticipate requesting any funding
    for repair of the Treasury Annex through the TBARR program, or
    actually through any other program?
        Secretary Snow. Well, we're going to need to have some work
    done on the Annex. Some work has been done, some safety work,
    some work on the elevators, and some of the things that are
    directly related to the safety of the people in the building. I
    think we will now need to have a maintenance budget at the
    Department, a regular funded maintenance budget. And one of the
    things in the past we haven't had was a maintenance budget, and
    of course if you don't maintain these great old buildings, they
    deteriorate on you, and then the cost is even greater.
        Senator Murray. Senator Dorgan has another question. We'll
    have one final one when he is through.

                                 TRADE DEFICIT

        Senator Dorgan. Mr. Secretary, again thank you for being
    with us today and answering questions. I know that you came to
    our State recently, and we're always honored when a Cabinet
    official visits North Dakota. You were there to talk about
    Social Security, and I suspect, although I was not able to be
    there because we had votes that day, I expect that you agree
    with President Bush that there is a ``crisis'' of sorts in
    Social Security. I've observed previously that Social Security,
    according to the Social Security actuaries and the CBO,
    somewhere between those two, Social Security will remain fully
    solvent until President Bush is 106 years old. That is not a
    crisis, although I admit that perhaps we'll need some
    adjustments along the way, not major surgery.
        But I think there is a crisis, and I think there's a crisis
    in international trade. Our trade deficit is a dramatic
    deficit. We're choking on trade debt. The China debt was up 30
    percent last year to $162 billion with that one country alone.
    Tell me, how do you assess our trade situation? Is this debt
    serious? Troublesome? Do you think our trade policies are
    working?
        Secretary Snow. Senator, thanks, I had a good visit to
    Bismarck, and Bismarck High is a great school. So is the
    University of Mary that we visited.
        The issue of Social Security and the crisis, that's
    semantics. It's a problem that needs to be addressed, and I'll
    leave others to put the adjective on it.
        The trade deficit is also serious, and it's something we
    are trying to address. A large part of the trade deficit grows
    out of the fact that the United States is growing faster,
    higher GDP growth, and creating more disposable income than our
    trading partners, our major trading partners, Japan, the Euro
    zone, and so on. Thus, we are buying more from them than they
    are buying from us. We also have a lower propensity to save,
    higher propensity to consume, and some of that shows us in our
    appetite for their goods.
        It's important for our trading partners to grow faster.
    It's one of the messages we try and take to them. You know, you
    may not be able to grow as fast as we would, because your
    population is growing more slowly--but your productivity can be
    as high, and if you have better growth policies, we'll narrow
    the trade gap.
        Senator Dorgan. Mr. Secretary, though, isn't that a
    position that on its face is wrong with respect to China?
    China's growing much more rapidly than we are. Their economy
    is--has a very rapid rate of growth, and yet our trade deficit
    with China is growing dramatically. So on its face, isn't that
    argument--isn't that an argument that doesn't hold water with
    respect to China?
        Secretary Snow. Well, it's an argument that holds water
    with Japan and Germany and France and Italy and Spain and all
    of our major trading partners. Now, clearly China is growing
    very fast, 8, 9 percent. But our exports to China are growing
    at a double-digit rate as well. So we need to keep pressing
    China to open up more and deal with issues like intellectual
    property rights and the thievery of our ideas.
        But I know China's going to continue to grow, I think, at a
    pretty good clip. But our exports are also there growing at a
    good clip. They should grow faster.
        Senator Dorgan. But our imports are growing more rapidly.
    That's why the trade deficit increases. I mean, if you just
    look at one side and portray that as positive when in fact the
    other side is growing much more rapidly. My point is that the
    basic argument, I've heard you make it before, and I think it's
    the administration's position, our trade policies are working,
    and the only problem is our trading partners aren't growing
    fast enough, just take a look at China. China's growing much
    more rapidly than we are, and so is our trade deficit with
    China. I just think that undercuts the debate here about that.
        My own sense about China is that you're right about
    counterfeiting and piracy, but the fact is that China wants us
    to be a sponge for all their trinkets and trousers and shirts
    and shoes and all the things they produce including high-tech,
    and yet they don't want to open their market to us and we sit
    around without the will, the nerve, or the backbone to say this
    is nonsense, we're not going to put up with this anymore.
        This is in many ways about enforcement, it's about good
    trade agreements. I want to just ask you about this, because
    it's--if you are reading about China, the country with whom we
    have the largest growing trade deficit, an alarming trade
    deficit, they are now ratcheting up an automobile export
    industry. They're very quickly putting together an automobile
    industry and they're anxious to have an automobile export
    industry. And in fact one of our major car companies is suing
    China for stealing the blueprints for a car that they're now
    producing.
        In our bilateral agreement with China, not done by this
    administration, done by the previous administration, but then
    all trade negotiators have the same mind set. They want to get
    into a room and reach an agreement as quickly as they can,
    notwithstanding what the agreement is. In our bilateral
    agreement, we agreed with China that on bilateral with respect
    to automobiles, they could impose a 25 percent tariff on U.S.
    cars that go to China and we would impose a 2.5 percent tariff
    on Chinese cars that come here.
        So with a country with whom we had a huge deficit we agreed
    that they could impose a tariff that is 10 times larger in
    bilateral automobile trade. That's not only incompetent, that's
    just nuts. And yet, we now watch the Chinese gear up for an
    automobile export trade after we have this fundamentally
    unsound trade agreement with them. I mean, what do you make of
    that?
        Secretary Snow. Well, Senator, I'm not at all happy with
    the situation. Trade's got to be a two-way street as you're
    suggesting, and the Chinese need to accelerate their
    commitments to WTO, they need to move to a flexible currency,
    they need to open up their markets, they need to enforce the
    piracy laws and the counterfeiting laws and stop stealing our
    intellectual property. There's a lot to be fixed there, a lot
    to be fixed, and probably including going back and looking at
    some prior agreements.
        Senator Dorgan. Madam Chair, one more point if I might, and
    then I'll conclude. You know that much of our trade issue with
    China's foreign policy, in fact, the interagency task force
    recommended that we take action against China based on wheat
    trade, and the answer was, no, that would be a too much of an
    in-your-face thing to do. So this is all soft-headed foreign
    policy.
        But I think that it's important for our country to
    recognize our trade deficit is a crisis, it is a genuine
    crisis, No. 1. No. 2, I think a little backbone would be good
    for us. I think, you know, if we told the Chinese, you know you
    have all these goods you want to sell, why don't you try
    selling them in Zambia for the next year and see what kind of
    market you have, because we are a cash cow for the China hard
    currency needs at the moment given our trade deficit. And the
    fact is China needs this trade relation. If--we just need to
    have some backbone to say to the Chinese, we're going to take
    action if you don't own up to your responsibilities.
        Well, Mr. Secretary, you and I will have further
    discussions about this. I would like to send you my--on the tax
    haven issue, with respect to treating them as if they never
    left, I would like to send you that bill and ask for the
    comments of the Treasury Department.
        Secretary Snow. I'd be delighted, Senator, and I look
    forward to talking to you about it.
        Senator Dorgan. Thank you.

                        BONNEVILLE POWER ADMINISTRATION

        Senator Murray. Thank you very much. Mr. Secretary, I just
    have one other issue, and that is, last week Director Bolten
    was here with us, and I asked him about borrowing authority for
    the Bonneville Power Administration, and I'm curious as to your
    views on this issue.
        In your administration's budget, you have proposed to hold
    certain financial transactions like third-party financing
    against BPA's borrowing authority. As I told Director Bolten
    last week, this proposal is rich in irony because it
    contradicts the President's own fiscal year 2003 budget. For 2
    years the administration opposed the Northwest delegation's
    effort to raise BPA's borrowing authority by $1.4 billion. In
    the 2003 budget, the President finally called for increasing
    this borrowing authority by $700 million, or actually half of
    what was needed.
        But the budget also said that BPA should use other
    financing means like third-party financing to meet the
    remainder of its investments' needs. Yet here we are again 2
    years later and your administration proposed to undercut the
    ability of BPA to use third-party financing by holding these
    and other types of transactions against their Treasury
    borrowing authority limit.
        Last week Director Bolten said he'd get back to me on this,
    and I expect you'll have to do the same. But I would recommend
    that before the administration proposes legislative language
    like this, we ought to have a common understanding on whose
    debt this is.
        And I just wanted to ask you, do you believe BPA's
    investments using third-party financing are liabilities of the
    U.S. Treasury or are they liabilities of the Northwest rate
    payers?
        Secretary Snow. Senator, I really would have to look into
    that, because I don't know enough about it to offer a
    thoughtful opinion, and I'd be reluctant without more knowledge
    to answer----
        Senator Murray. Well, this is a----
        Secretary Snow [continuing]. Such a complicated question.
    But I will look into it and I will----
        Senator Murray. This is a critical question for us. And
    believe me, rate payers in the State of Washington have really
    been hit from Enron on, and the answer to this question is
    absolutely critical. So I would like a response back as soon as
    possible from you.
        Secretary Snow. I will commit to do that.
        [The information follows:]

                     Bonneville Power Administration (BPA)

        The administration has encouraged BPA to seek private sector
    participation and joint financing of its transmission system upgrades
    and other capital investments that are structured to ensure that the
    financial risks of these investments are jointly shared by BPA and the
    private sector participants involved. When financial transactions are
    structured in this way, any resulting BPA obligation should not be
    counted against BPA's $4.45 billion statutory limit on the aggregate
    amount of debt that BPA has outstanding at any one time (BPA debt
    limit). For this reason, the administration's proposal excludes from
    the BPA debt limit third-party financings in which the private sector
    bears real financial risk, such as operating leases.
        In contrast, the 30-year capital lease transaction that BPA entered
    into in 2004 is an example of a transaction involving debt that should
    be counted against the BPA debt limit. Under this transaction, a third
    party issued bonds backed solely by lease revenues required to be paid
    by BPA and used the proceeds to finance the cost of BPA's acquiring,
    constructing or equipping certain new transmission assets. While the
    third party holds title to the assets, BPA has exclusive use and
    control of the assets during the 30-year lease period and, at the end
    of this period, BPA has the option to acquire the assets at minimal
    additional cost. The third party that issued the bonds has not borne
    any real financial risk. BPA's obligation to make lease payments under
    the capital lease is unconditional and not terminable unless BPA makes
    arrangements for the bonds to be repaid in full. Since repayment of the
    bonds depends wholly on BPA's making its guaranteed lease payments, the
    bonds are, in substance, a form of BPA debt which should be subject to
    the BPA debt limit. Under the administration's proposal, such debt
    would be subject to the limit.
        Despite the apparent perception of market participants that debt
    issued under the 2004 BPA third-party lease transaction is implicitly
    guaranteed by the United States, and the fact that BPA is a wholly-
    Federal entity in the Department of Energy, this debt is not backed by
    the U.S. taxpayer. As a matter of sound budgetary and financial
    practice, the administration supports having statutory limits on
    Federal agencies' debt regardless of whether or not the debt is backed
    by the U.S. taxpayer. A central purpose of BPA's debt cap is not just
    to limit its liability to taxpayers, but also to regulate and limit its
    financial risk exposure for its ratepayers. An effective BPA debt
    limit, one that applies to all forms of BPA debt, will make BPA's
    financial condition more transparent to its ratepayers and other
    stakeholders and serve as an important financial control device.

                         ADDITIONAL COMMITTEE QUESTIONS

        Senator Murray. Members of the subcommittee who have
    additional questions will submit them for your response, and
    they will also be included for the record.
        [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 Patty Murray

            MISMANAGEMENT OF IRS EMPLOYEE TUITION ASSISTANCE PROGRAM

        Question. Several years ago, the IRS established a tuition
    assistance program to help employees improve their accounting and
    information technology skills. This program was also supposed to
    improve training at taxpayer assistance centers since these centers
    have not had a good record at providing taxpayers with accurate
    guidance. To date, it appears that more than 60 percent of the funding
    for this program--some $7.2 million--has been used for overhead while
    only the remaining $2.8 million has gone toward true tuition
    assistance. This problem has persisted while nearly half of the
    employees eligible for the assistance have been denied by the agency.
        Given the fact that your Department has told us that they are
    trying to enhance the skills of the IRS workforce, how is it that no
    one at IRS knew that this program was failing so badly?
        What is being done to rectify the problem now?
        Your agency has periodically justified efforts to push Federal jobs
    over to the private sector on the grounds that private employees might
    be better trained.
        Given the way your Department has mismanaged these efforts to train
    your own employees, aren't the employees justified in complaining about
    your efforts to send their jobs to private contractors?
        Answer. Since 2000, when the Human Resources Investment Fund (HRIF)
    was funded and developed jointly with the National Treasury Employees
    Union (NTEU), the IRS has spent $499 million on employee training. This
    included tens of millions of dollars spent on technical training for
    employees in the taxpayer assistance centers and call centers. The HRIF
    was not directed at funding this technical training. Indeed, training
    for skills needed in current occupations is not funded from the HRIF
    but from the operating budget of the IRS business units.
        The amount available for HRIF tuition funding is set at no more
    than 2 percent of the overall training budget. Administrative costs are
    not paid from this allocation, but from general management programs.
    Even though the overhead associated with the HRIF did not reduce the
    amount available to employees for tuition assistance, we are currently
    analyzing the program to determine how to most effectively reduce the
    administrative costs.

          MISMANAGEMENT OF TREASURY COMMUNICATIONS ENTERPRISE CONTRACT

        Question. The Treasury Department let a contract for a new secure
    communications network to AT&T about 4 months ago and the contractor
    began work. I'm told, however, that the remaining project bidders
    protested the contract award, which GAO subsequently sustained.
    Apparently, the bidders protested successfully because your Department
    apparently did not give each of them all of the relevant bid data at
    the same time.
        Mr. Secretary, why was there never a line item in the budget for
    this initiative? Doesn't an initiative of this size and importance
    merit some discussion in your budget documents?
        Please explain to me what happened with this attempt to purchase a
    new communications system and who you are holding responsible for this
    botched procurement?
        Answer. There is no line item in the budget because this initiative
    represents a service that is funded out of the Treasury Working Capital
    Fund (WCF). The WCF, funded by contributions from Bureaus, provides
    common administrative services for the Department. The intent of the
    Treasury Communications Enterprise (TCE) contract was to replace the
    expiring Treasury Communications System (TCS) contract, which is
    currently funded through WCF. The scope of these services focus on
    providing enterprise wide area network data communications services to
    Treasury Bureaus and Offices.
        Treasury and GSA entered into a Memorandum of Understanding (MOU)
    on December 2, 2004 which 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. Treasury did not intend nor did it believe the
    MOU impacted the procurement as the Department fully intended to
    fulfill the option years of the TCE contract provided it represented
    the best value for the government. 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 which
    we did accomplish.
        Question. Secretary Snow, I was pleased to read in your testimony
    that you recognize the important role of the Community Development and
    Financial Institutions (CDFI) Fund.
        The President's Budget justification for the CDFI Fund states that,
    ``Historically, for every dollar in investments provided by the CDFI
    Fund, awardees have been able to leverage these grants with over $20 in
    matching funds.'' That is an incredible amount of funds flowing into
    these economically distressed areas, especially considering the small
    Federal investment.
        I was disappointed to see that the President's Budget for fiscal
    year 2006 calls for almost all CDFI funding to be sent to Commerce and
    combined with other community development programs, which will then be
    reduced by approximately a third.
        Under the President's smaller substitute grant program, would all
    current CDFI programs still be eligible?
        Answer. Although the manner in which the CDFI Fund accomplishes its
    mission is unique--through building the capacity of these lenders to
    provide improved access to financial services--the underlying objective
    is not unlike any of the other consolidated programs from the various
    cabinet agencies proposed to be consolidated at the Department of
    Commerce, which holds a primary mission of economic opportunity.
    Commerce has shown great skill in managing its programs and in greatly
    leveraging private sector investment. As currently envisioned, nothing
    would preclude the CDFI industry from being eligible sub-recipients of
    ``Strengthening America's Communities'' grant funds from communities
    and States that receive funding.
        Under the Strengthening America's Communities Initiative the
    Treasury Department would focus on its fiscal year 2005 New Markets Tax
    Credit Program which will award $780 million of tax credits using $2
    billion of its investment authority ($0.39 of each investment dollar),
    which is roughly 20 times larger than the CDFI Programs ($40 million in
    fiscal year 2005) proposed for consolidation to the Department of
    Commerce.
        Question. How will you be able to ensure that the new smaller
    substitute grant program would be able to continue to leverage over $20
    for every Federal dollar?
        Answer. These types of details will be determined in close
    collaboration with Congress and stakeholder groups as the
    administration creates legislation for the initiative, which will be
    submitted to Congress.
        The accountability measures and other requirements will reflect the
    administration's belief that local flexibility is more effective than
    Federal control. The administration will set accountability measures
    for the use of taxpayer dollars, requiring communities to show that
    they have made progress toward locally selected goals for development
    (such as job creation, homeownership, commercial development, improving
    blighted or abandoned properties, and increasing the number of
    businesses in their area) in return for being able to determine locally
    how best to spend Federal dollars to meet those outcomes.
        As noted in the previous question, under the Strengthening
    America's Communities Initiative the Treasury Department would focus on
    its fiscal year 2005 New Markets Tax Credit Program which will award
    $780 million of tax credits using $2 billion of its investment
    authority ($0.39 of each investment dollar), which is roughly 20 times
    larger than the CDFI Programs ($40 million in fiscal year 2005)
    proposed for consolidation to the Department of Commerce.
        Question. We understand that the staff that has the expertise in
    this area will not be transferred to the Department of Commerce.
        What expertise does the Department of Commerce have in creating and
    supporting financial institutions that can provide access to affordable
    credit to distressed low-income minority communities that are not
    served by traditional banks?
        Answer. The engine of economic and community development is
    economic opportunity, ownership and job growth. Because the focus of
    this initiative is on economic development, creating local job
    opportunities, and helping communities transition to self-sustaining
    economies, the Commerce Department's mission (job creation, economic
    development, and opportunity) is more consistent with those goals.
        The Fiscal Year 2006 Budget provides funding for salaries and other
    administrative costs to close out grants from previous years. The
    administration will continue to address these questions as it develops
    its legislative proposal, which will be submitted to Congress in the
    coming months. It will provide the necessary authorities to transition
    the programs and ensure the necessary administrative resources to
    support their activities. The President's fiscal year 2006 budget
    provides the Department of Commerce with adequate funding to start up
    the new program in 2006.
        Question. Currently, the CDFI Fund works directly with financial
    institutions, giving resources to institutions that would then provide
    the much needed financial services to these low-income communities.
    However, under the President's proposal, the money would go out to
    States and local entities, and then to financial institutions.
        Won't this make the process less streamlined and merely add one
    more layer of bureaucracy, contrary to the President's justification
    for this consolidation effort?
        Answer. Currently, seven Federal agencies administer 35 different
    grant, loan, and tax incentive programs for economic and community
    development efforts. The current system forces communities in need to
    navigate a maze of departments and programs in order access economic
    and community development assistance, each imposing a separate set of
    standards and reporting requirements.
        In addition, some programs duplicate and overlap one another, and
    some have inconsistent criteria for eligibility and little
    accountability for how funds are spent. In fact, the Office of
    Management and Budget, through the PART analysis, has determined that
    many of these programs cannot sufficiently demonstrate that they make
    or contribute to a measurable improvement in economic and community
    well-being.

             FINCEN HAS NO PENALTY FOR REGULATORS THAT DON'T COMPLY

        Question. The Financial Crimes Enforcement Network (FinCEN) created
    a new office of compliance in response to fundamental weaknesses in the
    Treasury Department's system for compliance examination with the Bank
    Secrecy Act. FinCEN has set forth procedures for the exchange of Bank
    Secrecy Act information with its five Federal banking agencies, but as
    part of the memorandum of understanding with those entities, FinCEN did
    not include any penalty for noncompliance. And in the future, FinCEN
    expects to enter into even more such arrangements with other Federal
    regulatory agencies and State entities.
        So, if FinCEN has no recourse with agencies that don't comply with
    the exchange of Bank Secrecy Act information, then how will the
    regulatory agencies seriously undertake this effort?
        Answer. Following a series of Congressional hearings in the wake of
    the enforcement action against Riggs National Bank, N.A., FinCEN took a
    number of steps to enhance its ability to oversee and support the Bank
    Secrecy Act examination function being carried out by Federal agencies
    to which the Secretary of the Treasury has delegated Bank Secrecy Act
    examination authority. FinCEN created a new Office of Compliance within
    its Regulatory Division devoted exclusively to overseeing and
    supporting the examination regime. In addition, FinCEN has allocated a
    significant portion of its analytical resources to supporting
    examination-related review and analysis. Central to FinCEN's plan of
    stepping up its efforts relating to examination oversight and support
    is to ensure that, for the first time, FinCEN has sufficient
    information to assess how well its delegated examiners are functioning
    and evaluate and act on their findings. The Memorandum of Understanding
    executed with the Federal banking agencies last fall creates the
    necessary framework to ensure the flow of information to FinCEN.
        The Memorandum of Understanding ensures the production of the
    following categories of information to FinCEN--(1) information on the
    methods and structure of the examination function with each agency; (2)
    aggregate information on a quarterly basis concerning examination
    findings; and (3) the identification and production of supporting
    factual material on specific financial institutions with significant
    compliance deficiencies. For its part, FinCEN agrees to provide
    analytical support--in the form of reports on compliance issues
    generally and information concerning issues specific to individual
    institutions--to the banking agencies; coordination on all matters
    related to compliance and enforcement; and periodic reports on
    information provided.
        Since last fall, FinCEN has executed a similar agreement with the
    Internal Revenue Service, and is currently negotiating similar
    agreements with the Securities and Exchange Commission and the
    Commodity Futures Trading Commission. Significantly, as of June 8,
    2005, FinCEN has executed information sharing agreements with over 30
    States and territories. These agreements, modeled after the agreement
    with the Federal banking agencies, will for the first time create a
    close relationship between FinCEN and those States examining banks or
    other financial institutions for compliance with the Bank Secrecy Act.
    This will substantially enhance FinCEN's ability to maintain
    consistency in the application of the Bank Secrecy Act, leverage
    examination resources, and ultimately ensure greater compliance.
        While none of the information sharing agreements that FinCEN has
    executed contain ``penalty clauses,'' FinCEN and the Department of the
    Treasury have ample ability to ensure that all signatories comply with
    the letter and spirit of the agreement. First, and most importantly, we
    have reached an unprecedented level of cooperation with the banking
    agencies. All involved realize the importance of working together to
    ensure better compliance across all regulated entities. To have sought
    a penalty provision within the agreement would quite simply have
    undermined our overarching purpose, namely, to cement a new and robust
    level of cooperation. Second, we do not believe that a penalty
    provision is necessary to ensure compliance with the agreement. Indeed,
    the concept of a monetary penalty for non-compliance is inconsistent
    with an intra-governmental information sharing arrangement. We believe
    that ``non-compliance,'' to the extent it occurs, will be in the form
    of reasonable disagreements over the scope of the agreement rather than
    a refusal to honor clear terms. In the event of non-performance,
    however, in the first instance, FinCEN has considerable power to
    encourage compliance through our comparison of one agency against the
    others. If that proves ineffective, we will elevate the issue to the
    Department of the Treasury. The Secretary of the Treasury is
    responsible for the administration of the Bank Secrecy Act. Failure of
    an agency to comply with the terms of the information sharing agreement
    could result in action at the highest level of Treasury to ensure that
    any deficiencies are cured.
        FinCEN is in the process of fundamentally redefining our
    relationship with the delegated examiners. Thanks in large part to the
    interest and support of the Congress; we have been able to make
    significant strides in this regard. Going forward, while we know that
    there will be issues, we expect to be in a position to resolve them,
    with Congress and others keeping a close eye on our progress. Our
    collective goal is to better ensure the protection of the U.S.
    financial system through the application of the Bank Secrecy Act. This
    will continue to demand that we work closely with all those involved,
    including the industry and law enforcement, to ensure that our
    regulations are reasonable and applied consistently.

                  LACK OF SECURITY OF INFORMATION AT TREASURY

        Question. Among the many problems your agency has with its
    information systems, one of the most troubling is the opportunity for
    agency employees, contractors, and law enforcement personnel to have
    unauthorized access to secret information.
        In addition to maintaining its own sensitive financial and tax
    information, IRS also maintains a significant amount of sensitive
    information for the Treasury Department relative to the Bank Secrecy
    Act. The GAO, in a report dated this month, stated that despite the
    progress the IRS has made in correcting information security
    weaknesses, more than half still remain unfixed since 2002. Moreover,
    because no overall agency-wide information security project exists,
    there are no security controls in place to prevent, limit, or detect
    unauthorized access to Bank Secrecy Act data or taxpayer copy data. So,
    any IRS employee, FinCEN employee, contractor, or State and local law
    enforcement employee involved in this effort, could have unauthorized
    access to secret information.
        Mr. Secretary, since many of these security weaknesses have existed
    since 2002, why is it taking IRS so long to correct them?
        What is your plan to establish an overall agency-wide plan as GAO
    recommends and to fix the remaining weaknesses?
        Answer. Recognizing the criticality of the security weaknesses, the
    IRS began an initiative in mid-2004 to analyze and fix required
    security activities at each of its computing centers and campuses and
    to support security certification and accreditation. The IRS is
    accomplishing this initiative using the latest processes and guidance
    as specified by the National Institute of Standards and Technology
    (NIST), and in accordance with the requirements of the Federal
    Information Security Management Act (FISMA).
        In responding to GAO's report, the IRS developed a detailed
    coordinated response to the 60 GAO findings. The response matrix
    includes the GAO findings, the specific actions the IRS is taking to
    implement corrections to the weaknesses, and the dates the IRS will
    complete the actions. A number of weaknesses have already been
    corrected and the appropriate documentation to substantiate the
    correction is being provided.
        The IRS is aggressively pursuing corrective actions to address the
    vulnerabilities identified in the GAO report, including correcting
    numerous weaknesses and implementing internal controls. The IRS is also
    developing a new enterprise-wide approach to security issues and is
    working on a plan to bring all of its systems into compliance with
    Federal, Treasury, and IRS policy, in addition to correcting the issues
    at the Detroit Computing Center (DCC). To further enhance the security
    process, the IRS has strengthened the role of the Designated Approving
    Authority (DAA) at the DCC. A DAA is a senior level official
    responsible for ensuring information security and mitigation of
    identified weaknesses. The DAA has been specifically assigned to
    provide a single point of authority and accountability for secure
    operations while ensuring the required oversight over the Center's
    equipment and associated systems software.
        Treasury also continues to improve the Departmental Cyber Security
    program as a whole. Treasury Bureaus and Offices are working
    collaboratively to strengthen Departmental governance processes and
    information security policies and procedures. The Department believes
    that the actions taken by the IRS are very positive steps towards
    improving the security posture at the IRS and in addressing the
    concerns outlined by GAO's report.
        Question. Mr. Secretary, a significant number of high-level
    positions are vacant at the Treasury Department--quite a few Deputy
    Secretary, Under Secretary and Director positions. The Deputy Secretary
    has left. So have the Under Secretaries for International Affairs and
    Domestic Finance. Five Assistant Secretaries are vacant including the
    position of Assistant Secretary for Management. These are positions
    critical to the effective management of a $12.5 billion agency and to
    the appropriate oversight of some of the problems I have cited this
    morning.
        In addition to funding your Department, this subcommittee also
    funds the Executive Office of the White House including the Office of
    Personnel.
        Are you confident that you are getting all the help you need in
    getting these vacancies filled?
        Answer. Absolutely. I have an excellent, close working relationship
    with the White House Office of Presidential Personnel. In fact, in
    recent weeks we have announced a number of important nominations,
    including Robert Kimmitt for Deputy Secretary, Tim Adams for Under
    Secretary for International Affairs, Randy Quarles for Under Secretary
    for Domestic Finance, Phil Morrison for Assistant Secretary for Tax
    Policy, and Kevin Fromer for Assistant Secretary for Legislative
    Affairs among others. A full list of Treasury nominees awaiting
    confirmation appears on the following page.
        The White House has been instrumental in helping us find the right
    people to fill these very important positions. I think you will find
    that we have selected an excellent group of nominees to fill the senior
    posts here at Treasury.
        Question. Do you agree that the significant number of vacancies has
    an impact on the ability of your agency to fully execute its mission
    and appropriately manage its people and programs?
        Answer. The Treasury Department is fulfilling its various missions
    and meeting its goals effectively. Although we have some vacancies
    right now, there are strong, competent individuals continuing to do the
    work of the Department on an acting basis, and of course, there are
    thousands of Treasury employees nationwide who admirably perform their
    duties.
        Currently, there 10 Treasury nominees pending before the United
    States Senate. I share your view that having a strong and effective
    team in place is important to making the Treasury Department run as
    well as it possibly can. These nominees will be a great addition to our
    team and I look forward to working with you to help the Senate consider
    these nominees carefully and then to get them confirmed as quickly as
    possible. I would greatly appreciate any help that you could provide to
    make the confirmation process for these nominees a smooth one.
    Nominations Awaiting Senate Confirmation and Dates of Nomination
        John Dugan.--Comptroller of the Currency (2/28/05).
        Tim Adams.--Under Secretary, International Affairs (4/06/05).
        Bob Holland.--U.S. Executive Director, World Bank (4/25/05).
        Sandy Pack.--Assistant Secretary for Management and CFO (5/16/05).
        Janice Gardner.--Assistant Secretary, Intelligence and Analysis (5/
    16/05).
        Jan Boyer.--Alternate Director, Inter-American Development Bank (5/
    25/05).
        Randy Quarles.--Under Secretary, Domestic Finance (5/26/05).
        Phil Morrison.--Assistant Secretary, Tax Policy (5/26/05).
        Kevin Fromer.--Assistant Secretary, Legislative Affairs (6/06/05).
        John Reich.--Director, OTS (6/06/05).
        Robert Kimmitt.--Deputy Secretary (announced, but not yet
    transmitted to the Senate).

     BUDGET PROPOSAL TO RAISE THE CAP ON ALLOWABLE SPENDING IF TREASURY'S
                REQUEST FOR TAX LAW ENFORCEMENT IS FULLY FUNDED

        Question. Mr. Secretary, this subcommittee is going to have some
    very severe funding constraints because of the President's proposals to
    eliminate Amtrak, cut the CDBG program, and rescind billions of dollars
    from HUD. The budget for your agency claims to recognize the linkage
    between enhanced tax law enforcement and receipts to the Treasury by
    including a special provision that would raise the cap on allowable
    spending by $443 million next year if we fully fund your request to
    boost tax law enforcement by 7.8 percent.
        What disturbs me about this proposal is that it is ``all or
    nothing.'' If we raise tax law enforcement spending by an amount that
    is $1 less than your request, that we get no scorekeeping relief at
    all.
        How can this proposal possibly make budgetary sense?
        If you believe that funding your 7.8 percent increase will yield an
    extra $443 million to the Treasury, how can you argue that if we
    provide a 7.7 percent funding increase, the Treasury will see no
    additional revenue at all?
        Answer. Section 404 of H. Con. Res. 95, the Concurrent Resolution
    on the Budget for fiscal year 2006, reads:

        ``Internal Revenue Service Tax Enforcement.--If a bill or joint
    resolution is reported making appropriations for fiscal year 2006 that
    appropriates $6,447,000,000 for enhanced tax enforcement to address the
    `Federal tax gap' for the Internal Revenue Service, and provides an
    additional appropriation of $446,000,000 for enhanced tax enforcement
    to address the `Federal tax gap' for the Internal Revenue Service, then
    the allocation to the Senate Committee on Appropriations shall be
    increased by $446,000,000 in budget authority and outlays flowing from
    the budget authority for fiscal year 2006.''

        The requested $446 million increase for enforcement consists of two
    parts--the pay raise and inflationary costs needed to maintain existing
    levels for our enforcement programs ($181 million) and the amount that
    funds increased enforcement efforts ($265 million). The request
    represents a balanced approach to increasing taxpayer compliance and
    should be considered in its entirety. Funding the $181 million
    associated with the costs to maintain current levels is particularly
    important. Without this funding, the Service would be forced to absorb
    these costs through base program cuts.
        Investment in IRS enforcement yields more than $4 in direct revenue
    for every $1 invested in its total budget. In fiscal year 2004, the
    Service brought in a record $43.1 billion in enforcement revenue--an
    increase of $5.5 billion from the year before, or 15 percent. Beyond
    the direct revenues generated by increasing audits, collection, and
    criminal investigations, IRS enforcement efforts have a deterrent
    effect on those who might be tempted to skirt their tax obligations.
                                     ______

                 Questions Submitted by Senator Robert C. Byrd

        Question. What steps are you taking to make certain that China acts
    immediately to end its decade long manipulation of its currency?
        Answer. The Bush Administration, led by the Treasury Department,
    has been working intensively over the past year and half to move China
    to a more flexible, market-based exchange rate as soon as possible.
    This has involved frequent, high-level consultations with senior
    Chinese officials. The administration has also mobilized our G-7
    partners, other East Asian nations, the IMF and the Asian Development
    Bank to make clear that this is an issue of multilateral importance.
    Finally, we have had an intensive program of technical assistance aimed
    at overcoming the obstacles China sees to adopting a more flexible,
    market-based exchange rate regime. Treasury's technical cooperation
    program has been highly successful in helping China address
    shortcomings in its banking system, such as poorly performing loans,
    and understand how to develop and regulate a foreign exchange
    derivatives market, and improve banks' foreign exchange risk management
    practices.
        The Chinese authorities in turn have undertaken a number of
    significant steps to prepare its financial infrastructure for a change
    to the currency regime and wider fluctuations in the value of its
    currency. China is now ready and should move on its exchange rate
    without delay in a manner and magnitude that is sufficiently reflective
    of underlying market conditions.
        Treasury has taken a number of steps recently to expedite the
    process of China moving to adopt a more flexible, market-based
    currency. In early May, Secretary Snow appointed a Special Emissary on
    China, Olin Wethington. The appointment of Mr. Wethington, who will be
    responsible for direct and frequent contact with Chinese leaders and
    key decision-makers on issues related to exchange rates, seeks to
    continue and intensify a constructive dialogue with China on this
    extremely important matter during this critical juncture in U.S.-China
    economic relations. In addition, in the recent Foreign Exchange Report
    submitted to Congress, Treasury emphasized that China's rigid currency
    regime has become highly distortionary and that it poses risks to the
    health of the Chinese economy, such as sowing the seeds for excess
    liquidity creation, asset price inflation, large speculative capital
    flows and overinvestment. Failure to move to a more flexible regime
    risks economic disruption and dislocation in China and in the larger
    global trading system. The Treasury report concluded that if current
    trends continue without substantial alteration, China's policies will
    likely meet the technical requirements of the statute for designation
    in a future report. Finally, Treasury continues to pursue high-level
    discussions with the world's major trading nations on how best to
    address imbalances in the global economy and, in particular, to urge
    support for exchange rate flexibility, especially in emerging Asian
    economies, notably China.
        Question. Under U.S. law, the Treasury Department is required law
    to issue a semi-annual report on other nations' currency manipulation
    by April 15 of each year. The Department has missed the deadline for
    this year. Why has the Department not issued the report? Will the
    report find, as many believe it should, that China is unfairly and
    manipulatively undervaluing its currency?
        Answer. The spring Report to Congress on International Economic and
    Exchange Rate Policies was submitted on May 17, 2005. Because of the
    complexity of these reports, they are time-consuming to prepare. While
    we always strive to deliver our reports to Congress on time, delays may
    be unavoidable from time to time. This administration has consistently
    delivered these reports much more promptly than most of its
    predecessors.
        The report found ``that no major trading partner of the United
    States met the technical requirements for designation under the Omnibus
    Trade and Competitiveness Act of 1988 during the second half of 2004 .
    . . Treasury has consulted with the IMF management and staff, as
    required by the statute, and they concur with these conclusions.''
        The report also stated that ``Treasury has engaged, and will
    continue to engage, with several economies, including some in Asia, to
    promote the adoption of market-based exchange policies and regimes.
    Most notable among these is China. Current Chinese policies are highly
    distortionary and pose a risk to China's economy, its trading partners,
    and global economic growth. Concerns of competitiveness with China also
    constrain neighboring economies in their adoption of more flexible
    exchange policies. If current trends continue without substantial
    alteration, China's policies will likely meet the statute's technical
    requirements for designation.''
        Question. Last week in testimony before the Senate Finance
    Committee, USTR nominee Bob Portman stated that the Treasury Department
    is responsible for addressing any problems arising from China's
    undervalued currency. Mr. Secretary, would you agree that China's
    manipulation of its currency raises concern about China's legal
    obligations before the WTO?
        Answer. As Treasury noted in its recent report pursuant to the
    Omnibus Trade and Competitiveness Act of 1988, current Chinese exchange
    rate policies are highly distortionary and pose a risk to China's
    economy, its trading partners, and global economic growth. As
    Ambassador Portman indicated, Treasury remains engaged with China to
    encourage its adoption of more flexible exchange rate policies. We
    believe that our intensive engagement with the Chinese authorities is
    the most effective way to bring about a change in China's exchange rate
    policy as rapidly as possible.
        Question. The Trade Act of 2002 makes both strong trade remedies
    and addressing the problem of WTO Panels and the WTO Appellate Body's
    having created obligations not agreed to by the United States in the
    Rules area principle negotiating objectives. A review of the documents
    that have been filed by the U.S. government in the current WTO Rules
    negotiations shows that the United States is not acting to address
    these critical negotiating objectives. While some preliminary papers
    have been presented in the Rules area, little has been done by the U.S.
    government to follow-up on these preliminary papers with further
    explanatory papers or specific proposals and/or actions necessary to
    redress the harm that has been suffered by the United States as a
    result of the WTO dispute settlement process. As part of the
    interagency review process, the U.S. Treasury Department reviews papers
    and/or proposals of the U.S. Commerce Department and other U.S.
    government agencies prior to their submission to the WTO in the ongoing
    Doha Round of international trade negotiations. Can you confirm that
    the U.S. Treasury Department is working, and will continue to work over
    the coming months, to facilitate expeditious interagency approval of
    U.S. proposals put forward by the U.S. Commerce Department and other
    U.S. trade agencies--proposals that necessarily must be submitted in
    the WTO Rules and other negotiations to address the core negotiating
    objectives that were included by Congress in the Trade Act of 2002?
        Answer. The Treasury Department participates in the USTR-chaired
    interagency Trade Policy Staff Committee and Trade Policy Review Group,
    the committees charged with helping formulate U.S. trade policy
    positions and papers. Treasury participates based on the deadlines
    established by USTR. Treasury supports effective and transparent WTO
    rules that provide protection from unfairly traded and injurious
    imports and assure fair treatment by other countries for U.S. exports.

                              SUBCOMMITTEE RECESS

        Senator Murray. Thank you very much. This subcommittee will
    stand in recess until Thursday, May 12, when we will take
    testimony on the President's budget request on Amtrak.
        [Whereupon, at 11:11 a.m., Tuesday, April 26, 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
                                      2006

                                  ----------

                             THURSDAY, MAY 12, 2005

                                           U.S. Senate,
               Subcommittee of the Committee on Appropriations,
                                                        Washington, DC.
        The subcommittee met at 9:33 a.m., in room SD-138, Dirksen
    Senate Office Building, Hon. Christopher S. Bond (chairman)
    presiding.
        Present: Senators Bond, Bennett, Burns, Murray, Byrd, Kohl,
    Durbin, and Dorgan.

                          DEPARTMENT OF TRANSPORTATION

                    National Railroad Passenger Corporation

    STATEMENT OF DAVID M. LANEY, ESQ., CHAIRMAN, AMTRAK
                BOARD OF DIRECTORS
    ACCOMPANIED BY:
            DAVID GUNN, PRESIDENT, AMTRAK
            JEFFREY M. ROSEN, GENERAL COUNSEL, DEPARTMENT OF TRANSPORTATION
            KENNETH A. MEAD, 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.
        Today we welcome a diverse panel: Mr. David Gunn, Amtrak's
    President and CEO; David Laney, Amtrak's Chairman of the Board;
    Jeffrey Rosen, General Counsel for the Department of
    Transportation; and Kenneth Mead, Inspector General for the
    Department of Transportation.
        While I understand that Mr. Gunn will not be presenting
    testimony but is here to answer questions, I look forward to
    each of your views on Amtrak's fiscal year 2006 budget. More
    importantly, I look forward to understanding your views on the
    difficulty that Amtrak is facing and the options that will
    dictate the future or demise of Amtrak as we know it today.
        Unfortunately, the 2006 budgets presents a very bleak and
    dour picture for the future of Amtrak. The OMB request includes
    only $360 million in the Commuter Rail Operations Account,
    intended to facilitate Amtrak's reorganization through
    bankruptcy. This budget request is some $840 million less than
    the $1.2 billion appropriated in the current year for Amtrak
    operations and related needs. Under any circumstances, $360
    million is not enough to meet Amtrak's needs in 2006, whatever
    choice Congress makes about the future of Amtrak.
        As I have told you individually, and I have told the
    Director of the Office of Management and Budget, I think it is
    irresponsible to propose bankrupting Amtrak without having any
    significant plans for reforming it or the money either to fund
    the bankruptcy which would be, in our opinion, far more
    expensive than you have any concept here if you look at the
    obligations of Amtrak, or keeping it alive.
        Amtrak claims it needs $1.82 billion for 2006 and it cannot
    survive in fiscal year 2006 even on flat funding $1.2 billion.
    However, even if I was to agree that $1.82 billion for Amtrak
    is justified, I do not see how this subcommittee will be able
    to provide such a significant increase when we have been given
    such a shortfall across our entire budget by OMB.
        It is not your problem directly. It is Senator Murray's
    problem and mine. But it has implications which are very
    serious for you because we have a number of very difficult
    funding decisions in a tight allocation.
        The overall budget for domestic discretionary funding is
    such that this subcommittee will have trouble reversing many of
    the administration's recommendations that eliminate or reduce
    funding for many other important and necessary programs.
        OMB, for example, has eliminated funding of $51.6 million
    for Essential Air Service, an important and popular program
    that subsidizes air travel from remote rural airports, often
    located in areas with few transportation options. I doubt that
    we would be able to pass this bill on the floor of the Senate
    if those funds were not included.
        The budget request also proposes to dismantle the CDBG
    program as well as 17 other programs, and put them in a block
    grant with the Department of Commerce and take a huge whack at
    them, cutting them by about $2 billion. CDBG, again not your
    problem, it is ours. But CDBG is critical to HUD's mission of
    being both a leader and partner with States and communities in
    the development of housing and economic growth. The program is
    a priority for all States and most communities, and it is also
    a priority for the members of this subcommittee.
        Under the budget request, the subcommittee will have to
    find a way to also absorb a $2.5 billion rescission of excess
    Section 8 funds. Over the last few years, the previous
    committee that I had the pleasure of chairing before it was
    blown up, VA/HUD, made a number of reforms to the Section 8
    program to make it much more efficient and to reduce the
    availability of excess Section 8 funds.
        Having made that change, I have no idea how the
    administration proposes to pay for this rescission. Neither the
    Secretary of HUD nor the Director of OMB have any idea or any
    methodology for determining this rescission of where the funds
    will come from.
        Having given you the bright news, now these are just a few
    of the problems facing the subcommittee and unfortunately will
    severely limit our ability to backfill funding for Amtrak.
    Believe it or not, there is a laundry list of other program
    cuts and shortfalls I will not bother you with, but all have
    strong support and deserve funding. In truth, in a time of
    deficit reduction, a program must not only demonstrate its
    value but an ability to overcome substantial program flaws.
        Unfortunately, Amtrak's problems only seem to get worse.
    Bankruptcy will not solve it. It is too complex, the costs
    potentially too great, and the results too uncertain. I am not
    sure anyone understands the true cost, but I am from the Show
    Me State and I would like to see it before I count on it.
        Amtrak deficits run over $1 billion a year. The Northeast
    corridor has had problems with Acela. Mr. Gunn, your
    predecessor as president, Mr. Warrington, promised Congress
    that Amtrak was on a glide path to profitability. He left
    Amtrak in worse shape than he inherited it, with Amtrak's debt
    increased from $1.7 billion in 1997 to $4.8 billion in 2002. At
    least I would trust you not to make any promises like that
    until we see a little better prospect.
        Trouble is dogging Amtrak. As I mentioned, the Acela
    Express, with 20 percent of the passenger service on the
    Northeast corridor accounting for 11 percent of Amtrak's ticket
    revenues, has been shut down because of the brake problems.
    There has to be a reform plan. There must be structural reform.
    And we cannot keep Amtrak on inadequate life support without a
    light at the end of the tunnel. At this point, that light
    appears to be an oncoming freight train.
        We are looking for a responsible plan and we count on the
    witnesses at the table today and the organizations you
    represent to provide it.
        In fiscal year 2004, the Omnibus Appropriations Bill
    encouraged Amtrak to provide off-peak travel discount for
    veterans and current military personnel. This has been ignored.
    I would trust that you would take that into account and
    consider implementing this positive policy.

                               PREPARED STATEMENT

        Unfortunately, I am going to have to miss the latter part
    of this hearing. I have a small bill on the floor that I have
    to deal with. But we look forward to having your full comments
    in the record and we will ask each of you to make 5-minute
    opening statements and have time for questions. I will review
    the record.
        [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. I welcome a
    diverse panel of Mr. David Gunn, Amtrak's President and CEO, Mr. David
    Laney, Amtrak's Chairman of the Board, Mr. Jeffrey Rosen, General
    Counsel for the Department of Transportation, and Mr. Kenneth Mead, the
    Inspector General for the Department of Transportation.
        While I understand that Mr. Gunn will not be presenting testimony
    but is here to answer questions, I look forward to each of your views
    on Amtrak's fiscal year 2006 budget. More importantly, I look forward
    to understanding each of your views on the difficulties that Amtrak is
    facing and the options that will dictate the future or demise of Amtrak
    as we know it today.
        Unfortunately, the fiscal year 2006 budget presents a very bleak
    and dour picture for the future of Amtrak. The administration's Budget
    Request includes only $360 million in the Commuter Rail Operations
    account and that funding is intended to facilitate Amtrak's
    reorganization through bankruptcy. This Budget Request is some $840
    million less than the $1.2 billion appropriated in fiscal year 2005 for
    Amtrak operations and related needs. Under any circumstance, $360
    million is not enough to meet Amtrak's needs in fiscal year 2006,
    whatever choice Congress makes about the future of Amtrak.
        On the other hand, Amtrak claims it needs $1.82 billion for fiscal
    year 2006 and that it cannot survive in fiscal year 2006 on flat
    funding of $1.2 billion. However, even if I was to agree that the $1.82
    billion request for Amtrak is justified, I do not know how this
    subcommittee will be able to provide such a significant increase from
    the Budget Request.
        In particular, the subcommittee has a number of very difficult
    funding decisions to make under what is likely to be a very tight
    allocation. Because of the administration's overall budget for domestic
    discretionary funding, this subcommittee will have trouble reversing
    many of the administration's recommendations that eliminate or reduce
    funding for many other important and necessary programs.
        The administration, for example, has eliminated funding of $51.6
    million for Essential Air Service, an important and popular program
    that subsidizes air travel from remote rural airports, often located in
    areas with few transportation options.
        The Budget Request also proposes to dismantle the Community
    Development Block Grant (CDBG) program along with 17 other programs and
    replace these programs with a new block grant in the Department of
    Commerce. The administration is proposing to fund this initiative at
    $3.7 billion which is an overall reduction of almost $2 billion from
    the fiscal year 2005 levels, of which CDBG would be reduced by some
    $1.6 billion. CDBG is critical to HUD's mission of being both a leader
    and partner with States and communities in the development of housing
    and community development initiatives. This program is a priority for
    all States and most communities. CDBG also is a priority for the
    members of this subcommittee.
        Under the Budget Request, this subcommittee will have to find a way
    to absorb a $2.5 billion rescission of ``excess'' section 8 funds. Over
    the last few years, the VA-HUD Appropriations Subcommittee made a
    number of reforms to the section 8 program to make the program more
    efficient as well as reduce the availability of ``excess'' section 8
    funds. I do not know how we pay for this rescission. Neither OMB nor
    HUD can identify the methodology for determining this rescission or
    from where the funds will come.
        These programs are merely illustrative of the problems facing the
    subcommittee and which will limit severely our ability to backfill
    funding for Amtrak. I could provide a laundry list of other program
    cuts and shortfalls within this subcommittee that are troubling and
    deserving of funding for fiscal year 2006--all are programs that have
    strong support and deserve funding. In truth, in a time of deficit
    reduction, a program must demonstrate not only its value but an ability
    to overcome any substantial program flaws and problems.
        Unfortunately, Amtrak's problems only seem to get worse. I do not
    believe that bankruptcy will solve our Nation's problems with Amtrak.
    Amtrak is too complex, the costs potentially too great and the result
    too uncertain to trust bankruptcy as the solution. I am not sure anyone
    understands the true costs of bankruptcy or who will pay for them. I am
    from the Show-Me State and a great believer in certainty.
        To be blunt, Amtrak runs deficits of over $1 billion per year.
    Since 2001, Amtrak's annual operating losses have exceeded $1 billion
    and annual cash losses have exceeded $600 million Amtrak also faces
    some $600 million a year in capital costs, mostly with regard to the
    Northeast Corridor. Amtrak also will have debt service of nearly $300
    million annually for the foreseeable future. In addition, the deferral
    of maintenance has created a significant risk of operational failure.
        And it only gets worse. Mr. Gunn, your predecessor as President,
    Mr. Warrington, promised the Congress that Amtrak was on a glide path
    to profitability. Instead, Mr. Warrington left Amtrak in worse shape
    than he inherited it with Amtrak's debt increased from $1.7 billion in
    1997 to some $4.8 billion in 2002. I credit your integrity with making
    no such promises. I also acknowledge your hard work and commitment to
    making Amtrak work successfully. Unfortunately, it is still not enough.
    In fact, Amtrak does not operate any more successfully than it did in
    2002, or for that matter 1992, 1982 or 1972.
        Trouble seems to dog Amtrak. Just this April, Amtrak was forced to
    shut down its Acela Express Service because of cracked brake rotors on
    most, if not all, of these passenger trains. The Acela Express has been
    one of Amtrak's few success stories, representing some 20 percent of
    its passenger service on the Northeast Corridor. As I understand it,
    Acela trains accounted for some 11 percent of Amtrak's ticket revenues
    for the month of February. Leaving aside Acela's success, how is it
    possible that there are problems with all or almost all of the brakes
    on trains just put in service a few years ago? How does Amtrak recover
    from these losses and who is responsible? Most importantly, how
    indicative is this problem of larger management problems at Amtrak?
        There has to be a reform plan and there has to be reform
    legislation. There must be fundamental structural reform if passenger
    rail service is going to continue in the United States. This
    subcommittee has too many other priority funding needs to keep Amtrak
    on life support without a light at the end of the tunnel. In other
    words, I expect action and a consensus on the future of Amtrak. Without
    that, you do not have my support.
        Finally, a small but important issue. The fiscal year 2004 Omnibus
    Appropriations bill included language encouraging Amtrak to continue
    providing an off-peak travel discount for our veterans and current
    military personnel. It appears Amtrak has ignored this language and has
    not made this service available since December of 2003. This is the
    type of program that engenders goodwill and builds ridership, and I
    urge you to reconsider this policy.
        I am likely to miss much or most of this hearing as I have
    responsibilities for helping to manage the highway bill on the floor. I
    will have a number of questions for the record. Please be assured that
    I will review the hearing record very carefully.
        Thank you, I now turn to my ranking member, Senator Murray.

        Senator Bond. Now I turn to my partner and ranking member,
    Senator Murray.

                       STATEMENT OF SENATOR PATTY MURRAY

        Senator Murray. Thank you very much, Mr. Chairman.
        Today we will take testimony on what promises to be the
    most challenging issue this subcommittee will face this year.
    Amtrak, America's national passenger railroad, served 25
    million passengers last year, the highest number in any year in
    its history. One-point-one million of those passengers were in
    my home State of Washington.
        Even so, there are those in the administration and in
    Congress who want to push Amtrak into financial collapse and
    push 25 million passengers onto our already overcrowded
    highways and runways.
        The benefits provided by Amtrak, as well as costs, have
    been debated in Congress every year since the Federal
    Government established the corporation 35 years ago.
        But make no mistake, this year is different. This year
    Amtrak's detractors smell blood. As we take each step in the
    Federal budget process, they have additional reason to be
    optimistic that this will be the year that Amtrak service
    finally grinds to a halt.
        Up until this year, the path of Amtrak's funding during
    each of the years of the Bush Administration has been largely
    the same. The Bush Administration proposes a funding figure
    that would throw Amtrak into bankruptcy. The Amtrak Board of
    Directors requests a sizable funding increase to truly allow
    the railroad to invest in its infrastructure and modernize.
    Congress has come along each year and generally provided Amtrak
    just enough money to limp along but not enough to invest and
    improve service.
        Over the life of the Bush Administration, actual
    appropriations for Amtrak have been about 141 percent above the
    levels sought by the administration. But have also remained
    some 30 percent below what the Amtrak board has said it needed.
        But as I said, this year is different. After working hard
    to keep Amtrak on a starvation diet over the last 4 years, the
    Bush Administration is now proposing to terminate all subsidies
    for Amtrak. Whether it is for State-supported trains like the
    Cascadia service in my State or the Empire Builder that runs
    from Seattle to Chicago, or for the service in the Northeast
    corridor, the Bush Administration's request is the same--zero
    funding. And zero funding means zero service.
        While the administration seeks $360 million for a special
    rail account in the Surface Transportation Board, that funding,
    by law, can only be used to allow certain local mass transit
    agencies like the Sounder Commuter Rail Service to continue to
    operate over Amtrak property once Amtrak has ceased all
    operations.
        Strangely, at the same time the administration is proposing
    to zero out subsidies and park all Amtrak trains, Secretary
    Mineta is flying around the country saying the Bush
    Administration is supporting Amtrak--they just want reforms.
        In fact, Secretary Mineta has stated publicly that the Bush
    Administration would support between $1.5 billion and $2
    billion in funding for Amtrak per year if his reforms were
    enacted. For me, the fallacy that this administration might
    actually support funding for rail service, reformed or not, was
    made clear during our hearing 3 weeks ago with OMB Director
    Josh Bolten. I specifically asked Director Bolten if the Bush
    Administration would be submitting a new Amtrak budget if
    reforms were adopted. Not once but twice Director Bolten made
    it very clear to us that the committee has received the only
    Amtrak budget from the Bush Administration that we are going to
    get, zero for Amtrak.
        One week after we took testimony from Director Bolten, the
    Congress took another act to help push Amtrak into insolvency.
    It adopted the conference report on the budget resolution. That
    budget set the cap on discretionary spending at the level
    consistent with the President's budget request, a budget
    request that assumes zero funding for Amtrak.
        On March 15 and 16, during Senate debate on the budget
    resolution, Senators Byrd and Specter offered an amendment to
    bring the level of funding for Amtrak up to $1.4 billion to
    provide some certainty and stability to the funding process for
    Amtrak this year. That amendment was defeated by a vote of 52
    to 46.
        So today our subcommittee finds itself in the posture of
    having to cut and cannibalize other programs as we have never
    done before, only to see if we can scrape together enough
    funding from other programs to extend Amtrak for another 12
    months. If the Senate had voted differently back in March, we
    might not be in this predicament.
        Today, we are joined by Amtrak's Board Chairman and
    President, David Laney and David Gunn. Three weeks ago,
    Amtrak's Board finally submitted its grant request to the
    Appropriations Committee. While I was disappointed that this
    request arrived some 2 months late, it is notable that the
    Amtrak Board, made up entirely of Bush Administration
    appointees, is asking this subcommittee to provide $1.82
    billion for Amtrak next year, more than a 50 percent increase
    over current funding.
        Much of the discussion of today's hearing might focus on
    the asserted proposals to reform Amtrak. We have two separate
    comprehensive reform proposals, one from the administration and
    one from the Amtrak Board. While senators might want to discuss
    these proposals, I want to remind my colleagues that these
    reform proposals are the responsibility of the Senate Commerce
    Committee.
        What this subcommittee needs to focus on is how much these
    reform proposals are going to cost. I think my colleagues will
    find as we discuss these reform packages is that neither of
    them, not the administration's proposal or the Amtrak Board's
    proposal, save money in the near term. They all require
    investments over the long-term that will require larger, not
    smaller, annual appropriations in the future.
        In that regard, perhaps the most important testimony we
    will hear this morning is not from the Bush Administration or
    the Amtrak Board. The DOT Inspector General Ken Mead has been a
    consistent monitor of Amtrak's finances. He will testify this
    morning that Amtrak can no longer limp along on $1.2 billion in
    funding it has received in each of the last 2 years. He will
    testify that in order to maintain that status quo at Amtrak
    next year, we will need to appropriate between $1.4 billion and
    $1.5 billion.
        Given the failure of the Byrd-Specter Amendment, finding
    even $1.2 billion will be extraordinarily difficult. Finding
    $1.4 billion or $1.5 billion will be a monumental and painful
    challenge. Unfortunately, the majority of the Senate voted to
    put us in this box. Only time will tell if we can find our way
    out of it.

                               PREPARED STATEMENT

        One thing that is certain is that Amtrak's 25 million
    passengers will be anxiously watching to see if we can succeed.
        Thank you very much, Mr. Chairman.
        [The statement follows:]

                   Prepared Statement of Senator Patty Murray

        Today, we will take testimony on what promises to be the most
    challenging issue this subcommittee will face this year. Amtrak,
    America's national passenger railroad, served 25 million passengers
    last year--the highest number in any year in its history. One-point-one
    million of those passengers were in my home State of Washington.
        Even so, there are those in the administration and in Congress who
    want to push Amtrak into financial collapse and push 25 million
    passengers onto our already-crowded highways and runways. The benefits
    provided by Amtrak, as well as costs, have been debated in Congress
    every year since the Federal Government established the corporation 35
    years ago. But, make no mistake, this year is different.
        This year, Amtrak's detractors smell blood. As we take each step in
    the Federal budget process, they have additional reason to be
    optimistic that this will be the year that Amtrak service finally
    grinds to a halt. Up until this year, the path of Amtrak's funding
    during each of the years of the Bush Administration has been largely
    the same. The Bush Administration proposes a funding figure that would
    throw Amtrak into bankruptcy. The Amtrak Board of Directors requests a
    sizable funding increase to truly allow the railroad to invest in its
    infrastructure and modernize. Congress has come along each year and
    generally provided Amtrak with just enough money to limp along, but not
    enough to invest in improved service.
        Over the life of the Bush Administration, actual appropriations for
    Amtrak have been about 141 percent above the levels sought by the
    administration. But they have also remained some 30 percent below what
    the Amtrak Board has said it needed.
        But, as I said, this year is different. After working hard to keep
    Amtrak on a ``starvation diet'' over the last 4 years, the Bush
    Administration is now proposing to terminate all subsidies for Amtrak.
        Whether it is for State-supported trains like the Cascadia Service
    in my State, or for the Empire Builder that runs from Seattle to
    Chicago, or for the service in the Northeast Corridor, the Bush
    Administration's request is the same--zero funding. And zero funding
    means zero service.
        While the administration seeks $360 million for a special rail
    account in the Surface Transportation Board, that funding by law can
    only be used to allow certain local mass transit agencies like the
    Sounder Commuter rail service to continue to operate over Amtrak
    property once Amtrak has ceased all operations.
        Strangely, at the same time the administration is proposing to zero
    out subsidies and park all Amtrak trains, Secretary Mineta is flying
    around the country saying that the Bush Administration is supporting
    Amtrak--they just want reforms.
        In fact, Secretary Mineta has stated publicly that the Bush
    Administration would support between $1.5 and $2 billion in funding for
    Amtrak per year, if his reforms were enacted. For me, the fallacy that
    this administration might actually support funding for rail service--
    reformed or not--was made clear during our hearing 3 weeks ago with OMB
    Director Josh Bolten.
        I specifically asked Director Bolten if the Bush Administration
    would be submitting a new Amtrak budget with reforms or without them.
    Not once, but twice, Director Bolten made it very clear to us that the
    committee has received the only Amtrak budget from the Bush
    Administration that we are going to get--zero for Amtrak.
        One week after we took testimony from Director Bolten, the Congress
    took another act to help push Amtrak into insolvency. It adopted the
    conference report on the Budget Resolution. That budget set the cap on
    discretionary spending at the level consistent with the President's
    budget request--a budget request that assumes zero funding for Amtrak.
        On March 15 and 16, during Senate debate on the Budget Resolution,
    Senators Byrd and Specter offered an amendment to bring the level of
    funding for Amtrak up to $1.4 billion to provide some certainty and
    stability to the funding process for Amtrak this year. That amendment
    was defeated by a vote of 52-46.
        So, today, our subcommittee finds itself in the posture of having
    to cut and cannibalize other programs--as we have never done before--
    only to see if we can scrape together enough funding from other
    programs to extend Amtrak for another 12 months. If the Senate had
    voted differently back in March, we might not be in this predicament.
        Today, we are joined by Amtrak's Board Chairman and President--
    David Laney and David Gunn. Three weeks ago, Amtrak's Board finally
    submitted its grant request of the Appropriations Committee. While I
    was disappointed that this request arrived some 2 months late, it is
    notable that the Amtrak Board--made up entirely of Bush Administration
    appointees--is asking this subcommittee to provide $1.82 billion for
    Amtrak next year--more than a 50 percent increase over current funding.
        Much of the discussion of today's hearing might focus on the
    assorted proposals to reform Amtrak. We have two separate comprehensive
    reform proposals--one from the administration and one from the Amtrak
    Board. While Senators might want to discuss these proposals, I want to
    remind my colleagues that these reforms proposals are the
    responsibility of the Senate Commerce Committee. What this subcommittee
    needs to focus on is how much these reform proposals are going to cost.
        I think my colleagues will find as we discuss these reform packages
    is that neither of them--not the administration's proposal or the
    Amtrak Board's proposal--save money in the near-term. They all require
    investments over the long-term that will require larger, not smaller,
    annual appropriations in the future.
        In that regard, perhaps the most important testimony we will hear
    this morning is not from the Bush Administration or the Amtrak Board.
    The DOT Inspector General, Ken Mead, has been a consistent monitor of
    Amtrak's finances. He will testify this morning that Amtrak can no
    longer limp along on the $1.2 billion in funding it has received in
    each of the last 2 years. Indeed, he will testify that in order to
    maintain that status quo at Amtrak next year, we will need to
    appropriate between $1.4 and $1.5 billion.
        Given the failure of the Byrd/Specter amendment, finding even $1.2
    billion will be extraordinarily difficult. Finding $1.4 or $1.5 billion
    will be a monumental and painful challenge.
        Unfortunately, the majority of the Senate voted to put us in this
    box. Only time will tell if we can find our way out of it. One thing
    that is certain is that Amtrak's 25 million passengers will be
    anxiously watching to see if we succeed.

        Senator Bond. Thank you, Senator Murray. Senator Burns, do
    you have an opening statement?

                       STATEMENT OF SENATOR CONRAD BURNS

        Senator Burns. Mr. Chairman, I have an opening statement
    and I am going to make it part of the record. I think you and
    the ranking member have pretty well summed up our problems over
    here, and we could not add too much to that, other then we all
    have our different little sections of the country that we like
    to take care of.
        I think we have got a sizable mountain to climb here and I
    am looking forward to hearing from our witnesses today. Thank
    you.
        [The statement follows:]

                   Prepared Statement of Senator Conrad Burns

        Mr. Chairman, thank you for holding this hearing today. As I am
    sure you know, Amtrak is an issue near and dear to my heart. It is also
    an issue of great importance to Montana. The Empire Builder covers a
    lot of ground in Northern Montana, and is a valuable link in our
    transportation infrastructure.
        The Empire Builder is more than just a popular train for tourism.
    Folks use the train to seek medical services, to travel across the
    State when roads are covered in snow, and as an alternative to air
    service that isn't always easy to come by in rural Montana. Estimates
    indicate that the Empire Builder brings $14 million annually to
    Montana. Amtrak is a vital link in our infrastructure, both in Montana
    and across the country.
        However, clearly some type of reform is needed. Those reform
    proposals should be guided by some basic principles. We need to invest
    in infrastructure. Crumbling tracks, aging equipment, and outdated
    technology risk Amtrak's future. We need a national system. State
    budgets are already incredibly tight, and a national train system can
    not be jeopardized by individual States that may not be able to
    allocate funds to rail service. Reform proposals need to be informed by
    a commitment to public service. While I believe that Amtrak must be
    financially responsible, and get its budgetary house in order, I also
    think that Amtrak serves an important public need that can't be easily
    calculated.
        Amtrak is America's rail system, and I think it will probably
    always need some type of public support. The public is committed to
    passenger rail, so allocating some amount of taxpayer dollars makes
    sense. Those investments need to be made wisely, of course, but they do
    need to be made. Looking at Amtrak only in terms of the bottom line
    fails to account for the public value it provides.
        Mr. Chairman, the Congress faces an important and difficult task
    this year in authorizing Amtrak funding. We will need to be creative,
    but I am ready to roll up my sleeves and get this done. As a member of
    both the authorizing and appropriations committees that oversee Amtrak,
    I am dedicated to preserving passenger rail. I look forward to working
    with you on this challenging task, and I look forward to hearing from
    the witnesses today.

        Senator Bond. Thank you, Senator Burns. I know what a
    champion you have been for Amtrak and I am looking forward to
    learning from you, your experiences, as well as the other
    members of this committee.
        I think on early bird, Senator Bennett was the next one
    here.

                     STATEMENT OF SENATOR ROBERT F. BENNETT

        Senator Bennett. Thank you very much, Mr. Chairman.
        I will repeat now to the board of Amtrak what I have said
    to this committee. I have been a supporter of Amtrak since
    before it was born, because I was in the Nixon Administration
    when the idea was conceived. And it was my responsibility to
    convince the Congress to pass the act. And I have a very nice
    letter from Secretary Volpe commending me on my success in
    bringing that to pass.
        Having said that, I repeat the refrain that I have many
    times before. The debate of whether we are for or against
    Amtrak is the wrong debate. We need passenger service in this
    country. We need a good passenger service in this country. And
    we should be prepared to pay for that passenger service in this
    country. But it should be in places where it makes sense. And
    the present nationwide grid of the Amtrak system does not make
    any sense.
        I got into trouble the last time I said that. I got some
    nasty letters from people in Utah saying how can you say you
    want to give up Utah's service? Utah's service is wonderful and
    we must hang onto it. I have now gotten the exact statistics. I
    may have been a little off in what I said before. The total
    Utah ridership is less than 100 people per day. One airplane
    per day could take care of the entire use of Amtrak. Two buses,
    all right three if you get a small bus, could take care of the
    entire use of Amtrak.
        And what are we spending to run an Amtrak train? It has a
    wonderful name. It is the California Zephyr. And boy, for those
    who love train traffic, the California Zephyr calls up all
    kinds of wonderful, wonderful memories and images. It goes
    through Salt Lake City, arrives at 3:35 in the morning, and
    leaves at 4:06 in the morning. I have watched the terminal for
    Amtrak go from an old train terminal that had great nostalgia
    around it, that has now been turned into a mall, to a smaller
    building, to a smaller building. And now it is a quonset hut
    that handles those less than 100 people a day who show up
    literally in the middle of the night.
        And I wonder if it really is the best use of public funds
    to keep that train running, all the way from Chicago to San
    Francisco, with this kind of service along the way when that
    money should be spent making sure the brakes are working on
    Acela and the Northeast corridor that is absolutely dependent
    on Amtrak is properly funded and properly taken care of.
        I am willing to spend what is necessary to spend to keep
    Amtrak going. But I applaud the Bush Administration in a very
    significant wake-up call that says Amtrak has to be changed to
    face the realities of where the market is.
        We do not have a market for transcontinental train traffic,
    either from the standpoint of those who are willing to pay for
    it. I realize we have to subsidize it. We are subsidizing
    Amtrak riders to the tune of about $200 per trip. I am
    perfectly willing to subsidize it with Federal funds in an area
    where it makes a significant contribution to the reduction in
    pollution and congestion. But I think subsidizing it to the
    point that less than 100 people per day can use it in my State
    does not make any sense.
        So Mr. Chairman, I am perfectly willing to raise the amount
    of money above what the budget calls for from the President.
    But I do think we should recognize that Amtrak remains
    virtually unchanged in its route structure since I helped
    convince the Congress to create it in 1970. That is 35 years
    ago. It is time we brought it up to reality.
        Thank you, Mr. Chairman.
        Senator Bond. Thank you, Senator Bennett, for the
    confession. I know it is good for the soul. I appreciate your
    prospective suggestions, as well.
        Senator Durbin.

                     STATEMENT OF SENATOR RICHARD J. DURBIN

        Senator Durbin. Thank you, Mr. Chairman. It is a pleasure
    to be with you at this new committee alignment. We see some new
    faces but some similar challenges to what we have faced in the
    past.
        I come from a railroad family. My mother, my father, my two
    brothers and I all worked for the New York Central Railroad in
    East St. Louis, Illinois. I have many fond memories of steam
    locomotives and trains and just loved them as a child.
        But I do not come to this hearing motivated by memories. I
    come to this hearing motivated by the economic reality of
    Amtrak in Illinois today. Amtrak in Illinois serves 3 million
    passengers a year. By Senator Bennett's standard, we are in the
    range of 8,000 to 10,000 passengers each day.
        Amtrak is a huge part of our State's economy--2,000
    employees. The thought of those 3 million passengers losing
    Amtrak and then turning to cars on the road is a frightening
    thought. The traffic congestion, the pollution that would
    result from it--how can that be good for us as a Nation? How
    can that possibly be a move in the right direction?
        Many of the passengers, incidentally, happen to be college
    students. We serve a lot of campuses with Amtrak. I have met
    with the presidents and leaders at those universities and
    colleges down-State who say the reason they bring kids in from
    Chicago is because students know the Amtrak service is going to
    be there to Champaign. It is going to be there to Macomb. It is
    going to be there to Quincy and all the other campuses served,
    Bloomington and other places. So it is not easy to replace that
    by saying buy all those kids a car. Let us take care of it that
    way. How can that possibly be the answer to moving people
    efficiently in an environmentally sensible way?
        Let me just add one footnote. It is not as if the State of
    Illinois is just saying give, give, give. The State of Illinois
    is a contributor to Amtrak--a substantial contributor--$12
    million a year from a State budget that is in trouble. About 90
    percent of the operating costs of Amtrak come from our State
    taxpayers who believe it is important. But for the capital
    investment in Amtrak and the rest of the operating costs we
    rely on Amtrak itself.
        I will just say one other thing. How many times are we
    going to go through this debate? How many times are we going to
    fight this battle? It is getting old. Amtrak cannot improve and
    modernize its service to the point where it attracts more
    passengers and more customers unless we are prepared to do for
    Amtrak what every successful company must do, invest in the
    future. We need capital investment in Amtrak so that they have
    better rail bids, faster service, and enough units.
        My wife recently took the train with my daughter from
    Washington to New York. And she said that the entire trip there
    were people standing in the aisles and sitting in the
    restrooms. There just were not enough cars to accommodate all
    of the passengers that were needed. The same thing happened on
    a recent trip from Chicago to Springfield.
        So there is a lot of pent-up demand out there. We need to
    make capital investments in Amtrak to make it work. I cannot
    justify every route in America. I will not even try to. But I
    can tell you in my State of Illinois we stand by Amtrak as an
    important part not of some nostalgic memory but an important
    part of our economic future.
        Thank you, Mr. Chairman.

                   PREPARED STATEMENT OF SENATOR THAD COCHRAN

        Senator Bond. Thank you, Senator Durbin. Senator Cochran
    has submitted a statement to be included for the record as
    well.
        [The statement follows:]

                   Prepared Statement of Senator Thad Cochran

        Mr. Chairman, thank you for holding this hearing today to discuss
    Amtrak's funding request for fiscal year 2006.
        I want to thank David Gunn for appearing before this subcommittee
    to answer questions and for his good service at Amtrak.
        When Congress received the President's Budget Request, many people
    were surprised to find that funding was not requested for our Nation's
    intercity train system. It is my understanding that the administration
    has still not requested funding for Amtrak, and I look forward to
    hearing from the Department of Transportation's representatives about
    this rationale.
        I hope we will be able to consider legislation that will outline
    the legal authority for a new national passenger rail system. The
    Appropriations Committee can't do it all.

        Senator Bond. Finally, we will get down to the meat of this
    and find out how those of you with responsibility and expertise
    in the area, what your recommendations are. First I call on Mr.
    David Laney, Chairman of the Amtrak Board of Directors.
    Welcome, Mr. Laney.

                       STATEMENT OF DAVID M. LANEY, ESQ.

        Mr. Laney. Thank you, Mr. Chairman, Senators.
        I appreciate the opportunity to appear before you today. My
    name is David Laney. I am Chairman of the Amtrak Board of
    Directors. Joining me is, as you all know, David Gunn,
    President and CEO of Amtrak.
        On April 21, Amtrak transmitted to Congress and the
    administration a series of strategic reform initiatives that
    are aimed at reforming Amtrak and maybe more importantly,
    revitalizing rail passenger service in the United States. Let
    me touch just briefly on our package before detailing our
    fiscal year 2006 budget request.
        Our plan advances four essential objectives. First,
    development of passenger rail corridors throughout the country
    based on an 80/20 Federal/State capital matching program with
    States becoming purchasers of a variety of competitively bid
    corridor services.
        Second, return of the Northeast Corridor infrastructure to
    a state of good repair and operational reliability over the
    next 4 to 5 years with all users of the Northeast Corridor
    gradually assuming increased financial responsibility for their
    share of corridor operating and capital needs.
        Thirdly, preservation of our national long-distance system,
    with gradually restructured routes to address your concern,
    Senator Bennett, that will over time have to meet minimal
    financial performance requirements, in some cases requiring
    State assistance.
        And finally, the opening of the intercity passenger rail
    industry to competition and private commercial participation.
        This plan is the product of a significant amount of work by
    Amtrak's Board of Directors and senior management with
    considerable input from rail experts from outside Amtrak as
    well. Additional details on these reforms are covered in my
    full statement but this is a serious proposal that will
    revitalize the passenger rail industry if it is implemented and
    adequately funded. I believe it also answers the call to reform
    made by the administration and by so many others.
        We have provided you with a full copy of the plan and hope
    you will take it into consideration as we move forward with the
    reauthorization and appropriations process.
        I would also like to add a point and at least emphasize the
    very thoughtful proposals also from the Inspector General of
    DOT, Ken Mead. He will get into those this morning, but there
    is substantial common ground between the Amtrak board's
    presentation and proposals as well as Mr. Mead's and I
    recommend his proposals as well for your review.

                           FISCAL 2006 BUDGET REQUEST

        As to the fiscal 2006 budget request, let me turn to that
    now. As Senator Murray pointed out, typically Congress receives
    our grant request in February. Since we were well into our
    strategic planning effort at that time, we elected to defer
    submitting the request in order to present it in the context of
    our reform package. The last dozen pages of the reform proposal
    detail our fiscal 2006 budget request and our requirements,
    which is $1.82 billion or $1.645 billion if our working capital
    needs are covered by a short-term credit facility instead of a
    grant.
        We have also included a preview of how we would go about
    reporting Amtrak's financial information by business line.
        Let me make a few points about this funding request. First
    of all, the increase over our current funding level of $1.2
    billion is solely attributable to essential capital spending,
    not operating expenses. These investments have very lasting
    value.
        The operating side is slightly lower than previous years
    and reflects the company's ability to keep operating costs
    constant despite inflation, rising insurance costs and the
    considerably higher cost of fuel.
        During the last 3 years we have not borrowed any additional
    funds nor have we assumed any new debt except for the DOT loan
    during the summer of 2002, which is being paid back in annual
    installments.
        We have lowered the head count at Amtrak from 25,000 in
    fiscal year 2001 to 19,500 today. Our deficit per train mile
    has decreased from $22 in fiscal year 2000 to $13 in 2004.
    Ridership, as a couple of you have pointed out, has continued
    to increase. Last year we had just over 25 million passenger
    trips, which was a company record. In fact, during fiscal years
    2000 to 2004, ridership has grown from 22.5 million to 25.1
    million, or 11.6 percent.
        We are very confident that there is additional, significant
    suppressed demand.
        On the capital side, we have made significant early headway
    in addressing the mountain of deferred maintenance in both
    plant and equipment facing us when the new management team
    arrived in 2002. The work that we have completed and plan to do
    is detailed in our budget proposal.
        In fiscal year 2006, we expect to continue this type of
    capital investment, renewal of track, signals, wire, equipment,
    switches, and interlockings. But we also will begin major
    multi-year projects to rebuild structures critical to the
    Northeast Corridor operations. These include replacement of the
    failure-prone movable bridge spans over the Thames and Niantic
    Rivers, replacement of the 1930's era cables in the Baltimore
    tunnels, and major track work on the Harrisburg line. Until we
    complete the bridge and tunnel work, we will continue to court
    the risk of a failure that could sever NEC service.
        These projects involve outside contractors and long lead
    times in ordering of materials as well as multi-year funding
    commitments to support the projects. But when they are
    completed, the repaired and rebuilt structures will last a
    lifetime.

                    CANNOT SURVIVE ON CURRENT FUNDING LEVEL

        Finally, it is important to emphasize that Amtrak's board
    and management have concluded that the company cannot continue
    to operate on Amtrak's current funding level of $1.2 billion in
    fiscal year 2006. Moreover, the negative financial impact of
    the recent Acela problems will substantially deplete our
    working capital by year's end. We have taken and will continue
    to take aggressive steps to achieve short-term savings but we
    have very little maneuverability in our operating budget and
    cannot responsibly make material reductions in capital
    expenditures principally tied to Northeast Corridor
    infrastructure and its state of good repair. Over time,
    significant savings will be achieved only through aggressive
    and systematic multi-year transitioning with legislative
    assistance.
        It is for this reason that we have brought forward our
    strategic reform initiatives to help inform your decision-
    making for fiscal year 2006 and beyond.

                               PREPARED STATEMENT

        In closing, we look forward to working with you. We fully
    understand the difficulties you have in this budget year. We
    also look forward to working with stakeholders in the months
    ahead as we further develop and implement our reform plan and
    move this debate forward. I cannot emphasize enough that
    adequate funding for Amtrak in 2006 will be a critical first
    step in advancing the objectives of our strategic reform
    initiatives plan.
        We look forward to your questions. Thank you, Mr. Chairman.
        [The statement follows:]

                   Prepared Statement of David M. Laney, Esq.

        Mr. Chairman and members of the committee, thank you for the
    opportunity to appear before you today. My name is David Laney, and I
    am Chairman of the Amtrak Board of Directors. Joining me is David Gunn,
    the President and Chief Executive Officer of Amtrak.
        On April 21, Amtrak transmitted to Congress and the administration
    a series of Strategic Reform Initiatives that we believe will help
    shape the discussion on the future of Amtrak and intercity rail
    passenger service. While the majority of the report was geared toward
    the reauthorization discussion, it did contain Amtrak's fiscal year
    2006 grant request. I will provide an overview of both.
        For the past several months, the Board and senior management at
    Amtrak have worked to produce a set of proposals to reform Amtrak and
    revitalize rail passenger service in the United States. The reform
    initiatives released April 21 are the results of those efforts. The
    reform plan contains a detailed set of initiatives, some of which
    Amtrak will accomplish on its own and others which will require
    government action. Taken together, we believe that Amtrak's Strategic
    Reform Initiatives can revitalize intercity rail transportation.
        Our proposal advances four essential objectives:
      --Development of passenger rail corridors based on an 80-20 Federal-
            State capital matching program, with States becoming
            ``purchasers'' of a variety of competitively bid corridor
            services.
      --Return of the Northeast Corridor infrastructure to a state of good
            repair and operational reliability, with all users gradually
            assuming increased financial responsibility for their share of
            corridor operating and capital needs.
      --Preservation of our national long distance system, with gradually
            restructured routes that will over time have to meet minimum
            financial performance requirements, in some cases requiring
            State assistance.
      --Finally, the opening of the intercity passenger rail industry to
            competition and private commercial participation.
        We have identified three sets of reform initiatives to achieve the
    objectives that I just mentioned. They include, in general terms,
    structural, operating and legislative changes.

                             STRUCTURAL INITIATIVES

        As you know, Amtrak has already made substantial progress in
    establishing an organizational structure and creating management
    controls which have resulted in cost savings and better management; but
    there is room for further improvement. We will continue to implement
    these types of changes and refine those already in place. To build on
    such improvements, our plan focuses on providing planning, budgeting,
    accounting and reporting of financial activity and performance along
    our distinct business lines--infrastructure management, Northeast
    Corridor rail operations, State corridor operations and long-distance
    operations. This type of change will improve our own planning and
    performance capabilities, and enhance the financial clarity of our
    operations.

                             OPERATING INITIATIVES

        Separately, operating initiatives identified in our plan highlight
    a range of actions intended to improve the performance of each business
    line to provide better service, achieve savings and enhance revenues.
    Our recommendations for changes in legislation hinge directly on
    creation of a Federal capital matching program. Other recommendations
    in our view, if implemented, would create a more fertile environment
    for competition in intercity rail passenger services and operations.

                            LEGISLATIVE INITIATIVES

        The lynchpin of this plan is the establishment of a Federal
    matching program appealing enough to attract and accelerate State
    financial involvement in emerging and existing corridors. Continued
    development of rail corridors is critical to the future of rail
    passenger service, and the pace of development will increase with the
    Federal Government as a reliable financial partner--the role it has
    played for almost half a century with highways, transit and aviation.
    The demand that exists today for high quality intercity passenger rail
    in this country will only grow with the rising congestion in highways
    and airports. A number of States have already begun developing rail
    corridors, largely on their own nickel. They have recognized the value
    of passenger rail capacity in responding to increasing congestion, and
    the popularity of rail service when it is adequately supported.
    (Ridership on corridor trains has grown 22 percent over the last 5
    years.) However, to realize the full potential of intercity passenger
    rail in addressing transportation challenges will require a Federal
    match program comparable with other modes.
        Returning the Northeast Corridor's infrastructure to a state of
    good repair is another essential part of our reform proposal. In
    compiling this plan, we studied various proposals and reviewed models
    that other countries have pursued for separating the maintenance and
    operations of busy rail corridors and have concluded for now that the
    complexities and risks associated with such a split outweigh any
    benefits. Amtrak owns most of the Northeast Corridor, is the only end-
    to-end user of the Corridor and, in terms of train miles operated, is
    also the majority user. Amtrak NEC trains operate at the highest speeds
    in North America, and there are still segments of the NEC where Amtrak
    is the only entity operating trains. Our immediate challenge is to
    restore the infrastructure to a state of good repair, which we are
    doing, as detailed in our proposal. Ridership continues to grow along
    the Northeast Corridor; in the near term we will have to begin planning
    for additional capacity to meet that ridership demand.
        Amtrak operates 15 long-distance trains and for more than half of
    the States we serve, they are the only Amtrak service. Unfortunately,
    long-distance trains have become the flash-point in the debate over
    ``reform'' of passenger rail service. That single-minded focus is
    misleading, although our long-distance service presents a variety of
    challenges. To be clear, Amtrak is committed to the preservation of
    national passenger rail service. Many communities served by long-
    distance trains lack real transportation choices and rely on these
    services. While we believe the continued operation of these trains is
    important to many communities they serve, they also represent the basis
    for interconnection and future expansion of rail corridors. We are
    confident that we will reduce the operating losses on long distance
    trains through a series of steps outlined in our plan, and we believe
    those reductions will be substantial; however, we will not eliminate
    the need for financial support for long-distance operations. Central to
    this is the establishment of a phased-in performance improvement
    program that will couple cost-saving efficiencies with revenue
    enhancement initiatives, so that over time these trains will achieve
    financial performance thresholds or be discontinued.
        Finally, we believe that there are many opportunities for
    competition in the delivery of rail passenger services. Having a single
    provider such as Amtrak does allow for economies of scale and certain
    cost efficiencies. Yet, Amtrak is not always the most efficient
    provider of rail-related services. There should be alternatives. Key to
    our plan is the development of a competitive supply industry and
    multiple service delivery options. Amtrak can take a few essential
    steps in that direction, but without Federal legislative assistance, we
    will not reach the station. Some of the legislative decisions in this
    area will be difficult and will encounter predictable resistance from
    entrenched interests. Any discussion of competition will involve making
    decisions about access rights to the freight rail infrastructure, tort
    liability limitations and limited changes to certain labor and labor
    retirement laws. We have provided a discussion of these matters in our
    proposal.

                         FISCAL YEAR 2006 GRANT REQUEST

        Let me turn to our fiscal year 2006 funding request. Typically,
    Congress receives our grant request in February. Since we were well
    into our strategic planning effort, we elected to defer developing the
    request, in order to present it in the context of our reform package.
    The last dozen pages of the proposal detail our fiscal year 2006 budget
    requirement, which is $1.82 billion or $1.645 billion if our working
    capital needs are covered by a short-term credit facility instead of a
    grant. We have also included a preview of how we would go about
    reporting Amtrak's financial information by business line.
        Let me make a few points about this request.
      --The operating request is slightly lower than previous years and
            reflects the company's ability to keep operating costs
            constant, despite inflation, rising insurance costs and the
            high cost of fuel.
      --During the past 3 years, we have not borrowed any additional funds
            nor have we assumed any new debt, except for the DOT loan
            during the summer of 2002, which is being paid back in annual
            installments.
      --We have lowered headcount from 25,000 in fiscal year 2001 to
            19,500--its current level--or a reduction of about 20 percent.
      --Our deficit per train mile has decreased from $22 in fiscal year
            2000 to $13 in fiscal year 2004.
      --Ridership has continued to increase. Last year we had just over 25
            million passenger trips, a company record. In fact, during the
            period fiscal year 2000 to fiscal year 2004, ridership has
            grown from 22.5 million to 25.1 million or 11.6 percent.
        On the capital side, we have made significant early headway in
    addressing the mountain of deferred maintenance in both plant and
    equipment facing us in 2002. The work that we have completed and plan
    to do is detailed in our budget proposal. In fiscal year 2006, we
    expect to continue this type of capital investment--renewal of track,
    signals, wire, equipment, switches and interlockings--but we will also
    begin major, multi-year projects to rebuild structures critical to
    Northeast Corridor operations. These include replacement of the failure
    prone moveable bridge spans over the Thames and Niantic rivers,
    replacement of 1930's era cables in the Baltimore tunnels, and major
    track work on the Harrisburg line. Until we complete the bridge and
    tunnel work, we will continue to court the risk of a failure that could
    shut down NEC service. These projects involve outside contractors and
    long lead time in ordering of materials, as well as multi-year funding
    commitments. But when they are completed, the repaired and rebuilt
    structures will last a lifetime.
        Finally, it is important to emphasize that Amtrak's Board and
    management have concluded that the company cannot continue to operate
    at Amtrak's current funding level of $1.2 billion in fiscal year 2006.
    Moreover, the negative financial impact of the recent Acela problems
    will diminish our working capital significantly by year-end. We have
    taken and will continue to take aggressive steps to achieve short-term
    savings, but we have very little maneuverability in our operating
    budget and cannot responsibly make material reductions in capital
    expenditures (principally tied to NEC infrastructure, and its state of
    good repair). Over time, significant savings will be achieved only
    through an aggressive and systematic, multi-year transition process
    with legislative assistance. It is for this reason that we have brought
    forward our Strategic Reform Initiatives to help inform your decision-
    making for fiscal year 2006 and beyond.
        In closing, David Gunn, his management team, my fellow Board
    members and I look forward to working with you and other stakeholders
    in the weeks and months ahead as we further develop and implement our
    plan and move this debate forward. I cannot emphasize to you enough
    that adequate funding for Amtrak in fiscal year 2006 will be a critical
    first step in advancing the objectives of our strategic reform
    initiatives plan.
        We look forward to your questions.

        Senator Bond. Thank you very much, Mr. Laney.
        We are very excited that you are putting forth a workable
    plan. I must tell you that until somebody can talk to the
    Office of Management and Budget, no matter how good a plan is
    put forward, this subcommittee is going to have tremendous
    difficulty funding it. And with your background, experience and
    your ability as a skilled counselor and advocate, we are going
    to have to count on you to help sell that because without the
    dough this subcommittee just cannot go.
        On that bright and cheery note, let me turn now to Mr.
    Rosen for his comments.

                         STATEMENT OF JEFFREY A. ROSEN

        Mr. Rosen. Mr. Chairman, Senator Murray and members of the
    subcommittee, thank you for inviting me here today. You have my
    full written statement, so I am going to limit my oral remarks
    to three primary topics.
        The first item I would like to address is some comments on
    the President's budget submission for Amtrak. Some have asked
    if the administration's budget is serious in seeking reform of
    Amtrak this year, and it is.
        Others have asked if we are serious that if we get real
    reform, we will support funding for a reformed system of
    intercity passenger rail. And the answer is that we are serious
    about that, too.
        Still others have asked well, how much money? But I cannot
    answer that until we get actual reforms. The administration
    will be prepared to talk about the amount of funding when
    Congress itself takes serious steps to fix passenger rail. But
    the reforms have to come first. Otherwise, we know from
    history, we will never see any real reforms.
        The administration is very serious about opposing the
    status quo arrangement. We do not support continuing funding
    for a broken system that has proven itself fatally flawed.
        So the second topic that I want to briefly address is what
    constitutes reform? That is a fair question but the
    administration has submitted its proposals for reform to the
    Congress, both in 2003 and again this year. Those proposals
    would modernize, revitalize and enhance intercity passenger
    rail. The five key principles of those proposals are included
    in my written statement so I will not go through them because
    it would take too long here. But I encourage all to review them
    because they underlie the reforms that we seek.
        By contrast, I should say that the administration does not
    consider a $2 billion a year simple reauthorization to be a
    serious plan and would certainly not be reform. In fact, any
    approach that relies on just funneling more money into
    operating subsidies is not reform.
        And that takes me to the third and final item I would like
    to address for today, that some have already alluded to, and
    that is that the alternative to legislative reform is not the
    status quo. As Amtrak itself has said, the status quo is
    unsustainable. Amtrak continues to spend at a rate far in
    excess of its revenues. And that is why the $360 million that
    the President's budget proposes for protecting commuter train
    service and protecting Northeast corridor trains needs to be
    taken seriously in the budget. But that is also the reason that
    those of us who want to save intercity passenger rail hope to
    work with the Congress to change the system and change where
    the funding goes.

                               PREPARED STATEMENT

        And while we are working with the authorizing committees to
    discuss the reform proposals, and we appreciate that Amtrak
    itself and Mr. Gunn are themselves supporting of the concept of
    reform, ultimately reform may also need some assistance from
    this committee as well as intercity passenger rail goes through
    a necessary transition away from the 1970 model that we have
    been living with for a number of years to something more
    contemporary and workable.
        Thank you, and I will be pleased, of course, to respond to
    any questions.
        [The statement follows:]

                     Prepared Statement of Jeffrey A. Rosen

        Mr. Chairman, Senator Murray, and members of the subcommittee, I
    appreciate the opportunity to appear before you today to address the
    urgent need for reform of intercity passenger rail service before
    further appropriations are provided to Amtrak.
        By now, everyone is of course aware of the President's budget
    proposal for Amtrak. That budget proposal was meant as a call to
    action. Fundamental change in the way we support intercity passenger
    rail service is not only necessary but inevitable. And that change
    needs to happen this year, before we appropriate one more taxpayer
    dollar to prop up a fundamentally broken system. As you are aware, the
    administration transmitted its legislative proposal to Congress, the
    Passenger Rail Investment Reform Act (PRIRA), and we hope Congress will
    move quickly to enact needed reforms.
        At this juncture, the only funds this subcommittee should
    appropriate are $360 million to provide for directed service of
    commuter and Northeast corridor trains in the event the current Amtrak
    model cannot deliver that service. Intercity passenger rail needs major
    reform, and it would do more harm than good to simply continue funding
    the status quo without reform.
        Amtrak itself has acknowledged the urgent need for reform, and that
    the 1970's model of passenger rail should not continue. Amtrak recently
    released its own strategic plan, which states ``Business as usual for
    Amtrak and intercity passenger rail is not sustainable as currently
    structured or funded.'' While it is the responsibility of the
    Authorizing Committees to consider the reform legislation, the subsidy
    questions are closely related to the reform issues, so I would like to
    set forth some of the facts and analysis that underlie the
    administration's reform proposal to assist in the appropriations
    process for fiscal year 2006.
        First and foremost, it is essential to recognize that the passenger
    rail service model created by the Federal Government in 1970 is not
    viable in 2005. The model created in 1970 was a single national
    monopoly set up to be a private corporation but it has instead become
    like a government agency relying on Federal support to survive, with a
    legacy system of routes incapable of adapting to market forces and
    demographic changes (but with less accountability than a government
    agency would have). It has little in common with our other modes of
    transportation and the deregulatory and market-oriented changes other
    modes have experienced in the last three decades. America's
    transportation system as a whole--our system of roads, airports,
    waterways, transit lines, and the mostly private operators who use
    them--provides excellent mobility, connectivity, and efficiency that
    have undergirded our economic growth. Sadly, intercity passenger rail
    has been a different story. The supposedly private for-profit
    corporation set up in 1970 to provide all intercity passenger rail
    nationally has never once covered its own costs, much less made a
    profit. And the Federal taxpayers have infused more than $29 billion
    into Amtrak during the last 34 years as it has lurched from crisis to
    crisis without ever achieving a stable and viable business model.
    Whatever one thinks of Amtrak or passenger rail more generally, this
    situation has been good for no one.
        To some, perhaps this is old news. Congress directed change in the
    Amtrak Reform and Accountability Act of 1997, and actually required
    that ``Federal financial assistance to cover operating losses incurred
    by Amtrak should be eliminated by the year 2002.'' In fact, the notion
    that Amtrak should operate free from Federal operating subsidies is
    codified as law in the United States Code: 49 U.S.C.  24101(d) states
    that ``Commencing no later than the fiscal year following the fifth
    anniversary of the Amtrak Reform and Accountability Act of 1997, Amtrak
    shall operate without Federal operating grant funds appropriated for
    its benefit.''
        In the 1997 Act, Amtrak was afforded new flexibility to get its
    house in order. But by 2002, Amtrak's situation was no better; to the
    contrary, it had grown worse, with massive increases in Amtrak's debt,
    continuing operating problems, and financial crises in both 2001 and
    2002. Amtrak's response once again was to turn to the Federal
    Government for even greater Federal financial assistance, simply
    ignoring 49 U.S.C.  24101(d) as well as  204 and 205 of the Amtrak
    Reform and Accountability Act of 1997. In no other functioning service
    market would rising costs and declining revenues be defined as a
    ``success'' if this produced a small increase in the number of
    customers. Yet, that is exactly what the defenders of the 1970 approach
    now say, as if the loss for each rider were ``made up in volume''. In
    2004, Amtrak increased its ridership by approximately 4 percent to a
    record 25 million passengers, asked for a record $1.8 billion Federal
    subsidy, and recorded a financial loss of more than $1.3 billion, of
    which approximately $635 million was a cash loss.\1\ This year again,
    Amtrak indicates that it may have less than $75 million in cash
    remaining at the end of fiscal year 2005.
    ---------------------------------------------------------------------------
        \1\ These are unaudited numbers.
    ---------------------------------------------------------------------------
        Things do not have to be this way. It is simply untrue that all
    passenger rail everywhere must have operating subsidies from
    government. It is simply untrue that there is no alternative to
    passenger rail remaining the most heavily subsidized form of
    transportation on a per passenger basis. The administration has made
    clear that there is an important role for intercity passenger rail in
    our transportation system, but only with a new model that will be
    responsive to the needs of the traveling public. We can only get there
    by reforming the failed model of 1970, and committing to a new
    approach. That is the point of the President's budget request.

                  RIDING THE RAILS: AMTRAK'S PAST AND PRESENT

        Amtrak was created in 1970 as a private corporation in a
    restructuring of the larger rail industry, which was in a state of
    major financial distress. In that restructuring, freight railroads
    ceased providing passenger service altogether. Instead, for the first
    time, there would be a single national provider of intercity passenger
    rail service to replace the multiple regional systems that reflected
    the areas covered by each of the freight railroads' route systems. The
    intent was that the national monopoly would reinvigorate passenger rail
    by permitting Amtrak to consolidate operations and achieve efficiencies
    that, after a very brief period of Federal assistance, would preserve
    and expand intercity passenger rail service as a for-profit company.
        By now we know that the hopes of Amtrak's creators have never been
    realized. Intercity passenger rail service has not been reinvigorated.
    The Department of Transportation (DOT) expects that each and every one
    of Amtrak's 15 long-distance trains will this year lose money on a
    fully allocated cost basis, even excluding depreciation and interest.
    On a per passenger basis, with depreciation and interest, the loss for
    long-distance trains ranges from $47 per passenger to $466 per
    passenger. But the long-distance trains are not alone: with
    depreciation and interest included, every one of Amtrak's 43 regularly
    scheduled routes loses money. See Appendix A, attached. After 34 years
    and $29 billion in Federal subsidies, intercity passenger rail's
    financial performance has not improved, service and on-time performance
    are below expectations, and passenger rail's market share relative to
    other modes has continued to erode. Last year's so-called ``record''
    Amtrak ridership amounted to a one-half of 1 percent share of the total
    intercity passenger transportation market. Airlines alone carry more
    U.S. passengers in 3 weeks than Amtrak does in a year.

        [Sources.--Rail travel: Association of American Railroads, Yearbook
    of Railroad Facts; Amtrak. Total intercity passenger travel is an FRA
    estimate synthesized from data provided by the Federal Highway
    Administration, Federal Aviation Administration, Bureau of
    Transportation Statistics (including travel behavior characteristics
    the 1995 American Travel Survey), the AAR, and Amtrak. For rail,
    ``intercity'' passenger-miles are an approximation as they include all
    passenger-miles generated on intercity trains, regardless of the length
    or purpose of individual trips. All air travel is deemed ``intercity.''
    For highway modes (privately-owned vehicles and buses), the synthesis
    approximates intercity travel as trips of 100 miles or more one-way.]

        That also belies one of the frequent arguments of today's defenders
    of the 1970 model--that the Federal Government supposedly subsidizes
    other modes of transportation at a greater rate than Amtrak. In fact,
    fiscal year 2005's appropriated subsidy of $1.207 billion represented
    approximately 9 percent of the total discretionary Federal funds for
    the Department--9 percent of Department funds go for one-half of 1
    percent of the market. The argument also passes quickly over another
    important fact: highways, transit and aviation are, unlike rail, funded
    substantially by user fees and also by State investments. Perhaps most
    importantly, however, the argument overlooks that Federal financial
    support for roads, airports, and transit goes to infrastructure and not
    to operations. In other modes of transportation, Federal aid goes to
    highway and airport infrastructure, for example, but Federal taxpayers
    are not regularly asked to write annual billion dollar checks to
    private trucking companies, private bus companies, private automobile
    commuters and vacationers, nor even to private airlines, although the
    taxpayers have regularly done so with regard to Amtrak.
        In considering where we are with Amtrak, it is useful to consider
    the varied things that Amtrak presently does to understand that recent
    appropriations to this private company have not been limited to rail
    infrastructure, but also go into actual train operations. Generally,
    Amtrak's business can be grouped into activities relating to (1) rail
    infrastructure, (2) corridor train operations, and (3) long-distance
    train service.

    Rail Infrastructure
        Amtrak owns its own right of way and rail infrastructure along most
    of the Northeast Corridor (NEC), except in Massachusetts and part of
    Connecticut, where the infrastructure is owned by those States. Amtrak
    also owns some infrastructure in Michigan, as well as train stations in
    a number of States. Otherwise, Amtrak mostly operates trains on rail
    infrastructure owned by others.
        Within the Northeast Corridor, Amtrak controls the infrastructure
    not only for its own use, but for use by numerous other railroads and
    transit agencies.

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

                   List of Users of the NEC Other than Amtrak
        CSX
        Long Island Rail Road
        Maryland Rail Commuter Service
        Massachusetts Bay Transportation Authority
        Metro-North Commuter Railroad
        Delaware DOT
        Rhode Island DOT
        Canadian Pacific
        New Jersey Transit
        Norfolk Southern
        Providence and Worcester Railroad
        Shore Line East (Connecticut)
        Southeastern Pennsylvania Transportation Authority
        Virginia Railway Express
        Consolidated Rail Corporation

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

        These other users of the NEC pay Amtrak for access and associated
    services, such as train dispatching. In total, trains operated by other
    users on the NEC actually exceed the number of trains operated by
    Amtrak itself on the NEC.
        Because of the way the 1970 model of intercity passenger rail was
    organized, maintenance and development of infrastructure in the NEC has
    been left to Amtrak.
        In fiscal year 2005, Amtrak has budgeted $215 million on fixed
    facility infrastructure projects, and a total of $587.2 million for
    capital expenses, most of which will come from the $1.2 billion of
    Federal appropriations made available by this subcommittee. None of
    those funds will be allocated to States, or to infrastructure in
    locations where Amtrak does not presently operate. Federal
    infrastructure dollars are allocated by a private corporation, Amtrak,
    instead of by State, local, and even Federal transportation planning
    officials.

    Corridor Services
        When viewed from the perspective of moving passengers, and the
    distance they are moved (passenger-miles), Amtrak can be seen as
    providing two types of services: ``corridor services'' of approximately
    100-500 miles and frequently under contract to States in which these
    corridors are located; and ``long-distance'', primarily leisure travel
    services. Within the category of corridor services, there are two
    different types: services on the NE corridor, where Amtrak operates on
    its own track and infrastructure, and services on other State
    corridors, where Amtrak operates on track and infrastructure owned and
    controlled by others.
        Northeast Corridor.--Approximately 20 million people, or 80 percent
    of all Amtrak riders in 2004, traveled on a corridor service. The
    largest portion of Amtrak corridor trips are on the Washington-New York
    City-Boston Northeast Corridor (NEC). If one looks at NEC train
    operations, separate from the NEC infrastructure, this is the one area
    where Amtrak operates at something close to a breakeven basis.
        Other Corridors.--In addition to the NEC main line, Amtrak operates
    trains for corridor service in 15 other States.

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

                      List of States with Corridor Service
        CALIFORNIA: Pacific Surfliner, Capitols, San Joaquins.
        CONNECTICUT/MASSACHUSETTS: Inland Route (New Haven-Springfield).
        ILLINOIS: Chicago-St.Louis, Illini, Illinois Zephyr, Hiawatha (with
    Wisconsin).
        MAINE: The Downeaster.
        MICHIGAN: Wolverines, Blue Water, Pere Marquette.
        MISSOURI: Kansas City-St.Louis.
        NEW YORK: Empire/Maple Leaf, Adirondack.
        NORTH CAROLINA: Carolinian (Extended corridor), Piedmont.
        OKLAHOMA: Heartland Flyer.
        OREGON: Cascades (with Washington).
        PENNSYLVANIA: Keystone Service, Pennsylvanian (Extended corridor).
        WASHINGTON: Cascades (with Oregon).
        WISCONSIN: Hiawathas (with Illinois).
        VERMONT: Ethan Allen Express, Vermonter (Extended corridor).

        Note.--States listed are the primary States served by each
    corridor.

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

        In 2004, a total of approximately 8 million people (i.e.,
    approximately one-third of the total Amtrak ridership) traveled on
    these additional corridor routes. In many instances, these corridors
    are subsidized in part by States. State operating subsidies for these
    trains totaled 10 percent of the combined Federal and State funding of
    Amtrak. However, States have not borne the full cost of these routes,
    and some States that have corridor trains have not paid anything at
    all, thereby producing issues of equity among the States, as well as
    market uncertainties about how travelers value the services. In the
    aggregate, on a fully-allocated basis, the non-NEC corridor trains
    (including both corridor and extended corridor service) had an average
    operating subsidy of $28 per passenger in fiscal year 2004.

    Long-Distance Services
        Amtrak's 15 long-distance trains have seen declining revenues and
    ridership--and increasing costs--over the last 10 years. DOT refers to
    these services as Transcontinental (more than 1 night), Overnight (1
    night) or extended corridor (greater than 500 miles, but with no
    sleeping accommodations). Amtrak presently operates 15 such trains.\2\
    Amtrak has continued to lose long-distance trip customers to an airline
    industry that is offering a low cost, high quality service, and to
    automobile drivers who choose to use highways rather than rail. Amtrak
    has had little or no success responding to this competition. As
    Amtrak's presence in this segment of the intercity transportation
    market has dwindled, Federal subsidies per passenger have continued to
    grow. In fiscal year 2004, the average passenger on a long-distance
    train received a subsidy of approximately $214 per trip on a fully-
    allocated basis,\3\ up from $158 in the year 2000--a 35 percent
    increase quintupling the 7 percent inflation over the same period.
    ---------------------------------------------------------------------------
        \2\ The long-distance routes are as follows: Vermonter, Silver
    Service, Cardinal, Empire Builder, Capitol Limited, California Zephyr,
    Southwest Chief, City of New Orleans, Texas Eagle, Sunset Limited,
    Coast Starlight, Lake Shore Limited, Crescent, Pennsylvanian,
    Carolinian. The Auto-Train, a specialized service, also operates over a
    long-distance route but with completely different characteristics. The
    Three Rivers (New York-Pittsburgh-Akron-Chicago) was discontinued in
    March 2005.
        \3\ Fully allocated costs include depreciation and interest.

                                         FULLY ALLOCATED LOSSES OF LONG-DISTANCE PASSENGER TRAINS, FISCAL YEAR 2004 \1\
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                               Subsidy Status               Fully Allocated
                                                                  ----------------------------------------    Loss (Fully          Fully           Fully
                                                                                                              Loaded with        Allocated       Allocated
             Service Type/Route                  Route No.          Unsubsidized by a    Subsidized by a     Depreciation,      (Loss) Per      (Loss) Per
                                                                          State               State        Interest, and All     Passenger    Passenger-Mile
                                                                                                               Overheads)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    EXTENDED CORRIDORS:
        Pennsylvanian...................  RT57...................  x                    .................      ($11,911,500)           ($69)        ($0.337)
        Vermonter.......................  RT04...................  ...................  x                      ($11,793,249)           ($47)        ($0.254)
        Carolinian......................  RT66...................  ...................  x                      ($16,723,244)           ($55)        ($0.197)
    OVERNIGHT:
        Silver Service..................  RT16A..................  x                    .................     ($173,078,522)          ($234)        ($0.374)
        Three Rivers (discontinued).....  RT17...................  x                    .................      ($75,173,377)          ($492)        ($0.990)
        Cardinal........................  RT18...................  x                    .................      ($18,602,874)          ($209)        ($0.497)
        Capitol Limited.................  RT26...................  x                    .................      ($43,784,083)          ($242)        ($0.486)
        City of New Orleans.............  RT30...................  x                    .................      ($30,429,407)          ($160)        ($0.335)
        Texas Eagle.....................  RT32...................  x                    .................      ($42,914,712)          ($183)        ($0.282)
        Coast Starlight.................  RT34...................  x                    .................      ($63,002,725)          ($152)        ($0.271)
        Lake Shore Limited..............  RT45...................  x                    .................      ($63,803,165)          ($228)        ($0.387)
        Crescent........................  RT52...................  x                    .................      ($64,761,043)          ($252)        ($0.445)
    TRANSCONTINENTAL:
        Empire Builder..................  RT25...................  x                    .................      ($75,338,574)          ($172)        ($0.223)
        California Zephyr...............  RT27...................  x                    .................      ($89,696,739)          ($267)        ($0.320)
        Southwest Chief.................  RT28...................  x                    .................     ($121,849,944)          ($420)        ($0.390)
        Sunset Limited..................  RT33...................  x                    .................      ($44,953,841)          ($466)        ($0.406)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    \1\ Source.--Amtrak Route Profitability System.
    See Appendix A for a more detailed account.

        Moreover, these long-distance trains have had considerable
    difficulty with regard to on-time departures and arrivals:

                              ON-TIME PERFORMANCE OF LONG-DISTANCE TRAINS, FISCAL YEAR 2004
    ----------------------------------------------------------------------------------------------------------------
                                                                                                    Average
                                                                                                    Minutes  Average
                                                                                        Percent On-   Late   Minutes
              Train Name             Service Type         Between           --And       Time (Zero    per      Late
                                                                                        Tolerance)   Train     per
                                                                                                      (All     Late
                                                                                                    Trains)   Train
    ----------------------------------------------------------------------------------------------------------------
    California Zephyr............  Transcon........  Chicago.........  Bay Area.......       14.2       136      159
    Capitol Ltd..................  Overnight.......  Chicago.........  Washington.....       13.8       101      118
    Cardinal.....................  Overnight.......  Chicago.........  New York via          33.1        48       74
                                                                        Cincinnati.
    Carolinian...................  Extended          New York........  Charlotte......       26.9        38       51
                                    Corridor.
    City of New Orleans..........  Overnight.......  Chicago.........  New Orleans....       47.7        26       50
    Coast Starlight..............  Overnight.......  Seattle.........  Los Angeles....       10.8       139      157
    Crescent.....................  Overnight.......  New York........  New Orleans....       41.6        34       58
    Empire Builder...............  Transcon........  Chicago.........  Seattle........       68.3        11       36
    Lake Shore Ltd...............  Overnight.......  Chicago.........  New York.......        8.2       123      134
    Pennsylvanian................  Extended          New York........  Pittsburgh.....       17.2        32       39
                                    Corridor.
    Silver Meteor................  Overnight.......  New York........  Miami..........       25.6        84      113
    Southwest Chief..............  Transcon........  Chicago.........  Los Angeles....       28.5        68       96
    Sunset Limited...............  Transcon........  Orlando.........  Los Angeles....        1.6       359      366
    Texas Eagle..................  Overnight.......  Chicago.........  San Antonio....       41.9        57       98
    Vermonter....................  Extended          Washington......  St. Albans VT..       32.1        21       30
                                    Corridor.
    ----------------------------------------------------------------------------------------------------------------

        Overall, the picture of where things stand in intercity passenger
    rail service is far from what was hoped for when Amtrak was created in
    1970. In short, while service and ridership erode, Amtrak continues to
    require extraordinary and ever-increasing subsidies from the Federal
    taxpayer despite the original model's intent and Congress' clear call
    for an end to operating subsidies by 2002 in the 1997 Amtrak Reform
    Act.
        Commuter Rail.--In addition, Amtrak has contracts to operate trains
    for certain transit agencies and State governments. These are:
    Connecticut Department of Transportation Shore Line East (SLE/CONNDOT),
    Long Island Rail Road (LIRR), New Jersey Transit (NJT), Southeastern
    Pennsylvania Transportation Authority (SEPTA), Delaware Transit
    Corporation (DELDOT), Maryland Transit Administration (MARC), Virginia
    Railway Express (VRE), Northeast Illinois Regional Commuter Railroad
    Corporation (METRA), Southern California Regional Rail Authority
    (SCRRA) Metrolink, North San Diego County Transit District Coaster
    Commuter Rail Service, Peninsula Corridor Joint Powers Board
    (CALTRAIN), Central Puget Sound Regional Transit Authority (Sound
    Transit), and Altamont Commuter Express Authority (ACE). In the event
    of a business failure by Amtrak, the President's budget calls for $360
    million to be appropriated to fund directed service of these trains (as
    well as those of the NEC). Such funding would protect commuter service
    affecting approximately 2,342 trains and 1,187,860 passengers each
    weekday for the relevant transit agencies, so that they would not be
    impacted by Amtrak's problems involving intercity service.

                     RECENT HISTORY AND THE CALL TO CHANGE

        During the 1990's, there was an increasing recognition that the
    1970 model of intercity passenger rail had developed some very serious
    problems. Congress sought to redress some of those in the 1997 Amtrak
    Reform Act. Unfortunately, the reforms embodied in the 1997 Act did not
    prove sufficient to solve the problems.
        Many of the reforms in the 1997 Act empowered Amtrak to improve its
    own performance and removed impediments to its doing so. After passage
    of the 1997 Act, Amtrak's then-management repeatedly reported that it
    was it on a ``glide path'' to self-sufficiency by 2002. That did not
    happen. The problems worsened, and it became increasingly clear that
    they were not solely the result of business misjudgments, but also
    involved inherent flaws in the 1970 model.

        Instead of a successful ``glide path'', Secretary Mineta was
    greeted with some unwelcome surprises in his initial experiences with
    Amtrak during the current administration. Early in 2001, instead of
    Amtrak being months from self-sufficiency as reported, Amtrak's then-
    management advised that Amtrak would be insolvent within 2 weeks unless
    the DOT subordinated the interest of U.S. taxpayers to a foreign bank
    so that Amtrak could mortgage its rights to use Pennsylvania Station in
    New York City. Within a year, Amtrak had lurched to yet another
    financial crisis, informing the Secretary that if the Department and
    Congress did not provide the company another $300 million, it would be
    insolvent within 2 weeks and would shut down commuter and intercity
    services. In response, to obtain time to assess and identify more long
    term reforms, DOT provided Amtrak a $100 million loan under the
    Railroad Rehabilitation and Improvement Financing Program, and Congress
    provided the remaining $205 million through a supplemental
    appropriation.
        These crises highlighted fundamental problems, some of which needed
    immediate action by Amtrak, and some of which were revealed to be
    inherent to the 1970 business model and in need of legislative change.
    Among the most urgent for Amtrak itself was the state of its financial
    books and records. Indeed, it took independent auditors almost all of
    fiscal year 2002 to close their audit of Amtrak's fiscal year 2001
    financial performance. That audit required $200 million in net audit
    adjustments and found 5 material weaknesses and 12 reportable
    conditions that needed to be addressed to fix the problems with
    Amtrak's accounting practices. It also revealed that Amtrak had taken
    on almost $3 billion in new debt in order to pay for (1) costly
    overruns of poorly managed capital improvements, (2) an unsuccessful
    foray into the express package business, and (3) day-to-day operational
    expenses.
        Since 2002, Amtrak's record-keeping has improved. In 2005, the
    independent audit was completed in March instead of September and no
    material weaknesses were found. While Amtrak's auditors still find
    significant areas for improvement, they comment favorably on
    developments over the last 3 years.
        Through participation on the Amtrak Board, and through changes to
    the appropriations process that enabled stronger FRA oversight of the
    grant process to Amtrak, Secretary Mineta and DOT have sought a variety
    of improvements that Amtrak could make on its own. That process
    continues and is ongoing. Happily, Amtrak operates in a more efficient
    and better way than it did 3 years ago, and the new requirements
    imposed by recent appropriations bills have produced significant
    improvements, and need to remain in place.
        But notwithstanding the very significant management improvements
    and a much-enhanced and valuable involvement of the Amtrak Board,
    fundamental difficulties continue to confront Amtrak, because the 1970
    model of intercity passenger rail is a framework that is flawed. Amtrak
    continues to spend dramatically more money than the revenues it
    generates, and this year is spending at a pace greater than the
    appropriation from Congress. Amtrak has estimated that by the end of
    fiscal year 2005 it will have less than $75 million to $100 million of
    cash remaining, with its costs continuing to far exceed its ticket
    sales.
        As shown by the two charts below, the structural problem in
    Amtrak's condition is long-term, and is getting worse, not better.

        Further adding to Amtrak's deterioration is that the company's debt
    increased massively in the late 1990's, from $1.7 billion in 1997 to
    $4.8 billion in 2002 (with $3.8 billion non-defeased), without
    adequately increased passenger revenues to pay the debt service.
    Because of this increased debt, Amtrak's repayment requirements
    (principal and interest) are forecasted to be approximately $273
    million in fiscal year 2005 (up from $111 million in 1997). Amtrak has
    recently suggested that the company be absolved from this $3.8 billion
    debt by the Federal taxpayers' assumption of all of it, as compared
    with the Federal appropriation covering approximately 40 percent of all
    Amtrak expenses the last 2 fiscal years. Amtrak would give the Federal
    Government nothing in return. That is unacceptable to the
    administration.
        The fiscal year 2005 appropriation for Amtrak of $1.2 billion
    itself represents a 134 percent increase over the appropriation for
    fiscal year 2001. Amtrak's President has said that as presently
    configured, Amtrak cannot successfully operate through fiscal year 2006
    without much larger amounts of taxpayer funds being allocated to this
    private company. Indeed, the increase sought by Amtrak--256 percent
    above the 2001 appropriation--would far outstrip the 22 percent
    increase in domestic discretionary spending over the same time period.
    For the Federal taxpayers, that is a spiral in the wrong direction.
        Passenger rail is already by far the most heavily subsidized form
    of intercity passenger transportation. When viewed on a per passenger-
    mile basis, analysis by the Bureau of Transportation Statistics
    indicates that the aggregate Federal expenditure for intercity
    passenger rail is 30 times greater than for commercial aviation.
    Likewise, the intercity bus industry, where there are no comprehensive
    or dedicated Federal operating subsidies, carries as many as 350
    million passengers annually (according to Eno Foundation estimates)--14
    times Amtrak's ridership. (Although not comprehensive or directed, FTA,
    under 49 U.S.C.  5311(f) provides for grants supporting rural
    intercity bus service. This grant program amounted to approximately $22
    million in fiscal year 2004, which is a minor amount relative to the
    taxpayer burden for Amtrak each year.) So continually increased
    operating subsidies is not the right answer.
        What is more clear now than ever is that the basic business model
    through which we provide intercity passenger rail service in this
    country--a single national entity called Amtrak--is unworkable and is
    not adequately positioned to respond to the changing transportation
    needs of this country. Massive increases in funding to merely slow a
    downward spiral are neither sustainable nor justifiable. At the same
    time, doing nothing at all will eventually result in a business failure
    and a lost opportunity for intercity passenger rail for this country. A
    change is needed.
        The administration's budget request reflects the importance of
    reform for America's intercity passenger rail system, which Amtrak has
    been operating at a loss for 34 years. As noted above, Amtrak has
    received more than $29 billion in taxpayer subsidies, including more
    than $1 billion in each of the last 2 years, despite the contradicting
    requirements of the 1997 Amtrak Reform Act. In 2003 and again this
    year, the administration sent to Congress, the President's Passenger
    Rail Investment Reform Act. This proposal would align passenger rail
    programs with other transportation modes, under which States work in
    partnership with the Federal Government in owning, operating, and
    maintaining transportation facilities and services.
        Deteriorating infrastructure and declining service further the case
    that, without congressional action on the administration's reform
    proposals, continued taxpayer subsidies cannot be justified.
    Consequently, no funding is included in the 2006 budget for Amtrak.
    Rather, $360 million is budgeted to allow the Surface Transportation
    Board to support existing commuter rail service along the NEC and
    elsewhere should Amtrak cease commuter rail operations in the absence
    of Federal subsidies. The President's budget is a serious call to
    action: The time for reform is now. If the administration's management
    and financial reforms are enacted, the administration is prepared to
    commit additional resources for Amtrak--but if, and only if, reforms
    are underway. Today is too soon to know if funding will be appropriate,
    or what the right amounts should be under a new model of intercity
    passenger rail service.

      THE ADMINISTRATION'S PLAN FOR REFORM AND PRESERVATION OF INTERCITY
                                 PASSENGER RAIL

        As a matter of transportation policy, the administration supports
    the availability of intercity passenger rail, but with a very different
    vision than the failed model of the past. Secretary Mineta has
    repeatedly set out the fundamental principles needed to reform
    intercity passenger rail and place this form of transportation on a
    sound footing. These principles are:
      --Establish a long-term partnership between States and the Federal
            Government to support intercity passenger rail.--Partnerships
            between the States and the Federal Government for the planning,
            decision-making and capital investment in transportation have
            been one valuable element in the success of Federal programs
            for highways and transit to date. The States, through their
            multi-modal planning mechanisms, are in a much better position
            to determine their intercity mobility needs and which form of
            investment makes the most sense in meeting these needs than a
            sole supplier company in Washington, DC. State-supported
            intercity passenger rail services in places like the States of
            Washington, North Carolina, California, and Wisconsin have been
            one of the bright spots for intercity passenger rail ridership.
            The administration wants to build upon these successes through
            a new program of Federal/State capital funding partnerships in
            which the Federal Government would provide matching grants.
      --Require that Amtrak transition to a pure operating company.--Amtrak
            today is both an operating company and the owner and maintainer
            of significant infrastructure that forms a key component of the
            intercity and commuter transportation systems of eight States
            in the Northeast, as well as many stations and other facilities
            that have local or regional transportation importance. These
            are two very different functions. By having them both reside in
            the same entity, the company is faced with conflicting
            priorities, which the company has found difficult, if not
            impossible, to balance. Infrastructure decisions have depended
            on Amtrak decisions, rather than those of the States and
            localities who are largely responsible for such planning in
            other transportation modes such as highways, airports, and
            transit. Amtrak, and the Nation's transportation system, would
            be better off with Amtrak able to focus on one thing--operating
            trains--and doing it well.
      --Create a system driven by sound economics.--One of the flaws of the
            1970 model is that intercity passenger rail has sometimes been
            defined by politics, habit and fear of change. That is one
            reason that some routes have high subsidies, such as the $466
            per passenger subsidy in fiscal year 2004 on the Los Angeles to
            Orlando Sunset Limited. Intercity passenger rail needs to serve
            the markets where there is an identifiable demand that
            intercity passenger rail can meet. It cannot and should not try
            to serve every market regardless of the cost and regardless of
            the revenue. Just as with other transportation modes and other
            successful businesses in general, intercity passenger rail
            needs to have the dexterity to recognize changing business
            patterns and demand, and that sometimes the services of
            yesterday are not needed or justified today or tomorrow.
            Intercity passenger rail service needs to be designed to cost-
            effectively meet and support the transportation needs of the
            traveling public and sponsoring public authorities.
      --Introduce carefully managed competition to provide higher quality
            rail services at reasonable prices.--For the last 34 years
            under the 1970 model, intercity passenger rail service has not
            been subject to the discipline of the market place. On corridor
            services, for example, States do not have any alternative but
            to have Amtrak operate the intercity service. This has resulted
            in a service that is more costly than one would expect in a
            competitive situation, and which often has not been responsive
            to changing transportation patterns, demands or expectations.
            In a free market economy, competition leads to improved cost
            effectiveness, higher quality and innovation, elements that
            have been sorely lacking in intercity passenger rail for the
            past generation. Transition to competition is never easy, but
            it is necessary for the public to get the service it demands
            and deserves.
      --Create an effective public partnership, after a reasonable
            transition, to manage the capital assets of the Northeast
            Corridor.--The Washington-New York City-Boston Northeast
            Corridor main line is the most heavily utilized rail route in
            the country, forming an essential link for intercity passenger
            and freight transportation and commuter access to the major
            cities of the Northeast. By some measures, such as the number
            of persons per day that use this infrastructure, Amtrak is a
            minority user of this infrastructure--particularly in urban
            areas. Transportation services on this corridor need to be
            insulated from the unpredictable consequences of Amtrak's own
            finances and needs at any given time. At least initially, the
            ownership of these assets should be in the public sector, and
            management and control of this asset should reflect significant
            input from the States that depend on the Northeast Corridor for
            passenger and freight mobility.
        As noted, the administration's Passenger Rail Investment Reform Act
    was transmitted to Congress last month. It sets out and details the
    administration's proposals on specific ways to achieve these
    objectives. After a generous transition period, intercity passenger
    rail would become an economically viable and strategically effective
    mode of transportation, supporting numerous successful rail corridors
    nationwide. As set out in Secretary Mineta's transmittal letter
    accompanying our legislative proposal, we look forward to working with
    Congress to discuss and fashion the specifics of legislation in ways
    that will successfully reform intercity passenger rail for the future.
        In addition, Amtrak itself released its plan of strategic
    initiatives crafted by Amtrak to begin the process of reform within the
    company itself. That is a timely development, with many positive
    elements. Amtrak's own recognition of the need for reform is a welcome
    response to Secretary Mineta's steadfast resolve to address the
    problems of intercity passenger rail, and create a viable future. But
    Amtrak's plan would not accomplish everything needed, and legislation
    will be needed that achieves all of the objectives set out by Secretary
    Mineta and the administration.
        From an appropriations perspective, it is worth noting that the
    administration's reform proposals would authorize funding for rail
    infrastructure to States rather than to Amtrak (except during a
    transition period). Conversely, some have asked whether it would be
    sensible to authorize some form of Federal bonds to support Amtrak.
    That would be a serious error, from multiple perspectives. It is not
    appropriate to issue government-sponsored or supported debt for a
    private corporation like Amtrak in this circumstance. Amtrak has no
    real ability or revenue to repay any bonds. While Amtrak can issue
    bonds on its own, no one would currently buy them because it lacks the
    incentives that discipline private issuers. In addition, Federal
    financing of Amtrak through any non-Treasury debt would be more costly
    than a General Fund appropriation supported by U.S. Treasury debt.
    Whatever one thinks about particular forms of bonding for
    transportation needs, Amtrak is a poor candidate for any such approach.

                                   CONCLUSION

        My own experience with Amtrak's Board persuades me that Amtrak
    itself recognizes the necessity for reform and that time is critical.
    It is essential that others come to recognize this, too. Without
    reform, Amtrak is not sustainable at its current level of funding or at
    any level Amtrak is likely to receive in these difficult budgetary
    times. Moreover, history tells us that merely throwing money at the
    1970 model of intercity passenger rail without addressing the problems
    that have been identified in the subsequent years does not result in
    any long-term improvements in Amtrak's finances or quality of service.
        Some people appear to assume that reform necessarily means that
    many areas will lose intercity rail service, but that is not
    necessarily so. There are other ways to run intercity passenger service
    and, given the chance, States are likely to try some of them and
    succeed at improving service and eliminating operating subsidies. The
    experience of the Alaska Railroad, which has done just that since the
    State of Alaska bought it from the government 20 years ago, is
    instructive. It did not change routes; it got creative about providing
    service based on the markets it serves. Today, the Alaska Railroad gets
    capital grants, but no operating assistance. It makes a profit ``above
    the rails.'' One of the Alaska Railroad's innovations is to supplement
    its basic, year-round passenger service by seasonally hauling special
    first-class cars belonging to the cruise ship companies. This is the
    kind of creative adaptation the administration's bill envisions, but
    making such improvements depends upon freeing intercity passenger rail
    from the frozen mold of 1970. It should not surprise anyone that
    continuing to do the same thing that failed before 1970 has failed
    again.
        The administration has been clear that it cannot support the failed
    model of the past, nor pouring more funding into that failed approach.
    We have been equally clear that IF meaningful reform is accomplished
    and implemented, the administration would support funding of
    infrastructure and transition needs for train operations and related
    costs. Although this complicates the appropriations process, we do not
    believe there is a basis for arriving at any ``baseline level of
    support'' for Amtrak until Congress has sent significant reform
    legislation to the President and it is enacted with his signature. In
    this regard, while the administration maintains that no funds should be
    appropriated for Amtrak's use in the absence of meaningful reform, any
    future appropriations should be subject to a variety of necessary and
    stringent grant conditions to ensure an improved intercity passenger
    rail system is achieved.
        Secretary Mineta and his team look forward to working with the
    Congress to resolve the recurrent crisis that plagues the old model of
    intercity passenger rail. Thank you for the opportunity to share our
    perspective on Amtrak and intercity passenger rail service. I would be
    pleased to respond to any questions you may have.

        Senator Bond. Thank you, Mr. Rosen. Mr. Mead.

                          STATEMENT OF KENNETH M. MEAD

        Mr. Mead. Thank you, Mr. Chairman.
        You know, the appropriations committees have been doing the
    heavy lift for passenger rail since Amtrak's reauthorization
    expired in 2002. We have testified several times since then on
    Amtrak's high debt of nearly $4 billion, large operating
    losses, poor on-time performance and deferred capital
    investment in the billions. Amtrak seems perpetually on the
    edge of collapse.
        We are testified again today on the same subject, but with
    greater urgency. As time goes by, the limp along status quo
    system of today comes closer to a major failure but no one
    knows when or where that failure will occur.
        The current model is indeed broken and the reasons why go
    beyond just budgetary shortfalls and extend to matters like who
    decides on the type and amount of service. Also, other than
    budget cuts, the current model provides few if any incentives
    for cost control.
        Amtrak is quite literally coming to the end of its rope,
    now projecting cash on hand of about $30 million at the end of
    this fiscal year. That will cover less than 2 weeks of Amtrak's
    operating expenses. And that does not take into account at all
    the loss off Acela services.
        I have heard some discussion of the bankruptcy option, but
    think that would be a complex and risky undertaking. Rather, a
    comprehensive reauthorization that provides new direction and
    adequate funding is needed and is needed soon.
        Reauthorization, in our opinion, ought to focus on
    improving mobility in short distance corridors around the
    country, not just in the Northeast, and in restructuring long-
    distance service to complement corridor service. That is going
    to require new relationships between the Federal Government and
    the States, among the States, Amtrak and the freight railroads,
    and also give the States greater authority over passenger rail
    decisions.
        But in order for that to work, Mr. Chairman, a considerably
    more robust Federal funding program for capital with a
    reasonable State match is going to be required.
        The administration proposal confronts several key issues
    straightforwardly while leaving others unanswered. We concur
    with the emphasis on corridor development within and outside
    the Northeast corridor. These are the places where the demand
    actually is. And we concur also with the greater decision-
    making power vested in the States.
        Also, reauthorization should leave open the door to
    competition. Amtrak is the sole provider and has few incentives
    other than the threat of budget cuts to operate efficiently.
    But we are not in a position to really say whether or how many
    potential competitors there might be, but there should at the
    very least be an even playing field for competition.
        Freight railroads own the track outside of the Northeast
    and they, too, have very legitimate interests.
        But a central issue left unanswered by the administration's
    proposal is the level of Federal funding it supports. This has
    fostered, in our judgment, a perception that while the States
    would be given more responsibility and authority, the funding
    burden would fall largely on them with no corresponding
    commitment to significantly expand Federal funding.
        To be sure, the current model's problems extend well beyond
    just funding matters but you are going to have to tackle the
    funding issue to secure anything approaching consensus.
        I would like to give you our own take, Mr. Chairman, on the
    funding situation. For 2005, Amtrak's appropriation was $1.2
    billion. In addition, Amtrak anticipates another several
    hundred million dollars this year in State contributions. If
    Amtrak receives only $1.2 billion in Federal funds in 2006,
    service will need to be cut almost certainly in significant
    ways. For 2006, passenger rail needs Federal funding between
    $1.4 billion and $1.5 billion plus the existing State
    contributions in order to move the system forward towards a
    state of good repair and better performance.
        For 2070 and beyond, Federal funding levels between $1.7
    billion and $2 billion should put you on the road to bringing
    the system to a state of good repair and better position the
    States to invest in rail corridors. That assumes the States
    would provide a reasonable match of 15 to 30 percent for
    capital grants, would cover a larger portion of operating
    subsidies, and that cost-saving measures in such areas as food
    service would be implemented.
        The committee may wish to consider the following, as well.
    First, a perspective on long-distance trains. It is important
    to appreciate that while they are highly subsidized and often
    inefficient, their total elimination will not come close to
    making ends meet. Savings ultimately would be in the
    neighborhood of around $300 million and the savings would not
    be immediate due to the need for labor severance payments.
    Also, 23 States have only long-distance service today. And of
    these, 16 have little potential for corridor development in the
    near term.
        Second, formula grants with no match required to go
    primarily to those States who have only long-distance service
    today and no real potential for corridor development in the
    near term and hence, would not see a capital grant program as
    particularly advantageous to them. Formula grants could be used
    to help offset the cost of service. Today we send the checks
    directly to Amtrak.
        Third, the Federal Government brings fleet and capital
    infrastructure to a state of good repair in the Northeast and
    outside the Northeast with no match required. But thereafter,
    once it is in a state of good repair, the States must share in
    the cost of keeping it in a state of good repair.
        And finally, Amtrak's high debt. Portions of this debt,
    which approach about $4 billion, are financed at very high
    interest rates. One example is 9.5 percent at Penn Station,
    much higher than the Treasury borrowing rate. But we currently
    pay the full tab anyway through the appropriations process.
    Consider discharging portions of that debt where it is
    financially advantageous to do so and, in return, take title to
    the Northeast corridor.

                               PREPARED STATEMENT

        Also, I would place very heavy restrictions on Amtrak's
    ability to incur debt in the future.
        Thank you.
        [The statement follows:]

                     Prepared Statement of Kenneth M. Mead

        Mr. Chairman and members of the subcommittee, we appreciate the
    opportunity to testify on intercity passenger rail and Amtrak.
    Intercity passenger rail is an important component of a balanced
    transportation system. Amtrak's authorization expired in 2002. In the
    interim, Congress has provided direction in piecemeal fashion in the
    appropriations process. We have testified several times since then on
    Amtrak's unsustainably large operating losses, poor on-time
    performance, and increasing levels of deferred infrastructure and fleet
    investment. We find ourselves testifying again today on these same
    subjects, but with greater urgency. As time goes on, the current limp-
    along status quo system comes closer to a major failure, but no one
    knows where or when such a failure may occur.
        We reported in November 2004, that the current model for intercity
    passenger rail is broken. And the reason it is broken goes beyond
    persistent budgetary shortfalls and extends to matters like who decides
    on the type and amount of service, who provides service, and who
    selects the providers. Other than budget cuts or the threat of budget
    cuts, the current model provides few incentives for cost control or
    delivery of services in a cost-effective way.
        Amtrak is quite literally coming to the end of its rope. Amtrak's
    most recent cash flow analysis forecasts cash on hand of about $32
    million by the end of fiscal year 2005, excluding the impact from the
    loss of Acela service. This amounts to less than 2 weeks of Amtrak's
    average cash requirements. For several reasons, a bankruptcy option
    would be an extraordinarily complex and risky undertaking--in our
    opinion, one not to be relied upon if the objective is to promote a
    more rational and reliable national passenger rail system. In short, a
    comprehensive reauthorization that provides new direction and adequate
    funding is needed and needed this year.
        A reauthorization, in our opinion, should focus on improving
    mobility in short distance corridors around the country--not just in
    the Northeast Corridor--and in restructuring long-distance services to
    complement corridor services. This will require new relationships or
    partnerships between the Federal Government and the States and among
    the States, Amtrak, and the freight railroads, and give the States much
    greater authority and control over intercity passenger rail decisions.
    But, in order for this to work, a considerably more robust Federal
    funding program for capital, with a reasonable State match will be
    required, along with additional State contributions.
        The administration's proposal recognizes that the current model is
    broken and confronts several key issues in a straightforward way, while
    leaving others less clear or unanswered. We concur with the emphasis on
    corridor development within and outside the Northeast Corridor--these
    are the places where the demand is--and we concur as well with the
    greater decision-making powers given the States.
        Also, reauthorization should leave open the door to competition.
    Amtrak is the sole provider of intercity passenger rail service and, as
    such, has few incentives, other than the threat of funding cuts, to
    operate more efficiently. While we are not in a position to say how
    many, if any, potential competitors there might be, there needs to be a
    level playing field to promote competition, and consideration must be
    given as well to the legitimate interests of the freight railroads who
    own the rail infrastructure outside the Northeast Corridor.
        Left unanswered by the administration's proposal, however, is a
    central issue, most notably the approximate level of funding it
    supports. This has fostered a perception that while the States would be
    given more authority, the funding burden for operating losses would
    fall largely on them, with no corresponding commitment to significantly
    expand Federal capital funding. The debate on reauthorization would be
    much better informed if the administration's bill spelled out Federal
    funding levels with greater clarity. We fully recognize that the
    problems of the current model extend beyond matters of money, but
    funding levels are an integral part of any solution and in reaching
    consensus.
        Our own take on the funding issue is as follows. In fiscal year
    2005, Amtrak received a Federal appropriation of $1.2 billion. In
    addition, Amtrak anticipates $140 million in State contributions for
    operating costs and $200 million for capital projects. In effect,
    Amtrak had access to funds totaling about $1.5 billion. This level of
    funding is not sufficient to make progress toward achieving a state of
    good repair.
        If Amtrak receives only $1.2 billion in Federal funding in fiscal
    year 2006, even combined with expected State operating and capital
    contributions, it will likely continue to defer needed capital
    investment and will need to cut services. Intercity passenger rail
    needs Federal funding between $1.4 billion and $1.5 billion, plus
    existing state contributions, in order to maintain the status quo as we
    know it today. However, this level of funding would not be sufficient
    to move the system to a state-of-good-repair, let alone permit
    investment in new corridor development.
        For 2007 and beyond, Federal funding levels between $1.7 billion
    and $2.0 billion would put us on the road to bringing the existing
    infrastructure and fleet to a state-of-good-repair and better position
    States to use Federal funds plus their own revenues to invest in rail
    corridors. This assumes that States would provide a reasonable match of
    15 to 30 percent for capital grants and would cover a larger portion of
    operating subsidies and that Amtrak would implement cost saving
    measures in such areas as food and beverage service.

    CURRENT MODEL IS BROKEN, RESULTING IN SEVERE FINANCIAL INSTABILITY AND
                           DECLINING SERVICE QUALITY

        Despite multiple efforts over the years to change Amtrak's
    structure and funding, we have a system that limps along, 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.
    Consider the following:
      --Amtrak is in a precarious financial condition. Its system continues
            to suffer operating losses on all but a handful of routes.
            Losses on some long-distance trains (excluding depreciation and
            interest) exceed $400 per passenger. For the last 6 years the
            average annual cash losses have exceeded $600 million. The
            growth in cash losses since fiscal year 2000 is primarily
            attributable to rising interest expense.

      --Amtrak is carrying a large debt burden. Its total debt grew 178
            percent between fiscal year 1997 and fiscal year 2002, although
            it has declined slightly in the past 2 years. For the
            foreseeable future, Amtrak's annual debt service payments will
            approach $300 million.

      --While ridership increased to 25.1 million in fiscal year 2004,
            passenger revenues were $1,304 million, below the $1,341
            million achieved in 2002, due primarily to fare pressures. For
            the first 6 months of fiscal year 2005, passenger revenues were
            $7.4 million lower than the same period in fiscal year 2004.

      --Amtrak has an estimated $5 billion backlog of state-of-good-repair
            investments, and underinvestment is becoming increasingly
            visible in its effects on service quality and reliability.
            Deferred capital investment has led to several system failures
            in recent years, including a failure of a key 12-kilovolt
            electric cable during the August 2003 northeast power blackout;
            fallen overhead power lines (catenary) on the line between New
            York and New Rochelle; and broken bolts on the Thames River
            bridge in Connecticut. No one knows where or when a critical
            failure will occur, but continued deferral of needed investment
            increases the risk that it may not be too far away.
      --Further, on-time performance fell from 74 percent in fiscal year
            2003 to 71 percent in fiscal year 2004, with even Amtrak's
            premier service--Acela Express--achieving on-time performance
            of only 74 percent. On-time performance for long-distance
            trains averaged less than 50 percent. Last year, the poorest
            performing train, in this regard, was the Sunset Limited, with
            an on-time performance of only 4 percent.

        Today, Amtrak's corridor trains outside the Northeast Corridor,
    based on current schedules, average 48 miles per hour and long-distance
    trains average only 46 miles per hour. These speeds reflect scheduled
    time and overstate the lower actual speeds due to delays. Deteriorating
    infrastructure and increasing freight and commuter rail congestion will
    continue to impact on-time performance.

                BANKRUPTCY IS NO SUBSTITUTE FOR REAUTHORIZATION

        A rail bankruptcy is an extraordinarily complex and risky
    procedure, and we cannot predict how the passenger rail system would
    emerge from bankruptcy. An Amtrak bankruptcy is no substitute for
    reauthorization. In our opinion, this is not an option to be relied
    upon if the objective is to promote a more rational and reliable
    national passenger rail system.
      --Labor Costs.--Labor negotiations are outside the bankruptcy
            process. In a non-railroad bankruptcy, the bankruptcy court can
            cancel or change collective bargaining agreements, which some
            airlines successfully used as leverage when renegotiating with
            their unions. In a rail bankruptcy, the Trustee would have to
            negotiate with Amtrak's unions under the Railway Labor Act.
      --Cash Crunch and Infrastructure Needs.--Amtrak's cash crunch would
            be exacerbated in bankruptcy. Once in bankruptcy, vendors often
            demand cash or provide credit under stringent terms. As a
            result, absent a Federal cash infusion, there is a possibility
            that major assets such as Penn Station and the Northeast
            Corridor would need to be sold or remortgaged to raise cash to
            sustain operations. Meanwhile, the value of the Federal
            Government's mortgages on these properties would be diluted,
            and the infrastructure would continue to deteriorate.
      --Public Interest.--Once in bankruptcy, a federally appointed Trustee
            would direct and manage Amtrak. The Trustee must consider the
            ``public interest,'' which has generally been broadly
            interpreted as continued operations of the railroad, but in
            what fashion would clearly be left up to the Trustee, which
            might not be the best solution or a solution that the
            reauthorizers would prefer or what the States would prefer. For
            example, in order to continue operations, the Trustee may need
            to shut down various State corridors or long-distance service
            to stop the bleeding of cash and operating losses.

      ELIMINATING LONG-DISTANCE SERVICE WILL NOT SOLVE THE FUNDING PROBLEM

        Long-distance service has sparked widespread controversy, in part,
    because of its heavy subsidies. In 2004, long-distance trains
    cumulatively incurred operating losses of more than $600 million
    (excluding interest and depreciation). In fact, the loss per passenger
    exceeded $400 on two of these trains--Sunset Limited and Southwest
    Chief. Eliminating long-distance service reduces operating losses
    associated with long-distance trains by about half (or $300 million)
    but will not make Amtrak profitable.
        Because long-distance trains share stations and facilities with
    corridor trains, eliminating the long-distance trains would not
    eliminate the shared costs. In addition, Amtrak allocates a share of
    overhead and infrastructure maintenance to the long-distance trains--
    some of these costs will be reallocated to all remaining trains. For
    example, we estimate that $300 million or more in shared and system
    costs would be shifted to other corridor trains. Thus, the expected net
    savings are only about $300 million. However, these savings would not
    be immediate. In fact, in the first year, it may cost Amtrak more to
    eliminate the service than to operate it because of its labor severance
    payouts (commonly called C-2).
        Long-distance trains represent about 15 percent of total intercity
    rail ridership. However, many long-distance riders do not really travel
    long distances. That is, long-distance trains carry only a small number
    of end-to-end riders. Of the 3.9 million long-distance riders in fiscal
    year 2004, only 527,000 rode the entire length of the route and another
    403,000 rode between city pairs also served by existing corridor
    service. The remaining 3 million riders traveled along portions of the
    route. These trips mostly ranged from 500 miles to 700 miles--slightly
    longer trip lengths than corridor riders.
        While eliminating long-distance service may seem appealing from a
    Federal budgetary standpoint, especially with the large deficits, it
    ignores the mobility needs of rural areas of the country and the
    benefits passenger rail provides. Amtrak provides long-distance service
    in 41 States and is the only intercity passenger rail service in 23 of
    those States. The questions of whether to provide long-distance
    service, who makes those decisions, and who funds the losses are
    critical policy decisions that will need to be made.

        WHERE DO WE GO FROM HERE? REAUTHORIZATION GUIDANCE IS ESSENTIAL

        The ``limp along'' approach is costly and leaves many unsatisfied.
    The current model for providing intercity passenger service does not
    leave the 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 service amenities. The model provides little balance
    between the national goals of an integrated network and regional and
    State transportation needs. How much funding and who provides the
    funding--Federal, State, or a combination--are also critical questions
    that need to be addressed. In providing reauthorization guidance, some
    core elements need to be considered in determining how passenger rail
    is funded and delivered, specifically, deciding the levels and mix of
    Federal and State funding, achieving a state-of-good-repair in the
    Northeast Corridor, determining the appropriate framework to integrate
    competing demands of infrastructure and operations in the Northeast
    Corridor, and paying off Amtrak's legacy debt.
        In our opinion, a new model for intercity passenger rail should
    also include several important aspects. The first is that funding and
    governance build in incentives for cost cutting. Specifically,
    eliminating direct subsidies to Amtrak, or any other operator, and
    channeling funds through the States will likely promote more cost
    control because an operator will need to better justify costs in order
    to retain an operating contract. In addition, it will encourage States
    to maximize efficiency by keeping their own costs to a minimum. Second,
    the introduction of private competition into the management and
    operation of intercity passenger rail services will exert additional
    market pressures on operators to provide cost-effective, higher quality
    service.

       ADEQUATE FEDERAL AND STATE FUNDING SHOULD BE PROVIDED IN ORDER TO
    RESTORE THE INTERCITY PASSENGER RAIL SYSTEM AND INVEST MEANINGFULLY IN
                              CORRIDOR DEVELOPMENT

        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. In the last 2 years, Amtrak has received annual Federal
    funding of $1.2 billion. This amount was supplemented by operating and
    capital contributions from State and local sources--in fiscal year 2004
    these were $135 million and $114 million, respectively. In effect,
    Amtrak received about $1.45 billion in public funds.
        It will require at least $2 billion in funding from all sources to
    begin any meaningful corridor development. The policy challenge is
    determining who pays for what portions of the system. Federal funding
    of $1.4 billion to $1.5 billion would not provide sufficient funding to
    maintain a 5-year program for restoring the system to a state-of-good-
    repair. Projects in both the Northeast Corridor and in the corridors
    and long-distance routes outside the Northeast Corridor would continue
    to be deferred. This simply maintains the limp-along status quo.
        One approach to promote adequate Federal and State funding could be
    to use a variety of grant programs similar to those used in aviation,
    transit, and highways that place funds in the hands of States. These
    programs are based on a combination of Federal/State matches and
    formula grants. More specifically:
      --Capital Grants With a Reasonable Match.--Like the administration's
            proposal, this approach would provide capital grants on a
            competitively determined basis and would be administered by the
            Department of Transportation (DOT). States that desire to
            improve existing intercity rail service and/or develop new
            corridor services would apply to DOT for a matching grant,
            similar to the Federal Transit Administration's New Starts
            Capital Program. The administration's proposal also suggests
            such a program but provides a 50/50 capital match rate by the
            end of the reauthorization period. Our view is that a lower
            State match rate requirement would provide incentives for
            States to take an ``ownership'' role in developing rail
            corridors on a more competitive basis with other transportation
            modes (historically, highways and transit have used an 80/20
            match rate).
          To accommodate the need for different types of capital
            investments, two types of capital matches could be established.
            For investments that qualify as traditional capital investment,
            such as track or purchases of passenger equipment, the Federal
            share could go up to 80 to 85 percent. On the other hand, for
            investments that qualify as capital maintenance (for example,
            those under the transit definition) the Federal share might be
            70 to 75 percent.
      --Formula Grants With No Match Required.--This approach provides
            funds to States outside the Northeast Corridor that do not have
            corridor development potential and that rely on long-distance
            trains for substantially all intercity passenger rail service.
            By discussing this approach, we are not taking a position on
            the ultimate policy of whether long-distance service should be
            retained or eliminated but merely presenting it as an approach
            for funding States that do not have the population densities to
            support corridor development. There are at least 16 States with
            only long distance service and little potential for any
            corridor development. These States are unable to take advantage
            of the matching capital grants for corridor development.
          This approach could initially include sufficient funds to
            subsidize existing long-distance and corridor services. Over
            the reauthorization period the funds associated with corridor
            services would be reduced and then eliminated at the end of the
            period. Further, we expect the level of Federal funds
            subsidizing the long-distance services would be reduced to
            reflect greater operating efficiencies resulting from capital
            investments as well as other savings resulting from food and
            beverage service changes, improved labor productivity, and
            efficiencies that may be introduced by competitive service
            providers.
          As determined by the States, funds could be used to defray the
            cost of operating subsidies, capital investment, or both, with
            no match required. The amount of the formula grant could be
            calculated on the basis of Amtrak's fiscal year 2005 operating
            loss allocable per embarking/disembarking passengers in the
            affected State or some other formula that provides an equitable
            allocation.
      --Restore Northeast Corridor to a State-of-Good-Repair.--The
            Northeast Corridor presents a difficult challenge. The funding
            priority for the Northeast Corridor reflects the accumulated
            deferral of investments which has resulted in an estimated $5
            billion backlog of capital projects, threatening current and
            future service reliability. The effects of the deteriorating
            infrastructure are readily evident. For example, Amtrak's
            reported on-time performance in the Northeast Corridor as a
            whole between 1994 and 2002 ranged from 82 to 89 percent. In
            fiscal year 2003, it dropped to about 80 percent. For fiscal
            year 2004, even Amtrak's premiere Acela service posted an on-
            time performance of only 74 percent, far short of Amtrak's
            stated goal of 94 percent. If the decision were made to keep
            the current Northeast Corridor intact, we estimate Amtrak would
            need to spend about $550 million annually for an extended
            period on infrastructure and rolling stock to eliminate the
            backlog of capital investment in the Northeast Corridor.
          Bringing the eight Northeast Corridor States and the District of
            Columbia together in a short period of time to direct and
            manage this effort is incredibly complex but may be achievable
            by the end of the reauthorization period. Recognizing this
            challenge, one option during the reauthorization period could
            be for the Federal Government to fully fund the Northeast
            Corridor's capital requirements until a state-of-good-repair is
            achieved. This would also address the States' reluctance to
            inherit a legacy system they did not create. We suggest that
            DOT distribute funds directly to the Northeast Corridor
            infrastructure manager separately from the competitive grant
            process.

    Construct for 5-Year Reauthorization Funding
        Congress and the administration have a difficult decision to make
    in determining the appropriate level of funding for intercity passenger
    rail. The level of funding can obviously vary. We have been giving this
    some thought and would like to present a construct for consideration.
    We recognize that many assumptions need to be made about who pays for
    what and how to balance national, regional, and State transportation
    needs. Those are decisions for Congress and the administration to make.
        In building this construct, we made several assumptions for
    purposes of illustration as follows.
      --Formula grants will not fully cover train operating losses.
            Amtrak's forecast net cash operating needs (excluding interest)
            were used as the starting point. The levels of funding
            represent imputed cost savings of 10 percent per year from a
            combination of revenue growth and operating cost savings.
      --Over the 5-year reauthorization period, Federal subsidies decline
            for long-distance trains and corridor operating subsidies shift
            to the States. We expect States to place higher performance and
            efficiency demands on the service provider to lower operating
            costs to more affordable levels.
      --Debt service is based on Amtrak's projected debt service payments
            through fiscal year 2009, adjusted for installment payments on
            their RRIF loan and possible early buyout options on leased
            equipment.
      --Capital requirements to restore the system to a state-of-good-
            repair are based on Amtrak's Strategic Plan for fiscal year
            2005 through fiscal year 2009 and on assumptions we made on
            allocating capital needs between the Northeast Corridor and the
            rest of the system. The funding allocation assumes a capital
            need of $550 million for infrastructure and fleet in the
            Northeast Corridor and $250 million for infrastructure and
            fleet outside the Northeast Corridor.
      --Funds available for capital match represent funds remaining after
            state-of-good-repair funding requirements, formula grants, and
            debt service are met.

                                          CONSTRUCT FOR REAUTHORIZATION FUNDING
                                                [In millions of dollars]
    ----------------------------------------------------------------------------------------------------------------
                                                      Fiscal     Fiscal     Fiscal     Fiscal     Fiscal     Fiscal
                 Federal Contributions              Year 2005  Year 2006  Year 2007  Year 2008  Year 2009  Year 2010
    ----------------------------------------------------------------------------------------------------------------
    Formula Grants (Capital and/or Operating              570        570        510        460        410        370
     Subsidy).....................................
    Debt Service..................................        276        278        358        306        308        375
    Capital to Restore System State of Good Re-           355        655        755        800        800        800
     pair.........................................
    NEC Infrastructure + Fleet\1\.................        300        525        550        550        550        550
    Non-NEC Infrastructure + Fleet................         55        130        205        250        250        250
                                                   -----------------------------------------------------------------
          Subtotal................................      1,201      1,503      1,623      1,566      1,518      1,545
    Available Capital for Match...................  .........  .........         27        234        432        455
                                                   -----------------------------------------------------------------
          Total Federal Contributions.............      1,201      1,503      1,650      1,800      1,950     2,000
    ----------------------------------------------------------------------------------------------------------------
    \1\ NEC: Northeast Corridor.

        New Federal capital available for State match does not become
    available until annual Federal funding levels reach $1.65 billion. This
    construct highlights the policy choice that needs to be made between
    restoring the system to a state-of-good-repair and investment in new
    corridor development. At $2 billion, we would expect about $455 million
    to be available to States to match for use in new and/or improved
    corridor development.

          TOO PREMATURE TO SEPARATE MANAGEMENT OF NORTHEAST CORRIDOR
                         INFRASTRUCTURE FROM OPERATIONS

        Proposals to separate the Northeast Corridor infrastructure
    management and operations into two independent companies present a
    level of complexity and risk that needs a more thorough examination. At
    some point down the road, this split might be feasible and may prove a
    better way of controlling costs. However, at this juncture, not enough
    is known about the benefits and risks of this proposal. As we witnessed
    in Great Britain's experience, there are risks associated with
    establishing a commercial, for-profit entity to operate the
    infrastructure. Allowing an infrastructure company to operate ``like a
    business'' may mean relinquishing control over how certain expenses are
    cut or which capital investments are made. An infrastructure company
    focused on its bottom line has incentives to make decisions that are in
    its financial best interest but may not be in the best interest from a
    safety or efficiency perspective for the operator. The result could be,
    at best, disruption to service and a decline in on-time performance
    and, at worst, compromised safety conditions.
        Aside from the risks of separating the infrastructure from
    operations in the Northeast Corridor, there are benefits to the
    integration. In particular, an integrated Northeast Corridor provider
    of track maintenance, capital programs, operations, and dispatching is
    likely to be more efficient and less costly than two providers, each
    having a separate organizational support structure. In addition, a
    bifurcated approach would require a fully functional oversight and
    control organization at the outset lodged in the Northeast Corridor
    compact or the DOT to coordinate between operations and infrastructure.
    If formation of the Northeast Corridor compact is delayed, there could
    be disruptions to the operation of the corridor.
        It may be possible at some point down the road to develop a model
    where all interests are best served, but a more thorough review and
    understanding of lessons learned from other similar attempts would be a
    valuable precursor to such a division in the Northeast Corridor.

               PAY OFF LEGACY DEBT AND RESTRICT FUTURE BORROWINGS

        As of September 30, 2004, Amtrak had long-term debt and lease
    obligations of about $3.8 billion with amortization periods extending
    beyond 20 years. Amtrak's balance sheet shows $845 million in escrowed
    proceeds to defease a portion of this debt, leaving close to $3 billion
    in unfunded long-term debt or lease obligations. Under the current
    model, these obligations are paid for with Federal appropriations.
    Because portions of Amtrak's debt were financed at higher interest
    rates than what the Federal Government can borrow, Congress and the
    administration should consider a one-time appropriation for the
    specific purpose of discharging any debt that can benefit from the
    Federal Government's borrowing power, producing long-term Federal
    savings. For example, Amtrak pays 9.5 percent interest on its mortgage
    obligation for Penn Station, New York, whereas recent 10-year Treasury
    notes issued by the Federal Government are yielding a little over 4
    percent. In addition, Amtrak's ability to incur long-term debt should
    be restricted, except for refinancing opportunities that lower interest
    expense and do not increase the outstanding principal, and no
    commitments should be made without advance approval by the Secretary of
    Transportation. In return for discharging Amtrak's debt, title to
    Amtrak's assets would transfer to the U.S. Government.
        Mr. Chairman, that concludes my statement. I would be happy to
    answer any questions at this time.

        Senator Bond. Thank you very much, Mr. Mead.
        I apologize for being jumpy but I am going to have to get
    back to the Highway Bill and I want to ask essentially two
    broad questions and then turn it over to my colleagues to run
    this.
        First, let me say that when I was governor of Missouri, I
    started the process of subsidizing Amtrak, convinced by the
    silver tongue of now Senator Bennett. And Missouri now
    subsidizes Amtrak at $6.2 million a year, which is behind
    Illinois, Washington and several other States. And we have a
    very modest $32 loss per passenger, which it is certainly not
    quite the best looking one in the whole ugly bunch but it is up
    there.
        Let me ask Mr. Laney and Mr. Mead and others to comment.
    While we are waiting for the Commerce Committee to act, and I
    gather your reorganization and restructure has go through the
    Commerce Committee, we cannot reauthorize in this committee.
    You are going to have to get it through there.
        If Congress does what Congress sometimes does, and that is
    nothing, would you go bankrupt this year? What would be the
    prospects of trying to restructure Amtrak in bankruptcy? Mr.
    Laney?

                                   BANKRUPTCY

        Mr. Laney. Bankruptcy presents an enormous set of
    challenges and complexities that we have not worked through
    from start to finish and it is much less flexible in the
    railroad context than it is in a normal business context.
        Nonetheless, we have considered it because of the proposed
    zero budget from the administration, and DOT.
        Senator Byrd. I am having difficulty hearing Mr. Laney.
    Could we have some way of making it louder?
        Senator Bond. Can you pull that up a little closer?
        Mr. Laney. I thought I had run out of funds and you turned
    off the electricity.
        It is an enormous challenge and really limits our
    flexibility. We have considered it. We do know that without any
    action by Congress that sometime, my guess is in the first
    quarter to the first half of fiscal year 2006--and Mr. Gunn may
    disagree with me and may think it is earlier--depending to some
    extent on the ultimate impact of the Acela problems right now,
    that we will in effect run out of cash.
        Senator Bond. Can you restructure in bankruptcy or do you
    have too many costs?
        Mr. Laney. It is totally out of our control in bankruptcy.
    It is a different structure. There is a U.S. trustee appointed
    and he, with proposals from DOT, selects someone, in effect, to
    run Amtrak in bankruptcy.
        Senator Bond. Mr. Mead.
        Mr. Mead. Pursuing the bankruptcy approach, in my opinion,
    is like taking a round peg and trying to pop it through a
    square hole. The reason why is most people, when you go through
    this type of bankruptcy, you want to emerge with something that
    is better or more rational. But you are going to need cash to
    do it.
        The short answer, as I said in my statement, you are going
    to have $32 million at the end of this year. That is 2 weeks.
    You are not going to have much cash.
        The second, big reason, very unlike the airlines. In
    bankruptcy for railroads, the labor issues, labor contracts
    which comprise over 40 percent of Amtrak's budget, they are
    handled on a totally separate track. They do not go to the
    Bankruptcy Court, they go to special labor boards.
        I do not know if that separate track is going to work very
    well.
        Senator Bond. Do you have a comment on that, Mr. Rosen or
    Mr. Gunn?
        Mr. Gunn. I will agree with my chairman.
        Senator Bond. Always a good idea.
        Mr. Gunn. But I do think the problem of the threat of
    bankruptcy is very imminent, given the Acela problem.
        Mr. Rosen. Senator, the only thing I would like to say
    about that is the preferred course of reform is clearly
    legislative through the Commerce Committee and in other ways,
    as well as board actions. I think it would be a mistake for
    anybody to believe that any approach should be off the table,
    depending on how events unfold, and that there are airlines
    that are operating in bankruptcy as we speak today.
        And clearly, one of the questions in a bankruptcy that
    anybody would be interested in is what would the service look
    like? How would it continue?
        And so I do not mean to have this misconstrued to saying
    that is the preferred option, but I think the complexities of
    bankruptcy are things that there is some experience with.
        Senator Bond. Mr. Rosen, excuse me. I want to ask one big
    question. Mr. Mead finally referred to what I believe is the
    900 pound gorilla in the room. When I talk to my colleagues,
    the one thing they ask about are what some perceive to be
    unreasonable labor costs. People talk about 3- and 4-hour
    workdays, work weeks that are significantly less than 40 hours.
    What are the impacts? Are the labor costs of Amtrak out of line
    with other transportation companies and organizations?
        I would ask Mr. Mead, Mr. Rosen, Mr. Laney and Mr. Gunn to
    comment on it. Mr. Gunn.

                                  LABOR ISSUES

        Mr. Gunn. I will start. I think if you look at Amtrak's
    labor situation, first of all, we have made a lot of progress
    tightening up the operation. As Mr. Laney said, we have dropped
    our head count from 24,800 to about 19,500. And at the same
    time we are running more trains and handling more passengers
    and doing a lot more maintenance work.
        The basic problem we have, I think, revolves around some of
    the work rule issues that we have. I think that if you look at
    our rates of pay on, for example, locomotive engineer or
    machinist, the rates of pay are not the problem for those
    groups of people. The problem is work rules.
        To give you a sense of what it means to us, these are
    probably between 700 and 1,000 people on the payroll that would
    not be there if you had control over crew consist and if you
    did not have the shops organized around crafts.
        Senator Bond. Is it true that traveling from St. Louis to
    Kansas City they have to change crews in Sedalia?
        Mr. Gunn. I do not know the crew change point on that train
    right now but----
        Senator Bond. It is a 4-hour trip and at one point there
    was a crew change.
        Mr. Gunn. On the Northeast Corridor we get a full day's
    work out of a crew. I think what they are doing on that is the
    crew probably takes the train and goes back home. In other
    words, they swap trains.
        To give you a sense of this, an engineer in the Northeast
    Corridor, a day's work, they come to work in Washington, they
    go to New York, they have a break, they get back on a train and
    bring it back to Washington. That is a fairly full day's work.
        If we have the frequencies and so forth, we get a day's
    work out of our train crews. The problem is we may have more
    people on the train than we need. That is the problem. It is
    not the basis of pay. That is my opinion.
        Mr. Mead. I think the labor rates are not out of line with
    what rail people would normally get. But I do agree with Mr.
    Gunn, that the work rules really do inspire a lot of
    inefficiencies. Plus, any organization where your ticket sales
    are exceeding--where your labor costs are exceeding your ticket
    sales is a prescription for problems. That is the case we have
    here.
        Mr. Rosen. The only thing I would add is that the
    difficulties that Amtrak faces go well beyond their labor
    difficulties.
        Senator Bond. Mr. Laney, any comment on that?
        Mr. Laney. No, Senator.
        Senator Bond. Thank you very much, gentlemen. I would have
    to say that to gain support on the floor, I think that the
    reorganization and restructuring plan may have to address the
    work rule question because there are a number of people who are
    reluctant to support anything for Amtrak until that is done.
        With that, I turn now to Senator Murray.
        Senator Murray. Mr. Chairman, I intend to be here for the
    duration of the committee and Senator Byrd wanted a chance to
    do a statement and he had another obligation. So I will let him
    go ahead of me on this round.

                      STATEMENT OF SENATOR ROBERT C. BYRD

        Senator Byrd. Senator Murray, I thank you. You are very
    gracious.
        Mr. Chairman, I thank you for holding this hearing.
        I will speak today about the millions of Amtrak passengers
    who board in stations like Montgomery, West Virginia;
    Greenwood, Mississippi; Winslow, Arizona; and Cut Bank,
    Montana.
        I recognize that Amtrak has problems. Amtrak provides
    crucial transportation services, not just for our major cities,
    but for millions of people across rural America. They pay the
    taxes that fund infrastructure in Iraq. They help to supply the
    men and the women from whose veins flow the blood that is shed
    in the deserts of Iraq. They need service. They are Americans,
    too.
        It is perhaps those citizens who have the most at risk in
    losing rail service as a result of the Bush Administration's
    budget. Once those towns fall off the national rail map, they
    are not coming back.
        Mr. Mead points out that many riders of Amtrak's so-called
    long-distance trains do not really travel long distances. We
    are talking about passengers who might be riding from
    Martinsburg, West Virginia, to Pittsburgh, Pennsylvania, on
    Amtrak's Capitol Limited, or passengers who may be traveling
    from Hinton, West Virginia, to Maysville, Kentucky, on The
    Cardinal.
        For residents of those communities, Amtrak provides an
    essential transportation option. Not every grandmother can just
    get behind the wheel and drive to see her grandchildren. Not
    every college student has the option of driving home from
    school for the Easter recess. There are over 120 communities
    across the Nation that receive regularly scheduled Amtrak
    service but have no commercial air service whatsoever. Several
    of these communities have also seen their bus service
    eliminated as a result of the shrinking of the national
    Greyhound network.
        The administration does not seem to grasp the
    transportation needs of rural America. Not only does its budget
    propose to eliminate all subsidies to Amtrak, the
    administration's budget also proposes to cut in half funding
    for the Essential Air Service program, causing dozens of
    communities across the Nation to lose their guaranteed air
    service.
        These budget proposals appear to be consistent with many
    other provisions in the President's budget that do real harm to
    the quality of life in rural American communities.
        The President's budget includes deep cuts for rural housing
    loans, and for water and sewer grants that help rural
    communities have clean water. The President's budget eliminates
    funding for vocational education grants that help students in
    rural America who are not going on to college but who need
    training to get a job that pays a livable salary.
        When it comes to the President's budget for Amtrak, we are
    not talking about just another proposal to cut a program by 10,
    20, or 30 percent. We are talking about a proposal to eliminate
    all of Amtrak's Federal funding and all of Amtrak's available
    services.
        I should point out that, just 2 months ago, I tried to
    rectify this situation when the Senate debated the budget
    resolution for the coming fiscal year. On March 15, I offered a
    bipartisan amendment, with Senator Specter and several other
    Senators, which sought to boost Amtrak funding to $1.4 billion
    for 2006. I did not take that funding figure out of thin air.
    When President Bush submitted his budget request last year for
    Amtrak, $1.4 billion was the level that he, himself, included
    in his budget for 2006.
        As I stated on the floor during debate on that amendment,
    the elimination of Amtrak's subsidy, as called for under the
    President's budget, is not a recipe for a streamlined railroad.
    It is not a recipe for a more efficient railroad. It is a
    recipe for a dead railroad.
        My amendment sought to bring that railroad back to life as
    part of the budget for the coming fiscal year. Unfortunately,
    that amendment failed on a vote of 52 to 46. So, unfortunately,
    a dead railroad may very well be what we get from the coming
    fiscal year.
        I have been fighting for Amtrak for a long time, Mr. Gunn,
    Mr. Rosen, for a long time. I was hopeful of landing a rail
    passenger route in southern West Virginia 30 years ago. In
    1974, I had proposed to the Appropriations Committee,
    Subcommittee on Transportation, that we add money to Amtrak's
    budget to help bring this about. On April 11, 1974, in a
    hearing conducted by the Transportation subcommittee, which I
    chaired at the time, Roger Lewis, then-president of the
    National Rail Passenger Corporation, Amtrak, told me that $4
    million would provide adequate funding to begin a route through
    southern West Virginia. The route that I had been trying to
    secure would run from Norfolk, Virginia, to Cincinnati, Ohio,
    with stops in West Virginia at Bluefield, Welch, Williamson,
    Fort Gay, and Kenova. I told Mr. Lewis that I would add the $4
    million by offering an amendment to the Transportation
    Appropriations bill.
        In answer to my questions, Mr. Lewis said that he
    anticipated no problem in securing the cooperation of the
    railroad. He also said that this amount of money would provide
    adequate funding to initiate capital improvements and initial
    operating costs for the operation of Amtrak on a new route from
    Norfolk to Cincinnati.
        According to Mr. Lewis, N&W tracks could be used all the
    way; or, as an alternative, both N&W and C&O tracks could be
    used. In any event, repairing tracks and rebuilding passenger
    facilities along the route, Mr. Lewis explained, could be
    accomplished within 6 months if the railroad labor forces were
    available and if the N&W Railroad was willing to undertake that
    program.
        On April 24 of that year, 1974, the Transportation
    Appropriations Subcommittee accepted my amendment, adding $4
    million to the Transportation Appropriations bill to provide
    Amtrak rail service between Norfolk, Virginia, and Cincinnati,
    Ohio, and on April 30, the full Appropriations Committee
    approved my amendment.
        Then, on March 24, 1975, 30 years ago, the Mountaineer, a
    new Amtrak passenger train, made its inaugural run in southern
    West Virginia.
        Mr. Gunn, the Amtrak president at that time was Paul
    Reistrup. He and I were among the passengers on the maiden run.
    On its daily runs from Norfolk, Virginia, to Chicago, Illinois,
    the train would stop, as I have already indicated, at
    Bluefield, Welch, and Williamson in West Virginia, and would be
    made up of two coaches, a snack/diner, a sleeper, and a baggage
    car. A guaranteed operation of 2 years for the new route
    through southern West Virginia had been made by Amtrak.
        Mr. Reistrup said that the Mountaineer would habitually
    lose money and that the run would lose $4.5 million in each of
    the first 2 years of operation, while taking in only $900,000
    in the first year.
        I had been instrumental in making the Mountaineer a reality
    by securing an appropriation of $4.6 million, which was reduced
    to $2 million in the Senate/House conference. That was an
    experimental run, and its continuance beyond the 2-year
    experimental run would depend upon the ridership achieved.
        The Mountaineer did not last all that long. I was also
    instrumental in getting The Cardinal. Amtrak still serves West
    Virginia, the only State among the 13 in Appalachia that is
    wholly in the Appalachian regional system.
        Unfortunately, a dead railroad may very well be what we get
    for the coming fiscal year. That would all depend, perhaps, on
    whether this subcommittee can find the resources to meet
    Amtrak's needs next year.
        Mr. Chairman, I thank you for being a good chairman. I hope
    that we can come to the aid of Amtrak. We have people down
    there, people who pay taxes, whose sons and daughters die in
    the unnecessary war in Iraq, and who pay taxes to build the
    infrastructure in Iraq. Perhaps, we ought to have Amtrak in
    Iraq. Maybe we could get more money for it, even though it
    would lose money. That would not be a question over there, I
    suppose.
        I recognize the problems. I want to help. I, for one, plan
    to work with my colleagues as best as we can to accomplish that
    goal.
        In closing, I thank my leader on this issue, Senator Patty
    Murray, for her diligence and dedication to her work in
    providing the rail passenger service to people like those who
    have sent me to Washington for eight terms. I fought for them
    before, and I am going to fight for them now.
        Thank you, Mr. Gunn, for your services. Thank you very
    much. You are trying hard, and I want to work with you.
        Senator Murray, the challenge will be considerably greater
    due to the failure of the Senate to adopt my amendment a while
    back.
        Now, when Cicero spoke, the people said he makes a good
    speech. But, when Demosthenes spoke, they said let us go
    against Philip. So, Mr. Chairman, let us go against Philip. Let
    us go against Philip, Mr. Gunn. Do not lose heart. It is going
    to be a problem. It is going to be hard work. I will tell you
    this, people in the rural areas of this country vote, too.
    Thank you very much.
        Senator Burns [presiding]. Thank you, Senator Byrd. I think
    I am next on the list here, and I will kind of open up this
    morning.
        I also serve on the Commerce Committee. We have looked at
    this Amtrak thing for the last couple of years and we have
    drawn some conclusions from the testimony of Mr. Mead and Mr.
    Rosen, and then a short visit over here with my good friend
    from Utah.
        We are going to have to be very imaginative if we make this
    thing work. But we cannot be imaginative if we are not a part
    of the overall transportation plan of this country and it does
    not sound like that has been the case.
        I am going to be very critical of the Department of
    Transportation now. You say reforms but I have not seen anybody
    knocking on my door up here, saying we have got these reforms
    that we think would work for Amtrak or a national
    transportation plan. We have not heard that. I have had no
    request for an appointment to come up and say we should look at
    this because we think it is a vital part of the overall plan of
    this country.
        And I aim to take this to the Secretary. We cannot expect
    any kind of imagination to flow unless we get some cooperation
    down there. Or, if it is not on the radar screen, tell us it is
    not on the radar screen and we will do something else. We will
    put it over in another department. Let's put it over in the
    Department of Defense because we might want to move some troops
    one of these days. Who knows?
        We can sure get it out of here if it is not a priority.
        Mr. Rosen, am I incorrect in that statement? What is your
    take on that?
        Mr. Rosen. Senator, let me first say I would be more than
    happy to be with you at any time or your staff, of course. So
    let me put that to the side.
        But we have been working with the committee staff and have
    had a number of consultations. And as you know, I did testify
    before the Commerce Committee on April 21, both written
    testimony and oral testimony. The administration's bill was
    transmitted by the Secretary, I want to say the first week of
    April. It is substantially similar to a bill that was submitted
    previously, in 2003. My predecessors, as the Secretary's
    designee to the Amtrak board, each testified about that bill,
    Michael Jackson and Alan Rutter.
        So I think there has been consistent efforts by the
    Department to explain, lay out, discuss the administration's
    reform concepts. But I hear you and we can certainly do more
    and better. And I would like to work with you.
        Senator Burns. It is going to take that kind of a
    situation. All of the questions have pretty much been covered.
    In my case across Montana, for a transcon, we are a flyover
    State or we are a ride-through State. We do fairly well up
    there in the State of Montana in the support of Amtrak.
        But you put it through the most desolate part of the State.
    If you run it down through Billings--and I know I am going to
    get telephone calls from my people that live in Havre and Wolf
    Point and Shelby and Whitefish, I will get a letter from them.
    But we used to have Amtrak service down on the southern part,
    too. And that connected all of the schools down there. In fact,
    that is where most of your population is.
        Right now we have got about 129,000 people who ride that
    train in Montana and into some areas that are mostly
    recreation: over at Whitefish, skiing in the summer, vacation
    in Flathead. But it is also used by others because we have no
    bus service. There is no bus service. We cannot make that work.
        And I am kind of like Senator Byrd. Those folks up there in
    those Hi-Line counties vote, too.
        So I am going to go back to Senator Murray. I just do not
    think that we can make it work unless we have got an advocate
    down at the Department of Transportation. Everybody got all
    excited the other day when United made their announcement that
    they are going to forego and abandon their pension programs.
    And pension programs do not carry people but we sure got
    excited about it. And now with this, you are touching real
    people in areas where we have no other alternatives.
        You made the statement that you want to go intercity. How
    many options do people have to get from point A to point B in
    the inner city? You have your competition bus service You can
    also go out here from 6 o'clock in the morning until 9 o'clock
    in the morning on 395, and it is the world's largest parking
    lot. You can go there and watch. But there are still options.
    And then there is the Metro. There are options there.
        We have no other options. And that is the point I want to
    make.

                         ADMINISTRATION BUDGET REQUEST

        Senator Murray.
        Senator Murray. Mr. Rosen, last year, when the Bush
    Administration sent up its budget request for Amtrak, you
    proposed to cut Amtrak funding by $300 million. But you said
    that you would support as much as $1.4 billion each year if
    your reform proposals for Amtrak were enacted.
        When we reviewed OMB's multi-year budget documents, the
    administration was true to its word. You budgeted $1.4 billion
    for Amtrak for 2006 and every year thereafter. That was last
    year.
        This year, when you look at the President's budget, he is
    requesting zero for 2006 and anticipates requesting zero for
    every year after that.
        If that is the case, why is Secretary Mineta publicly
    stating that the Bush Administration would support $1.5 billion
    to $2 billion for Amtrak if your reforms are enacted?
        Mr. Rosen. Two things, Senator, let me to clarify. The
    original proposal that you are alluding to, when the
    administration proposal was $900 million, contemplated that
    there would be an increase if the administration's reform
    proposals were adopted.
        As you will recall, they were not adopted to date. And when
    this year's budget came out and the Secretary made clear that
    the President's current budget was a call to action. It was
    clear that the earlier budget proposals, if they were a call to
    action, they did not work.
        So the President's budget this year, as a call to action,
    has at least had the effect of being more effective at calling
    attention to the need for reform. That is point No. 1.
        I indicated in my opening remarks to the effect that we
    know from history that the reforms have to come first, the
    money to follow.
        The second part is with respect, Senator, I think you are
    mistaken what you said that Secretary Mineta has said.
    Secretary Mineta has not said that the administration would
    support $1.5 billion to $2 billion a year.
        What he said was he was asked, I believe, a question about
    what it would cost to bring the Northeast corridor up to a
    state of good repair. And he referenced what is a multi-year
    number, 5 or 6 years I believe, that there are estimates--I
    think Amtrak itself is estimated approximately $1.5 billion to
    $2 billion to do that. Although I would add the caveat that
    Amtrak has begun the process of spending to bring the Northeast
    corridor to a state of good repair. So some of that money has
    actually been spent last year and this year.
        So I think there may be some confusion or a mistake as to
    what numbers are being referenced. I do not think the Secretary
    has said what the numbers associated with a true reform package
    would be.
        Senator Murray. Mr. Rosen, let me just share with you that
    on March 4, 2005, I believe it was on NPR, Secretary Mineta was
    asked, ``The budget says zero dollars. What is the real figure
    that the administration is willing to spend on Amtrak?'' And
    Secretary Mineta said very clearly, probably in the area of
    $1.5 billion to $2 billion.
        So he has stated that.
        Mr. Rosen. Again, with respect, I think you need to look at
    the full context of those remarks. I do not think that was a
    question that--I think it was a question that related to the
    Northeast corridor.
        Senator Murray. No, I disagree. Actually, I will read you
    the whole question. He was asked: ``Democrats in Congress who
    have criticized your proposal have said well, this thing that
    Secretary Mineta is talking about is not what the budget says.
    The budget says zero dollars. What is the real figure that the
    administration is willing to spend on Amtrak?''
        To that, Secretary Mineta answered probably in the area of
    about $1.5 billion to $2 billion. So he has said very clearly.
        Mr. Rosen. Again, I have a different interpretation, that
    that figure relates to a multi-year capital item.
        Senator Murray. I do not see any reference to multi-year
    capital. But I will tell you this, when OMB Director Bolten
    testified before our subcommittee, it was 3 weeks ago now, I
    asked him whether the administration would ever consider
    sending us a revised budget for Amtrak. And Director Bolten was
    really clear. He said that this committee has received the only
    budget we should expect to get from Amtrak under any
    circumstance.
        I would like to know what conversation you or Secretary
    Mineta have had with the White House that makes you think that
    the administration might request Amtrak funding if a reform
    bill is enacted?
        Mr. Rosen. I am not sure if I fully understand the
    question, so let me try this. In formulating the
    administration's reform proposals, there have been regular
    discussions with the Office of Management and Budget. And
    indeed, the reform proposals had to be approved by the Office
    of Management and Budget when they were transmitted to the
    Congress, both in 2003 and 2005.
        I think the earlier budget proposals that you referenced in
    the administration proposal for fiscal year 2005 came out, did
    contain both a number for that fiscal year and a number with
    regard to what reform funding would look like. This year, a
    different approach was taken and you have that before you.
        Senator Murray. Mr. Rosen, you said you did not understand
    my question. Let me make it very clear.
        The administration is saying that zero funding for Amtrak
    unless a reform is enacted. Director Bolten made it very clear
    to us that the administration was not going to request
    additional funding. So where do we get the idea that if
    Congress does enact reform, that the administration will then
    request the $1.5 billion to $2 billion that Secretary Mineta is
    talking about? Are we going to get a request or not?
        Mr. Rosen. So far we do not have reform legislation that
    has been enacted. I think perhaps that is the key point to
    start with.
        Senator Murray. Say we pass reform. Is the administration
    going to request the $1.5 billion to $2 billion? Or are they
    just going to say they support it?
        Mr. Rosen. Well, first of all I have told you that I do not
    think you are accurate with regard to the $1.5 billion to $2
    billion figure. But putting that aside----
        Senator Murray. I am quoting--I will submit this to the
    record, the statement from Secretary Mineta.
        [The information follows:]

          [From Morning Edition, National Public Radio, March 4, 1005]

      Secretary Norman Mineta Comments on the President's Proposal to Cut
                               Funding for Amtrak

        Mr. STEVE INSKEEP [host]. The Bush Administration says it is not
    trying to bankrupt Amtrak. In the budget the President sent to
    Congress, there is no money for the passenger rail system and that
    prompted an angry response from Amtrak supporters. But the President's
    top transportation official says the administration is willing to
    subsidize Amtrak if it's restructured. Norman Mineta is a former
    Democratic congressman who's now Transportation Secretary.
        Secretary Norman Mineta [Transportation Department]. The reason
    that the President has put no funding for Amtrak subsidy this year is
    that we submitted our reform legislation in 2004. There's been no
    action on it, and so finally we decided in order to get people's
    attention, we would just put no money in for the subsidization of
    Amtrak.
        Mr. Inskeep. The President called a lot of attention to this. He
    said he was cutting more than 150 Federal programs. Amtrak was
    described by the administration as one of them.
        You're saying the administration didn't really mean that.
        Secretary Mineta. If we get the reform that we're looking for, then
    we will be asking for the funds to fund a national inner-city passenger
    rail system. And that's why in our reform legislation, what we do is to
    make Amtrak an operating company. Right now we subsidize Amtrak, and so
    they put money into their capital investment program as well as the
    operational side of their program. And the problem is that much of
    their money goes into the operation of lines that nobody uses. At the
    same time capital improvements are being starved. So what we're saying
    is, let Amtrak be an operating company and the Federal Government will
    do the financing of capital infrastructure.
        Mr. Inskeep. Democrats in Congress who have criticized your
    proposal have said, ``Well, this thing that Secretary Mineta is talking
    about is not what the budget says. The budget says zero dollars.''
    What's the real figure that the administration is willing to spend on
    Amtrak?
        Secretary Mineta. Probably in the area of about $1.5 billion to $2
    billion. Right now the state of the tunnels and all those things are
    woefully neglected and we would bring those up to good standards and
    then turn it over to the States. And then we would participate on a
    local match on the continued improvement of any capital investment
    that's made into the system.
        Mr. Inskeep. You're proposing that the Federal Government would
    continue to pay for upkeep of track or new trains, Amtrak would run
    them and would be expected to run trains that at least broke even or
    made a profit?
        Secretary Mineta. The lines would be determined by States and not
    by Amtrak itself. As an example, we have now some 12 States that are
    spending something like $345 million a year for passenger rail service;
    $140 million of that is for capital improvements. If our bill had been
    in place then those States would be getting a 50:50 match on the $140
    million on capital investment, whereas right now they're making all of
    that investment with their own State money. By our taking over the
    capital investment part of it and let the operations of the railroad be
    done by Amtrak or other operating agencies, they then can concentrate
    on delivering the service that people deserve. We're treating Amtrak
    inner-city passenger rail no differently than we treat highways,
    airport improvements or transit right now.
        Mr. Inskeep. Although, forgive me, you can improve part of an
    interstate highway and leave the rest of it unimproved for later. But
    if you've got a rail line that goes across seven States and just one of
    them doesn't want to contribute, that rail line goes away. It can't
    run.
        Secretary Mineta. No. No. The rail line will still run but we won't
    stop in that State or open its doors.
        Mr. Inskeep. Do you really think that this system could maintain
    political support if a number of States stopped having service there?
        Secretary Mineta. We have spent over $29 billion in subsidies to
    this rail system. I don't think we should continue pouring money into a
    flawed system. If the President and I really were out to kill Amtrak,
    we wouldn't do anything.
        Mr. Inskeep. Secretary Mineta, thanks very much.
        Secretary Mineta. Not at all. It's great to be with you, Steve.

        Mr. Rosen. Rather than debate that, I will put that to the
    side and say what I said in my opening remarks, that if the
    Congress itself takes the serious steps to reform and fix
    intercity passenger rail, then the administration is serious
    that if we get real reform we will support funding for reformed
    system.
        Senator Murray. What does support mean? Does that mean
    request or you will just say it on the radio?
        Mr. Rosen. It does not mean that we will say it on the
    radio, but as I have said here and I have said previously, I
    think it is premature to talk about what exact steps and what
    exact amounts the administration will take or propose until we
    have the reforms.
        Senator Murray. I take it your answer is----
        Mr. Rosen. We know where that leads.
        Senator Murray [continuing]. We should not expect a request
    from the administration on the exact dollar amount? They will
    just say that they support money once reform is enacted.
        Mr. Rosen. I am sorry, Senator, I do not understand the
    question.
        Senator Murray. It is a statement. It sounds to me like
    your response to us is that we cannot expect a request from the
    administration whether or not we do pass any kind of reform.
        I believe my time is up.
        Mr. Rosen. I think what I can say is that if there is no
    reform, you have the administration's request. But that is not
    necessarily the end of the story.
        Senator Burns. Senator Bennett.
        Senator Bennett. If I could just pick up on what Senator
    Murray is saying, and give you a little advice, and I am fully
    supportive of what you are trying to do. I am fully supportive
    of reform. And I think the Congress needs a jolt and we
    certainly have had one.
        But I would advise you to define the carrot instead of just
    saying we will support something. It would be nice to say if
    you really do come through with the reform, this is what we
    will do. And I think it is reasonable that Senator Murray is
    asking for some more concrete definition of what the carrot
    looks like.
        You are saying there is a carrot out there for us. You have
    hit us with a 2 by 4 between the eyes and got our attention to
    the fact that something serious has to be done. And I am
    supportive of that. But having used the stick, I think a little
    bit clearer carrot would probably be a good idea.
        I think that is what Senator Murray is asking for.
        With that, let me go back to the subject I have raised. I
    have here the Amtrak strategic reform initiatives and fiscal
    year 2006 grant request, provided by Amtrak. I think it is a
    pretty good piece of work. We keep hearing yes, we are going to
    reform. In 1997, we were assured by Amtrak's management, Amtrak
    is absolutely going to be self-sustaining and profitable by
    2005. And we heard right up through--pardon me, 2002. And we
    heard right up through 2001 that they were on track to
    profitability. And then on 2002, it was well, by the way, we
    are nowhere near it and the CEO resigned.
        We have got to be serious. So let me ask Mr. Laney and Mr.
    Gunn, if you were kings and had a completely free hand, and you
    did not have to worry about past contract obligations that you
    feel now bind your hands, you could have any kind of work rules
    you wanted, you had access to whatever funds you needed for
    capital improvements, all of the rest of it. In other words
    clean sheet of paper time.
        Could you design an intercity passenger system on rails
    that made sense and was sustainable over time? With the
    assumption that there would be some degree of Federal subsidy?
    Because I think we probably would have to have a degree of
    Federal subsidy. I do not think you could expect it all to come
    out of the fare box. But one would hope it would be a degree of
    Federal subsidy substantially less than we are doing now.
        Is that a possibility? Forget where you are, in terms of
    the straitjackets of the past that are put upon you. Clean
    sheet of paper time, you are king. You can devise whatever you
    want. Could you, in fact, envision a passenger system that
    worked?

                       REDUCED FEDERAL OPERATING SUBSIDY

        Mr. Laney. Senator, let me first say I want to hear from
    Mr. Gunn on this, as well, because his perspective may differ
    slightly but I do not think much. But let me be king first.
        Yes, absolutely. And I think, to a great extent, what we
    presented in terms of our strategic reform package does just
    that. We have erased the blackboard and started writing on it
    again. We have been constrained by some prior decisions by
    earlier boards and earlier managements and we bear the burden
    of those decisions and they are difficult. There is no question
    about it. Whether it is issues with respect to the Acela,
    whether it is issues with respect to long-distance trains,
    whether it is issues with respect to debt.
        But absolutely, there would be different answers and
    different responses for our different lines of service. Whether
    it is the corridor service, Northeast Corridor, or other State
    service corridors, not only could we, we absolutely should,
    from a transportation policy standpoint, begin to address in a
    serious way State corridor issues. There been references to
    congestion, when it is aviation or whether it is highways.
    There is a very complementary role for passenger rail service
    to play.
        You project it 25 years, 50 years, 75 years forward, we
    will have made a serious mistake if we do not begin taking
    incremental small steps now.
        There is also a role for long-distance service.
        Senator Bennett. That is where the argument was going to
    come.
        Mr. Laney. There is also a role, but it would be a
    reconfigured long-distance service. And to address some of your
    issues, I think we have presented, in effect, a systematic
    approach by which we reevaluate and address current routes,
    ultimately eliminate some, and may begin to add others over
    time. But it cannot happen overnight and it needs to be managed
    carefully. But I think long-distance still plays a role. It
    just needs to be reconfigured slightly, or significantly.
        Mr. Gunn. I basically support what the chairman said, not
    just because he is my chairman. I actually agree with him. I
    think that the way that you look at this is that in the future
    there is no way you get around the fact that the capital is
    going to have to come from the government, either a combination
    of State and Federal.
        I think the operating deficits can be managed and they can
    be controlled and reduced, particularly if we have the kind of
    freedoms that you mentioned. They cannot be totally eliminated.
    And I do not think they will be eliminated except in some very
    dense corridors such as the Northeast Corridor. But you have to
    have volume.
        I think the long-distance trains, the deficits can be--
    there is a lot of things we can do if we have freedom to
    control those deficits. And I think if you look at our plan,
    which you have, we actually give you sort of a vision of what
    would happen over 5 years, in terms of the Federal requirement.
    You see the operating subsidy dropping--or not going up
    certainly--but the capital is absolutely a governmental
    responsibility and you cannot avoid that. This is not a
    profitable business.
        Senator Bennett. I understand that. And if I may, Mr.
    Chairman, one last quick question in the spirit of Senator
    Murray's question, assume that we do everything you are talking
    about here, that Congress gives you the authority you want. We
    put in the capital to make the necessary improvements.
        Can you give us a ball park as to what the operating
    subsidy then would be? Would we still be talking about $1
    billion year out of the Congress? Or would it come down? You
    talk about long-distance and we can argue about that. That is
    $300 million and that is not inconsequential in this situation.
        Mr. Laney. You are just talking about an operating subsidy,
    Senator, not capital?
        Senator Bennett. That is right.
        Mr. Gunn. We made a stab at projecting if our reforms were
    enacted what the Federal needs would be in fiscal year 2011
    which is what, 5 years out. And basically we showed the Amtrak
    requirement dropping to about $800 million for the whole
    system. And if you look at this, that is capital and operating.
    Operating is $220 million.
        Right now our operating deficit is about $570 million and
    we show that dropping to about $220 million. There is a
    combination of things. It is efficiencies brought about by work
    rule change, changes in the retirement package and some other
    things, but also a shift to the States of responsibility for
    their corridor development if they get the Federal capital.
        But you can see the Federal piece certainly not rising. It
    would drop. We are estimating you can get it as low as $800
    million, both capital and operating, if you got the reforms,
    the real reforms we are talking about. And those are tough. It
    is the Railway Labor Act piece.
        Senator Bennett. As I say, I think you ought to stress that
    to the Commerce Committee because $800 million is a much easier
    pill for the Congress to swallow, particularly in 2015 when it
    is an even smaller percentage of the Gross Domestic Product
    than it is today, than the amount we are currently paying
    today.
        Thank you, Mr. Chairman.
        Senator Burns. Senator Kohl.
        Senator Kohl. Thank you very much, Mr. Chairman and Senator
    Murray.
        While I share the sentiments of our colleagues regarding
    the President's draconian approach to reform, I prefer to use
    my time to assess the merits and viability of passenger rail
    outside of the Northeast corridor.
        Whenever we hear talk of passenger rail, we hear about the
    Northeast corridor. Indeed, the administration's fiscal year
    2006 budget is no exception, providing funding only to operate
    this corridor should Amtrak be forced to cease operations.
        As a Senator from the Midwest and Wisconsin, I have to say
    I find this approach to be shortsighted and potentially harmful
    to our Nation's intermodal transportation system.
        In the Midwest, as in many parts of our country, passenger
    rail provides, as you know, a critical link for thousands of
    travelers. While I understand that increased ridership does not
    necessarily equal success for Amtrak, I agree that reform is in
    order. However, I would argue that forcing the more than
    545,000 Wisconsin riders who used Amtrak last year to find
    another means of transportation does not certainly by itself
    equal reform.
        I do not think that anyone here would argue that shutting
    down Amtrak in the Midwest will result in reaching agreement on
    plans to reform the system. Putting more cars on congested
    roadways and more travelers in overcrowded airports cannot
    possibly be the solution and I hope that we can arrive at
    better suggestions.
        Mr. Gunn, we have heard the administration talk about the
    need for reform at Amtrak, and as part of that reform the need
    for greater State investment in passenger rail. As you know,
    Wisconsin has been a leader in this effort, providing 75
    percent of the necessary funding for the highly popular
    Hiawatha service between Chicago and Milwaukee. This line has
    continued to break all-time ridership records over the past
    years. Without the funding that Amtrak is requesting today,
    will this line be forced to shut down? And if so, when?
        Mr. Mead, I would appreciate a comment from you.
        Mr. Gunn. If the administration proposal went through and
    it was bankruptcy, the line would cease to operate.
        Senator Kohl. It will cease to operate.
        Mr. Gunn. It would still run freight and Metra but Amtrak
    would cease to operate.
        Senator Kohl. Mr. Mead.
        Mr. Mead. I would not going to go so far as to say that
    Amtrak would totally cease to operate. I would say that there
    would be almost certainly very significant cuts in service,
    including the route that you mentioned.
        Senator Kohl. That Chicago to Milwaukee----
        Mr. Gunn. I was referring to if the administration's budget
    proposal went through, zero, we would cease to operate.
        Mr. Mead. I am sorry, I misspoke. Certainly, $360 million
    is just not going to--you are going to have to have a shut
    down. I was referring to $1.2 billion, which is the current
    year's appropriation. If you just reenacted the 2005
    appropriation for 2006, that would give you $1.2 billion, you
    are going to have very significant cutbacks in service.
        Mr. Gunn. You will have a cash crisis. If you have $1.2
    billion, you will have a cash crisis and we will be right back
    where we are today very quickly.
        Senator Kohl. I think we all recognize, and I am sure you
    know, that that particular line is really, really successful
    and serves an important purpose.
        Mr. Gunn. Since the airport station opened, we have had
    ridership growth of 30 percent, 25 percent in the last few
    months.
        Senator Kohl. Increase.
        Mr. Gunn. Yes, because of the airport station, which is
    just south of Milwaukee. It has just taken off.

                              HIGH-SPEED CORRIDORS

        Senator Kohl. I worked to get funding for that so I am very
    much aware of what you are saying and I cannot imagine a
    decision that, in effect, would close down that route.
        Yesterday, I met with a group of constituents from La
    Crosse, Wisconsin. Currently, La Crosse is only served by the
    Empire Builder line with one round-trip stop in the city each
    day. My constituents shared with me the potential economic
    impact of bringing high-speed rail to the western side of
    Wisconsin.
        Due in part to the heavy debate over Amtrak's funding
    needs, the debate over the merits of high-speed rail seems to
    have quieted. I did note, however, that the administration
    zeros out funding for the next-generation high-speed rail
    program which funds the research needed to determine the
    viability of high-speed rail in America.
        Mr. Mead, can you provide some insights as to why the
    administration would zero out funding for this relatively
    modest program? Do you believe that there is any merit in
    having high-speed rail outside of the Northeast corridor? And
    Mr. Gunn, I would appreciate your view.
        Mr. Mead. I think it depends on what your definition of
    high-speed rail is. I think the average speeds of some of these
    long-distance trains that we have today is around 46 or 48
    miles per hour, and that is scheduled. That does not count
    whether there is going to be delays. So if you go up to about
    80 miles an hour, I think for those people that ride those
    trains that are doing 46 miles an hour, that would be
    relatively high speed.
        Actually, I would just like to, if I might, just take a
    moment to point out something that is in the administration's
    bill that I think is very important. The administration's bill
    proposes capital grants to develop rail corridors such as those
    that you are describing. The problem is that the States are
    saying well, this is nice. It is a capital grant program. But
    how much funding is the Federal Government going to put into
    it?
        And it becomes a chicken or egg issue, in my judgment, that
    the States are not going to buy into a capital grant program
    and take on more decisions and take on more responsibility and
    authority for making rail decisions that affect their corridors
    and agreeing to a capital grant program until such time as they
    understand the financial consequences of that.
        And I think that is a core element of the debate here, is
    the uncertainty over what the funding conundrum is going to
    look like. That certainly is what Senator Murray's line of
    inquiry was after.
        Senator Kohl. Mr. Gunn.
        Mr. Gunn. I would only comment that Amtrak's management
    position has been that there are a number of corridors outside
    the Northeast that should be developed and we worked with the
    States for them. For example, the Milwaukee and perhaps onto
    Madison, Chicago to Madison, is one of those corridors where
    there is real potential. There are also corridors in California
    and in the Northwest.
        Our view is that they should be done incrementally. In
    other words, when you go into these, do not go in trying to go
    to 150 to 200 mile an hour trains. What you want is to get up
    to the 90 or 100 mile an hour trains, which we can do with
    conventional equipment, and have frequent service. That is the
    key, good, solid and reliable service. But it does not have to
    go 150. And you can do it on a relatively modest budget if you
    use existing technology.
        But, I think, we have about eight corridors that we think
    are really ripe for development if the States get this new
    State/Federal partnership where there is capital money
    available. But they have to know what that is. But there are
    corridors, definitely.
        Senator Kohl. Thank you. Thank you, Mr. Chairman.

                         REDUCING THE OPERATING SUBSIDY

        Senator Murray [presiding]. Mr. Laney, let me go back to
    you again.
        You submitted a grant request seeking $1.82 billion for
    next year. That is more than 50 percent above your current
    funding level. And you also, of course, submitted a
    comprehensive set of reform proposals. As part of that grant
    request you said--and I want to read it to you--we believe that
    these initiatives will, in time, dramatically reduce the
    requirement for ongoing Federal financial support for Amtrak
    and reinvigorate intercity passenger rail.
        How soon would your subsidy needs dip below the current
    level of $1.2 billion if that reform package is enacted?
        Mr. Laney. Certainly not during fiscal year 2006. There is
    no question about that. Fiscal year 2006 we would stay at the
    same level, if not higher. But let me make clear what I said
    earlier, and that is the increase from $1.2 billion to $1.85
    billion is capital only, our capital investments as well as
    working capital. It is not an increase in operating expenses.
    The operating expenses are basically flat.
        Largely in 2006, it would be an increase, as I mentioned,
    in capital. And my guess is that capital expense would stay
    flat but higher for the next 4 or 5 years as we rebuild, in
    effect, the Northeast Corridor infrastructure and rehabilitate
    a bunch of very old and tired equipment. And there is enormous
    demand, I think, growing demand for equipment beyond just the
    Northeast Corridor.
        But I believe perhaps as early--but I do not know, this is
    conjecture--as 2007 we will see----
        Mr. Gunn. It depends on when the reforms are enacted. In
    other words, the ability to start winding down or trending down
    some of the cash demands for Amtrak depend upon when you enact
    a proper capital grant program for the States, an 80/20
    program. And then how long you give the States to adopt, to get
    into that program and to begin to assume full responsibility
    for the operating deficits for the corridors.
        Senator Murray. So the costs of Amtrak are not going to be
    reduced. It is just going to be the States who are going to
    have to come up with that?
        Mr. Gunn. No, actually Senator, there are two pieces to
    this. If the reforms that we have in there--if we got our work
    rule reform and we got the Social Security reforms and some
    other things, there is probably $200 million or $300 million
    which we could ultimately, over time, reduce.
        Senator Murray. Over time when? From my understanding, at
    this point----
        Mr. Gunn. We assume, for example, if we got work rule
    reform, we would implement it through attrition rather than
    just laying people off. That has been our position with our
    unions. And so, once you got the reform, it would take a number
    of years, 2 or 3 years or 4 years, to attrit out the people
    that were surplus.
        Senator Murray. To get to the point where you are saving
    $200 million to $300 million?
        Mr. Gunn. One hundred million dollars on the labor. There
    are some internal reforms that we are going to do, or changes
    that we want to make in terms of food service and some other
    things, that will take place gradually over the next 2 or 3
    years.
        Senator Murray. But the vast majority of this is just
    putting money to the States. It is not like these costs
    disappear?
        Mr. Gunn. A big part. I would not say vast. It is very
    important, if we can get the changes that we are suggesting, if
    we can move from railroad retirement to Social Security, if we
    can get either through reform of the Railway Labor Act or
    through negotiation and get the work rule reform and make the
    others, it is probably $200 million or $300 million of
    operating subsidy that we can deal with.
        But it is also--I do not want to be argumentative. It is
    that there is a significant portion of improving the efficiency
    of Amtrak.
        Senator Murray. Mr. Mead, you are familiar with both of the
    reform proposals. Can you tell us whether you think either of
    these proposals save any money in the short-term, Federal tax
    dollars?
        Mr. Mead. Well, they save money in the sense that--some of
    them, they save money in the sense that they would avoid cost
    that you would other otherwise incur. But the bottom line in
    terms of how much money you would need, because of a backlog in
    capital inside and outside the Northeast corridor, you are
    going to need some money to put the system in a reasonable
    state of good repair and to improve performance.
        So you are not going to--in my opinion, it is a myth I
    think that you are going to save your way somehow out of this.
    There are savings. There is no question. This food service one,
    for example. I do not mean to get emotional about it, but it is
    something that they could have been doing for some time. And it
    is about $80 million, $90 million, $100 million. There is no
    need to wait for 3 or 4 years to do that.
        But I am telling you, I would take the $100 million and I
    would pump it into capital. That is what we need to do. We are
    talking about several billion dollars in capital.
        The other area that I think that we get some savings on is
    in this debt service. I think the loan they took out or the
    mortgage they took out on Penn Station was about $300 million
    at 9.5 percent. Your committee is paying for that at 9.5
    percent. And that means the Treasury Department is, too. So I
    think there are some savings there.
        Senator Murray. Can you tell us what your estimate is of
    what the President's reform bill, if it was passed, would cost
    us in 2006?
        Mr. Mead. I would put it in at about $1.4 billion or $1.5
    billion.
        Senator Murray. Mr. Gunn, do you have an estimate of what
    it would cost to implement?
        Mr. Gunn. I approach it a little differently, if I may. If
    you look at the administration's reform package, it basically
    is internal to Amtrak, restructuring the corporate structure.
    And I think it will be a disaster because it is impractical.
    And it does not deal with some of the real issues that need to
    be addressed that I think the board's reform package deals
    with.
        Senator Murray. Can you explain that?
        Mr. Gunn. If you look at the administration proposal, what
    it does, it is based on the assumption that the services we
    operate can be privatized and contracted out, which they
    cannot. They are not profitable. You can contract them out, but
    you have to subsidize them.
        Also, the basic proposal is to create three Amtraks instead
    of one. You have a residual Amtrak, you have an Amtrak
    passenger service operating company, you have an infrastructure
    company. And it all has to happen on a fairly tight time frame.
    That will be extremely disruptive and expensive. It also has
    some operating problems associated with it.
        But you will end up with--overhead departments will have to
    be replicated. In other words, the way we function now you have
    one law department. Well, if you have three separate companies,
    you are going to need three. You have one personnel department,
    you will have to have three.
        And it is all being done in an environment where it is not
    clear how it is going to be funded. I think it does not address
    any of the real cost issues that are associated with Amtrak.
    And what will happen is you will end up with a lot of the
    service coming off and you will have an enormous C(2) bill, the
    labor protection.
        Senator Murray. This committee will not decide the reform
    package, the Commerce Committee will.
        Mr. Gunn. I am just saying it will cost you money.
        Senator Murray. But you are saying to us that if we pass a
    reform proposal, we are not going to save money in 2006, which
    is what this committee is currently looking at?
        Mr. Rosen. Senator, could I suggest that I do not think Mr.
    Gunn is actually the best expert you are going to find on the
    administration's proposal. And I would say I think his
    characterization of it was totally wrong.

                   AMTRAK FUNDING NEEDS FOR FISCAL YEAR 2006

        Senator Murray. Mr. Rosen, again, this committee is not
    here to debate the different reform proposals. What this
    committee has to do is provide the funds for the expenses for
    next year.
        So what I am hearing is that zero funding is not going to
    do it and, in fact, it is going to cost more no matter which
    proposal is put in place in the short term. I think that is
    what this committee is concerned with.
        Mr. Mead, I do want to ask you, for the last 2 fiscal
    years, the subcommittee funded Amtrak at about $1.2 billion. In
    fact, the funding level for the current fiscal year is actually
    somewhat smaller than the assistance provided last year because
    of the across-the-board cut and the fact that Amtrak is now
    required to pay back part of its Federal loan.
        Even though Amtrak was able to make it through a funding
    freeze for 2005, you are now testifying to this committee that
    they need a $200 million to $300 million boost simply to
    maintain the status quo in fiscal year 2006. Can you explain
    why that is the case?
        Mr. Mead. It does sound a bit inconsistent, but I can
    explain it, I think.
        Actually, for this year, Amtrak has $1.4 billion already in
    Federal money. And that is because they closed out the last
    fiscal year flush with cash. They had $200 million extra, which
    they are going to spend this year. And that puts you at $1.4
    billion, not withstanding the fact that the appropriated level
    is $1.2 billion.
        Now, we are not going to end this fiscal year like we did
    last fiscal year. I have pointed out in my statement that we
    are going to have about $30 million or $32 million in cash as
    you roll into the new fiscal year. So it kind of makes the time
    pressures on the appropriation process more of a priority.
        Senator Murray. Are you certain that Amtrak services would
    have to be reduced if we froze Amtrak funding at $1.2 billion?
        Mr. Mead. Am I certain?
        Senator Murray. That Amtrak services would have to be
    reduced if we did $1.2 billion?
        Mr. Mead. Senator, I think that--I am concerned about the
    capital condition in the Northeast corridor. I do not want to
    analogize the situation to the kid at the dike where he is
    putting his fingers in the different cracks in the dike. But I
    am concerned about the number of go slow orders in the
    Northeast corridor. And I think Amtrak would have no choice but
    to cut back service in some significant ways.
        Senator Murray. Mr. Gunn, what are your views?
        Mr. Gunn. To build on what the Inspector General said, I
    think that he has explained why the $1.2 billion does not work
    because we are spending this year at the rate of $1.4 billion.
    But what makes the problem even worse is that we have a number
    of very serious infrastructure issues that have to be dealt
    with which add up to about $100 million that are not in this
    year's budget. So that gets you up to like $1.5 billion.
        If you were to drop back to $1.2 million, what would happen
    is you would basically have--you would have $350 million
    available for capital instead of the $650 million that we are
    saying we need.
        The problem is that we have already--with the lead times on
    materials, the $350 million would be--probably $100 million of
    it would be for material which would sit because you would not
    have the money to install it. So your actual capital available
    for the railroad would be about $200 million or $250 million.
        And if you look at our budget right now, just the car
    budget for the Northeast Corridor would be $100 million of
    that, to repair the Amfleets, to rebuild the Amfleets. You
    would have almost no money for infrastructure work. You would
    have $100 million for infrastructure.
        That is not sufficient to maintain a high-speed railroad.
    What will happen, the Inspector General is correct, you
    immediately will have slow orders show up. But more
    importantly, the operating budget will go through the roof
    because you will have emergency repairs all over the place. It
    will quickly come unglued.
        Senator Murray. To that point, you were required to suspend
    all service of Acela, high-speed Acelas, a few weeks ago
    because of the brakes. My understanding is that the loss of
    revenue from that is requiring you to eat up a lot of your
    available cash right now.
        Mr. Gunn. Yes.
        Senator Murray. What confidence do you have that Amtrak
    will be able to finish this year, knowing that, with a cash
    positive situation?
        Mr. Gunn. I think we will probably limp into next year.
        Senator Murray. What is limp?
        Mr. Gunn. By limp, I mean we will have like $20 million
    left in the bank, something in that neighborhood.
        Senator Murray. That takes into account the Acela?
        Mr. Gunn. Yes, I think that will be the case. But I
    really--the problem we are having is that the ridership is
    still moving around. In other words, we have got replacement
    service in effect and the riders appear to be coming back. But
    we are definitely going to be hurt to the tune of $5 million a
    month net. That is an optimistic number. It depends on what
    that number actually turns out to be.
        Senator Murray. Mr. Rosen, are you and other members of the
    Amtrak board monitoring the situation?
        Mr. Rosen. Absolutely, and I think that one of the things
    that the company is going to need to do is look for ways to
    reduce expense and conserve cash.
        Mr. Gunn. The reality is at this point we do not have a lot
    of options left to conserve cash.
        Senator Murray. Mr. Rosen, if it looks like Amtrak is going
    to sink into bankruptcy before the end of this current fiscal
    year, is the administration looking at a supplemental
    appropriation request for Amtrak to keep it out of bankruptcy?
        Mr. Rosen. I think that the board is looking carefully, as
    is DOT, at what the cash situation is, and that it will be
    incumbent on any responsible management to look for ways to
    make that situation work. I cannot speak for all of the board
    members but I have some confidence that all of the board
    members will, in fact, want the company to do that.
        Senator Murray. So it is possible that we could see a
    supplemental appropriation if we see a bankruptcy occurring?
        Mr. Rosen. Senator, I was referring to monitoring the cash
    situation and the company taking appropriate steps to ensure
    that it is satisfactory.
        Senator Murray. Mr. Gunn, let me go back to you. You have
    been required to operate a railroad in the midst of all this
    debate over proposals by the administration to put Amtrak into
    bankruptcy. I am concerned about how the railroad's day-to-day
    finances have been impacted by the language in the President's
    budget stating the administration's intention to put the
    railroad into bankruptcy. And I am curious how that and the
    Senate vote that failed to reinstate your subsidies may have
    impacted your daily finances?
        Have any of railroad's costs, be they borrowing costs or
    insurance costs or expense costs been negatively impacted by
    the discussions of bankruptcy or the failed vote in the Senate
    to restore your subsidy?
        Mr. Gunn. Yes.
        Senator Murray. Can you be specific?
        Mr. Gunn. A number of things have happened. One, on
    insurance, we did have an insurance policy that was up for
    renewal. And it was an important policy. And I think we
    probably ended up spending $500,000 to $1 million more than we
    would have. We had our bond rating downgraded. We are beginning
    to get from certain--and I do not want to be specific--but we
    are beginning to get from certain suppliers requirements for
    changes in payment terms. We are pretty current. We pay on a
    current basis. We try to be a good neighbor in that sense. But
    we have a number of fairly large accounts that are talking
    about our escrowing cash or giving them cash in advance.
        We have been unable to close our books, and that means the
    meter is still running on our accountants. There is nothing
    wrong with the books; the issue is the management letter. So
    there has been a number of real impacts, and the biggest impact
    which could happen, of course, is on the payable side,
    commercial payables.
        Senator Murray. We are going to have a vote in just a few
    minutes so I will end shortly. But Mr. Rosen, I just want to
    say that the only funding for passenger rail included in the
    President's budget is the $360 million for the Surface
    Transportation Board. As a matter of law, those funds can only
    be used to continue the operation of commuter rail services
    that operate over Amtrak property or by Amtrak employees once
    Amtrak ceases to operate. That is what the law says. The funds
    can be used once Amtrak ceases operations.
        Your formal statement kind of glossed over that fact and
    you seemed to imply that this funding provided to the Surface
    Transportation Board could actually be used to continue
    operations of Amtrak trains on the Northeast corridor.
        So Mr. Gunn, I want to ask you to clarify this question. If
    this committee adopted the President's budget of providing zero
    to Amtrak and $360 million to the Surface Transportation Board,
    do you think that the Northeast corridor trains will be able to
    operate next year?
        Mr. Gunn. Absolutely not. I can give you a real simple
    reason why. If you look at the engineering department's
    operating budget and capital budget for fiscal 2004, for
    example, it was $550 million, $150 million operating and $400
    million capital. And basically that is all corridor, 90 percent
    of it is corridor.
        But on top of that, in order to run the corridor, you have
    to have a payroll department, an accounting department, a law
    department. You have to have the support. You have to have
    procurement.
        We gave the IG--actually the FRA Administrator but it was
    also to the IG--a report a year or so ago where we calculated
    the cost of a stand-alone corridor and it is $1 billion a year
    plus.
        Senator Murray. So would it be even safe to operate the
    commuter trains under these conditions?
        Mr. Gunn. I cannot answer that. I do not know how they are
    going to spend the money without an organization to spend it.
    That is the problem. We are the ones that spend the money, that
    know how to fix the wire, the signals, the track. If we are
    gone and have been liquidated, I do not know who spends the
    money.
        Senator Murray. Mr. Mead, do you want to add anything else
    before we recess?
        Mr. Mead. Just that I do not think anybody really thinks
    that the $360 million is the best way to go. It is a road we
    have never been down before. I do not think anybody really
    wants to go there.
        Senator Murray. Thank you very much. Mr. Rosen, you look
    very anxious to clarify.
        Mr. Rosen. I would like to add a couple comments to that,
    if you give me 1 last minute here.
        The question as to whether the STB's funding could be used
    for Northeast corridor trains would require a legal
    determination as to whether those trains, particularly the ones
    that make multiple stops, could be deemed to constitute
    commuter service. So I think there is a legal question there
    that it would have to be resolved. And it is not a given that
    it would only be the trains operated by say New Jersey Transit
    or SEPTA and others.
        Second, one should not forget that the Northeast corridor
    trains, on the operating side, operate at something
    approximating break even. They do generate cash. It is not a
    given that those would need to stop if Amtrak was otherwise in
    a problematic financial situation.
        Senator Murray. Unfortunately, we have a vote. I have to
    say that Mr. Gunn, let me just ask you, how many years have you
    spent working in the railroad and transit industry?
        Mr. Gunn. Forty-one.
        Senator Murray. Mr. Rosen, how many years?
        Mr. Rosen. How many years working in the railroad industry?
        Senator Murray. I am sure you are a great lawyer but I just
    wonder how much time you have spent working in the railroad and
    transit industry?
        Mr. Rosen. Given that I have been a lawyer my whole career
    and have not been a train operator, I think you know the answer
    to that.
        Senator Murray. I appreciate that. So you cannot blame me
    for considering Mr. Gunn's views to be authoritative on this.
        Mr. Rosen. I hope you will take my views as the
    authoritative ones on the administration's reform proposals,
    rather Mr. Gunn's, too.

                         ADDITIONAL COMMITTEE QUESTIONS

        Senator Murray. Any additional questions submitted to your
    department should be answered in a timely manner and will be
    included in the record.
        [The following questions were not asked at the hearing, but
    were submitted to the agency for response subsequent to the
    hearing:]

              Questions Submitted to the Amtrak Board of Directors

                  Questions Submitted by Senator Conrad Burns

        Question. Your proposal for long-distance trains requires the
    performance of trains to be measured against a set of undetermined
    performance criteria, which would seem to be mostly--if not entirely--
    financial. Under such a system, how would the public service value of
    Amtrak be measured?
        For example, if folks are riding the Empire Builder to go to a
    doctor, or to receive long-term medical care, the cost of that service
    might not pencil out, but it is certainly valuable. How would that be
    considered, under your proposal?
        Answer. The clear signal we have received from Congress and the
    administration is that financial performance must improve. The Board
    agrees with that message. Nonetheless, I anticipate that the criteria
    for evaluating the performance of long distance trains will attempt to
    factor into account public benefits and not just financial performance.
    For example, the route performance criteria might include a measure
    that reflects the number or percentage of passengers on a long distance
    route traveling to/from communities where alternate public
    transportation services are limited or non-existent.
        Question. Your proposal also relies heavily on the development of
    corridor trains. Do you have a sense of what the real potential for
    such service is?
        Answer. Despite the absence of a Federal corridor rail program, 13
    States are currently partnering with Amtrak to fund the operation of
    corridor services in shorter distance markets (less than 500 miles).
    Many of these States have also made capital investments with their own
    funds. The growth in ridership and service that has resulted from these
    investments--on the Amtrak Cascades route in Washington and Oregon, the
    Capitol Corridor in California and the Hiawathas route in Wisconsin to
    name just three--demonstrates the potential for corridor rail
    development in densely populated corridors throughout the country.
        Due to the lack of a Federal capital program for States, there is
    no data source to indicate the potential for development of corridor
    rail service. Knowing this, over the past 2 years, Amtrak has surveyed
    States to get an indication as to their plans for existing or future
    corridor development. In 2004, 29 States responded to the survey and
    provided details about their plans. Many of them also indicated that
    lack of a Federal funding match program is a major impediment to
    corridor development, and that enactment of such a program would act as
    an incentive to more aggressively develop existing passenger rail
    corridors or begin developing new ones.
        Based upon the information States provided in the 2004 survey, the
    Corridor Appendix to Amtrak's fiscal year 2005-2009 Strategic Plan
    (transmitted to Congress and available at www.amtrak.com) identified
    eight ``Tier I Corridors'' and four ``Tier II Corridors''. These are
    corridors where States have ``ready to go'' plans--including capital
    investment plans and funding commitments for State matching funds--for
    corridor development projects that could provide significant near-term
    benefits if Federal dollars were made available to match State
    investments.
        Question. Can you discuss the recommendation to shift new workers
    away from the Railroad Retirement system into Social Security?
        Answer. Amtrak's Strategic Reform Initiatives propose that the
    provision of intercity passenger rail services be opened to
    competition, and that intercity passenger rail be placed on an equal
    footing with other transportation modes. Requiring Amtrak and many
    potential new operators of interstate passenger rail service to pay
    Railroad Retirement taxes places interstate passenger rail at a
    disadvantage with respect to other transportation modes. For example,
    the airline industry is subject only to Social Security, and a large
    portion of its retirement obligations to its employees has been assumed
    by the Federal Government as a result of airline bankruptcies. The fact
    that some potential operators of intercity passenger rail might not be
    subject to Railroad Retirement taxes under existing law also creates
    inequities that ultimately must be eliminated to create a truly
    competitive market. Conversely, potential interstate passenger
    operators are unlikely to attempt to enter the Amtrak market as
    competitors if the cost of doing so includes Railroad Retirement taxes.
        Amtrak believes that placing all new intercity passenger rail
    employees under Social Security is the best way to transition to a
    level playing field and reduce Federal subsidy requirements without
    impacting the retirement planning or benefits of current Amtrak
    employees and retirees.
                                     ______

                         Questions Submitted to Amtrak

                 Questions Submitted by Senator Byron L. Dorgan

                               VETERANS ADVANTAGE

        Question. Thousands of North Dakotans depend on Amtrak each year
    for their transportation needs. However, long distance trains,
    including the Empire Builder that serves my State, are under attack by
    the Bush Administration. The administration provides no Federal subsidy
    in its fiscal year 2006 budget for Amtrak's long distance rail service.
    I understand that Amtrak has submitted a sizable request for funding
    for next year, and I will do what I can to support it as a member of
    this subcommittee.
        On a related note, I would like to talk to you about a program to
    provide discounted train service to America's veterans. For more than 2
    years, Amtrak offered a 50 percent discount for veterans in off peak
    periods. I am told that this was a very successful program.
        You may recall that this committee included language in the 2004
    conference report strongly urging Amtrak to continue the 50 percent
    discount for veterans. Would you please let this committee know what
    Amtrak intends to do in the future about this program?
        Answer. As you know, Veterans Advantage (VA) is a paid membership
    program, and the discount associated with this program is only
    available to their subscribers. Amtrak currently offers VA members a 15
    percent discount.
        The 50 percent discount that you refer to was initiated as a
    promotional offer, and the promotion had a mutually agreed upon end
    date of December 2003. This deep discount offer was never intended as a
    permanent fare program. VA was aware of the terms and conditions of the
    promotional discount and knew that it would expire in 2003. No other
    business partner with Amtrak received as generous an offer as what was
    given to VA for this promotion.
        Last year, in an effort to work cooperatively with VA, Amtrak
    offered a buy one get one free promotion that was rejected by VA.
    Amtrak then offered a limited 50 percent off promotional program to VA
    members for the fall of 2004 that too was rejected by VA. The Amtrak
    offer was from September 14, 2004 through February 8, 2005. VA sent a
    letter dated September 16, 2004, declining the Amtrak 50 percent
    discount offer. Since then, Amtrak has tried to work reasonably with VA
    in the hopes of reaching a mutually beneficial arrangement for
    additional temporary promotional offers for its members, yet our offers
    have been turned down.
        I want to be clear that for the past year we have worked sincerely
    to find a mutually beneficial solution to this matter. In fact, Amtrak
    not only continues to offer a 15 percent discount to VA members, but
    the program is also promoted on Amtrak's website, system timetables and
    other marketing materials. In addition, to provide the program with an
    incentive to attract new members, Amtrak is also offering 500 free
    points in its Guest Rewards program to new Veterans Advantage members.
    Amtrak remains committed to continuing to work with VA and its members.

                      AMTRAK'S IMPACT ON RURAL COMMUNITIES

        Question. Do you believe long distance passenger rail routes will
    be able to survive if States are left held responsible for making up
    the funding? Has any State indicated to you that they would have the
    resources to make up such shortfalls?
        Is it your expectation that some of the long distance routes would
    cease to exist?
        Answer. Under Amtrak's Strategic Reform Initiatives, States would
    be required to provide operating funding for long distance trains only
    if, after efforts to improve performance, a particular train still
    fails to meet minimum performance thresholds, and then only to cover
    the ``gap'' between the threshold amount and the train's actual
    operating losses. While no State has indicated that it is in a position
    to bear the full operating losses of multi-State long distance trains,
    we believe that it is possible that some States might provide some
    ``gap closing'' amounts required under this proposal.
        Amtrak does not anticipate that long distance routes would survive
    if States were responsible for covering all operating losses.
    Significant impediments to States assuming such responsibility include
    the large number of States (generally 6-12) served by each long
    distance route; differences in relative benefits received by individual
    States; and variations in States' financial resources, transportation
    policies, and constitutional statutory frameworks governing
    transportation funding. It bears noting that on no occasion in Amtrak's
    34-year history has a group of States offered to provide operating
    funds to retain long distance routes slated for discontinuance.
        Whether some trains are ultimately added to or subtracted from the
    long distance system will depend upon the performance of individual
    routes and, for any routes that do not meet minimum performance
    thresholds, States' willingness to fund a portion of operating losses
    so that those thresholds are met.

                             AMTRAK AND COMPETITION

        Question. Part of the Amtrak reform plan is aimed at promoting
    competition. Have other rail operators indicated to you that they wish
    to provide passenger rail service for the long distance routes, such as
    in my State of North Dakota?
        Answer. No other railroad has indicated to Amtrak that it is
    interested in operating long distance trains. Some private companies
    have expressed very preliminary interest in providing on-board services
    (food and beverage/sleeping car) on long distance trains. Amtrak
    remains open to other providers assuming additional services, or
    ultimately operating entire routes, if legal and contractual
    impediments are addressed.

                             CONCLUSION OF HEARINGS

        Senator Murray. The subcommittee stands in recess, subject
    to the call of the Chair.
        [Whereupon, at 11:32 a.m., Thursday, May 12, 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
                                      2006

                                  ----------

                                           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 2006 budget request. Those statements
    submitted by the chairman follow:]

                          UNITED STATES POSTAL SERVICE

        Prepared Statement of John E. Potter, Postmaster General and CEO
        Good morning, Mr. Chairman and members of the subcommittee. I
    appreciate this opportunity to talk to you today about the Postal
    Service's accomplishments in recent years; the continuing challenges we
    face in the years ahead; and our appropriations request for the next
    fiscal year.
        Since I became Postmaster General in June of 2001, I have focused
    the Postal Service on transforming into a leaner, more efficient, more
    modern organization. Our continuing Transformation efforts are
    delivering results for the American people. In the last few years, we
    have seen significant positive results in the areas of service,
    customer satisfaction, finances, and workplace improvements. I am very
    proud of our employees and our management for helping us achieve these
    impressive results in these challenging times.
        Our record of accomplishment is clear. We again set records for
    service performance and customer satisfaction in 2004. Last year, we
    reduced our debt by $5.5 billion. At $1.8 billion, our debt is at its
    lowest level in 20 years. We also recovered all prior years' losses
    and, for the first time since postal reorganization in 1971, ended the
    year with positive retained earnings. We have achieved an unprecedented
    five consecutive years of growth in total factor productivity--the
    equivalent of $6.1 billion in cost savings. Financially, we had a
    second straight year of positive earnings--with a net income of $3.1
    billion. Career staffing has declined from its peak in 1999 to pre-1985
    levels, thanks to our embrace of new technologies and greater
    efficiency. And, this was accomplished without layoffs. The workplace
    environment is improving, with grievances awaiting arbitration down by
    61 percent. Accidents are down by 36 percent. These results can all be
    directly tied to our 2002 Transformation Plan--a plan that continues to
    be our guide and that we are in the process of expanding and
    extending--with the help of our stakeholders--through fiscal year 2010.
        We remain focused on aggressively managing our business. Our
    employees are doing an exceptional job utilizing resources efficiently
    while holding down costs. This focus will not change.
        Yet, our success continues to hide the long-term structural
    problems that are impeding the viability of our outdated business
    model. Designed to meet the needs of a 1970's marketplace, this
    business model assumes that the revenue from continually rising mail
    volumes will offset the costs of an ever-growing delivery base.
        The model worked well for the marketplace it faced at the time it
    was created--long before the advent of electronic communications such
    as e-mail. Then, we faced little competition in hard-copy mail and
    package delivery. At that time, the Postal Service was granted a
    limited monopoly to protect its universal service mandate--that is, the
    ability to provide quality, affordable mail service to every single
    home and business in America.
        While this model has served the American people well for the past
    35 years, communications and normal business practice have undergone
    profound structural change. Today, we face a competitive marketplace
    for hard-copy mail and package delivery services. As businesses and
    individuals make ever greater use of electronic communications to place
    orders, pay bills, obtain account information and communicate with
    friends and loved ones, their use of the mail continues to decline.
        Since 2000, First-Class Mail volume, which provides the highest
    contribution to overhead, has fallen by almost 5.6 billion pieces.
    These changes are evidence that the value of our monopoly has
    diminished. As recently as 2002, First-Class Mail was by far the
    largest component of the mailstream. Over the past 4 years, First-Class
    Mail volume has declined 5.4 percent while advertising mail volume has
    grown 6.1 percent. However, it takes nearly three pieces of advertising
    mail to generate the same contribution as one piece of First-Class
    Mail.
        Last year, First-Class Mail was less than half of total mail volume
    and we expect that this year, for the first time in Postal Service
    history, Standard Mail will overtake First-Class Mail as our largest-
    volume product. The shift in the mail mix from First-Class Mail to
    lower revenue-per-piece mail has significant implications for our long-
    term bottom line. At the same time, the number of deliveries continues
    to grow. In 2004, we expanded our delivery network to accommodate 1.8
    million new addresses. That base grew by 1.9 million the year before.
    Structural changes in societal and business communications have altered
    the economics of our business model. We are squeezing the margins
    within that model's narrow parameters.
        Without modernization of our business model, the opportunities for
    savings and efficiencies can only decline and the only available
    alternative to cutting costs is raising rates. Raising rates normally
    has a negative effect on volume growth. We could find ourselves in a
    vicious cycle--a cycle of rising rates forcing volumes to decline which
    would then force additional rate increases to cover the continued
    expansion of delivery points. Ultimately, the service that America
    expects could be in jeopardy.
        We have filed a request for a rate increase in 2006. This across-
    the-board rate filing is not a function of revenue failing to meet
    operational costs. We expect to end this year in the black, with
    positive net income of more than $1 billion. There would be no need to
    raise rates before fiscal year 2007 were it not for the $3.1 billion
    escrow funding required by Public Law 108-18. However, the Postal
    Service must now begin the process of seeking a rate increase to comply
    with the requirements of Public Law 108-18, the Postal Civil Service
    Retirement System Funding Reform Act of 2003. The Act adjusted Postal
    Service payments to the Civil Service Retirement System so that we
    would avoid over funding our obligations to the program.
        It also stipulated how the so-called ``savings'' we realized under
    the Act were to be used. In reality, those ``savings'' are the
    difference between our former, higher payment rate that would have
    resulted in over funding, and the current, lower rate. From 2003 to
    2005, the ``savings'' realized under the Act were used to reduce debt,
    offset operational expenses and hold postage rates steady. Beginning in
    2006, however, the Act requires that we pay $3.1 billion to an escrow
    fund.
        Postal reform legislation under consideration in the House and
    Senate would eliminate this escrow fund, but require payments to pre-
    fund future health benefit liabilities. We will continue to monitor the
    costs associated with pending legislation and reassess our rates
    requirements for 2006 as appropriate.
        Over the past 2 years, we have seen a broad consensus--among
    government leaders, legislators, the mailing industry, customers and
    postal employee organizations--about the need for reform of the laws
    governing the Postal Service.
        The administration and both houses of Congress have explored new
    business models for the Postal Service. The Postal Service's goal
    throughout this process has been to identify a model that will protect
    the ability of all Americans to continue receiving affordable,
    universal mail service well into the 21st century.
        I look forward to continuing my discussions with this subcommittee
    and others as we work to find a business model that is best for our
    customers, our economy and our Nation. We must define this business
    model now--before we face a crisis in the Postal Service.
        And speaking of now, I am also here today with more immediate
    needs--our appropriations request for fiscal year 2006. This request
    covers funding for revenue forgone and free and reduced rate mail, as
    well as additional funding to complete the system modifications that
    will improve mail safety and security for our employees and for the
    American people. Our request differs from the amounts recommended by
    the administration's fiscal year 2006 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 6 years, under the Revenue Forgone Reform Act). The
    outstanding balance on this debt is approximately $870 million. This
    year's appropriation would be the thirteenth 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 $870 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 $108.5 million in payment for
    costs imposed on the Postal Service by statute. This $108.5 million is
    for current year costs of $79.9 million and a $28.5 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 request of
    $87.3 million. The administration provides $58.7 million for current
    year costs plus a $28.5 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.
        The third part of our appropriations request is for costs
    associated with the nationwide deployment of the Biohazard Detection
    System, the Ventilation and Filtration System, and a Mail Sanitization
    Facility to be located in the Washington, DC area. We are requesting
    $51 million to complete these initiatives. The administration's budget
    does not include funding for the Postal Service's efforts to improve
    the safety and security of the Nation's mail system. In the past 2
    years, we have accomplished significant improvements in our emergency
    preparedness. For example, we successfully decontaminated and re-opened
    major mail-processing facilities in Washington, DC, and Trenton, New
    Jersey--rehabilitation projects on a scale never before attempted.
        While we agree that funding for homeland security needs must be
    prioritized, the Postal Service believes that funding to continue
    efforts to improve the safety and security of the mail for postal
    employees and customers should be one of those priorities.
        I appreciate the support we received for these important
    initiatives during the 108th Congress, when funding of $503 million was
    appropriated to continue these efforts. While those funds will permit
    the Postal Service to continue to purchase and install state-of-the-art
    Biohazard Detection Systems and Ventilation and Filtration Systems in
    our mail processing centers, additional funding is needed to complete
    this installation process. The Postal Service will continue to cover
    the operating expenses for these systems from our operating budget.
        Both the administration and Congress have recognized that
    supporting the costs for postal system changes has been a critical
    element in the enhancement of the security of the Nation. These costs
    have been--and should continue to be--funded by the government as part
    of its homeland security activities. These are not costs that should be
    borne by postal ratepayers.
        The Postal Service has dedicated its resources to identifying the
    best and most effective approach to detecting biohazards in the mail.
    Our Biohazard Detection System continuously gathers air samples as mail
    passes through the initial pinch point in the mail processing system.
    Sample analysis occurs at intervals of approximately 1 hour, followed
    by a 30-minute analysis cycle. The test intervals help assure that no
    mail will leave a facility before the analysis is completed.
        To date, these Biohazard Detection Systems have performed over
    625,000 tests involving more than 12 billion pieces of mail. There have
    been no false positives. These systems allow for quick response to a
    positive test result, triggering the local integrated emergency
    management plan, which includes cessation of operations and facility
    shutdown, and notification to community first responders, including
    local public health officials who would make any medical decisions
    regarding potentially exposed employees and customers.
        These automated systems, developed in conjunction with experts from
    the Federal Government, the military and the private sector, provide
    rapid on-site analysis of aerosol samples collected during one of the
    earliest stages of mail processing. These systems are now operational
    at 114 locations. By the end of the calendar year, this equipment will
    be deployed in every State of the Nation, at all of our 282 major
    processing centers.
        Since the initial development of the Biohazard Detection System
    concept, the Postal Service has actively sought to improve this
    flexible and expandable system. New, improved components of this system
    are being developed to detect threats in addition to anthrax.
        A new technology with promise for expanding our detection ability
    uses electro-chemical luminescence, ``ECL''. ECL technology has the
    capability to detect both biological agents and toxins, such as ricin,
    that escape detection by our current testing process. ECL hardware and
    software were integrated into an existing system in March 2004. The
    technology is being tested to determine its level of sensitivity and
    reliability before the Postal Service proceeds further. As was the case
    with previous BDS testing, the Postal Service is working with the U.S.
    Army at the Edgewood Arsenal facility.
        We have also moved forward with the deployment of a Ventilation and
    Filtration System that, used in conjunction with the Biohazard
    Detection System, will isolate and contain mail-borne biohazards. The
    Ventilation and Filtration System draws air across the surface of
    letter and flat canceling systems through a series of ducts, and
    ultimately into High Efficiency Particle Air (HEPA) filters capable of
    trapping one-to-three micron-size anthrax spores, as well as a variety
    of other potential contaminants that might be released in mail
    processing operations.
        In addition, we are finalizing our plans for the construction of an
    irradiation facility here in Washington to minimize the delays involved
    with rerouting government mail to New Jersey for this purpose. The
    construction of this Mail Sanitization Facility will reduce Postal
    Service costs and improve mail service to Congress and the Federal
    Government.
        The Postal Service is currently spending approximately $800,000 of
    its own funds each month to irradiate mail destined for Congress, the
    White House and Federal Government agencies in Washington, DC.
    Irradiation is conducted at a leased sanitization facility in New
    Jersey. In addition to the cost to truck mail to the New Jersey
    facility, this procedure causes 2-3 day delays in mail delivery. We
    have not requested funding for these costs in the past, nor will we now
    request funding for these costs.
        The emergency preparedness funds we are requesting today would
    enable an enhanced level of protection for our Nation. Through the
    field testing phase of the Biohazard Detection System, the Postal
    Service has forged important and productive partnerships with
    government and public health officials at the Federal, State and local
    levels. With the events of recent years, the historic responsibility of
    the Postal Service to safeguard the Nation's mail, and those who
    deliver it, has greatly expanded. We carry this trust all across
    America, at each Post Office and every postal facility, and at every
    address in the Nation. Your favorable consideration of this
    appropriations request will help us to fulfill this role to the best of
    our ability.
        In closing, 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
    2006, we are not requesting an appropriation for public service.
        Thank you, Mr. Chairman and members of the subcommittee for the
    opportunity to discuss our fiscal year 2006 appropriations request. I
    would be pleased to respond to any questions at this time.
                                     ______

                         OFFICE OF PERSONNEL MANAGEMENT

         Prepared Statement of Honorable Dan G. Blair, Acting Director

        FISCAL YEAR 2006 PERFORMANCE BUDGET FOR THE OFFICE OF PERSONNEL
                                   MANAGEMENT

        Mr. Chairman and members of the subcommittee, I appreciate the
    opportunity to submit for the record a statement addressing both the
    appropriations request for the Office of Personnel Management (OPM) for
    fiscal year 2006 and the significant administration initiatives we
    intend to pursue in furtherance of the President's management agenda.
        To provide some context for the President's request for
    appropriations for OPM, I would like to review briefly the progress we
    have made during the last year, particularly in developing new human
    resources management systems for the Departments of Homeland Security
    (DHS) and Defense (DOD), and to outline the plans we have to extend
    that progress throughout the civil service.
        First, our joint development, with DHS, of the new human resources
    management (HRM) system for that department was unprecedented from the
    standpoint of the joint regulatory process through which the system was
    established. In addition, the collaborative process through which those
    regulations were developed included employees and managers and the
    largest labor organizations representing the department's employees, as
    well as numerous Federal and private experts and stakeholders. The
    final regulations were published on February 1, 2005.
        Simultaneously, we have been engaged with DOD in the development of
    their National Security Personnel System (NSPS), building on the
    experience we had gained through the DHS process. The proposed
    regulations for NSPS were published on February 14, 2005, and the
    comment period ended on March 16, 2005. The many comments received are
    currently being analyzed and will be considered in the development of
    the final regulations that will establish the new system.
        Having learned from those experiences, we are now uniquely
    positioned to apply those lessons in a thoughtful and creative fashion
    throughout the civil service. Consistent with administration policy, we
    will be developing legislative proposals to modernize the systems and
    authorities available to the remaining Federal agencies. In a more
    specialized arena, we will be working to identify whether additional
    separate legislative proposals are needed for law enforcement officers
    (LEO's).
        As with the new systems in DHS and DOD, implementation activities
    are a crucial part of OPM's role with regard to other recently-passed
    legislation. The Federal Workforce Flexibility Act made significant
    changes that will require complex adjustments in pay and leave
    administration practices. In addition, the new pay-for-performance
    system for the senior executive service (SES) requires certification of
    agency performance appraisal systems, as well as extensive guidance on
    issues relating to SES performance management and administration.
        In addition, the intelligence reform legislation enacted last year
    authorized the director of the Federal Bureau of Investigation (FBI) to
    establish career positions for intelligence analysts within the FBI, to
    establish an FBI reserve service for the temporary reemployment of
    former FBI employees during periods of emergency, and to extend, for a
    limited period, the mandatory retirement age for FBI employees to 65.
    We will be working with the FBI to facilitate the implementation of
    those intelligence reforms.
        The introduction of new dental and vision benefits for Federal
    employees and annuitants will require additional efforts this year.
        Also, the acceptance of the transfer of personnel security
    investigations functions from the Defense Security Service constitutes
    an immensely important responsibility, creating in one place a single
    unit to conduct the vast majority of background investigations for the
    entire Federal Government. As a result, to carry out personnel
    investigations, an additional 1,686 employees were added to OPM's rolls
    to date as a result of the transfer of function, and the workload has
    drastically increased, as well.
        We will also continue to engage agencies in implementing the human
    capital standards for success as they transform their human capital
    management practices, consistent with the merit system principles,
    veterans' preference, and other critical standards. The standards for
    success were developed jointly with the Office of Management and Budget
    and the Government Accountability Office. Through the compliance
    program, OPM will ensure that merit system principles are preserved and
    honored.
        In addition, we will be working closely with agencies to strengthen
    their human capital accountability systems. As additional human
    resources flexibilities are being made available to agencies, there is
    a greater responsibility for accountability at the level within each
    agency where authorities are delegated and decisions are made.
    Strengthening accountability Government-wide helps ensure adherence to
    merit system principles and results in efficient, effective, and
    responsible administration of Government services.
        Again in 2006, OPM will assess the effectiveness of its strategic
    human resources policy activities by administering the Federal human
    capital survey, and by continuing to track and report the extent to
    which agencies are using flexibilities such as direct hiring authority,
    teleworking, and student loan repayments.
        Among our most extensive and forward-looking responsibilities is
    the implementation of a Human Resources Line-of-Business (HR-LOB)
    common solution. Transition of our current OPM-managed e-Government
    projects into a single framework will leverage economies of scale,
    while reducing costs and increasing the quality and consistency of
    service provided.
        In fiscal year 2006, the request for resources for e-Government
    initiatives funded from salaries and expenses, including Enterprise
    Human Resources Integration (EHRI), and e-Payroll, is more than $4
    million below the amount provided in fiscal year 2005, including no-
    year and 3-year funding.
        For basic operating expenses, OPM's general fund request totals
    about $124.5 million, to support 998 full-time equivalent (FTE)
    employees. These overall resources will enable OPM to continue to
    support the transformation of agencies in more effectively managing
    human capital while increasing their accountability; to modernize HRM
    systems to streamline hiring, and link pay more closely to agency
    missions; and to improve both employee security and emergency response
    coordination. Included are nearly $114.2 million in annual funds and
    slightly more than $10.3 million in no-year funding for the e-
    Government initiatives described earlier, including EHRI, e-Payroll, e-
    Training, and HR-LOB.
        In transfers from the benefits trust funds, OPM is requesting
    $100.0 million in annual funds to support 1,151 FTE engaged in the
    administration of the employee retirement and insurance programs.
        Additionally, we will continue working to establish contracts to
    implement the major activities of the retirement systems modernization
    project. That strategic initiative will replace OPM's legacy systems
    with modern technology, moving from paper to electronic recordkeeping
    and reengineering business processes.
        It should be noted, too, that the funding for the Office of the
    Inspector General (IG) is derived, in significant part, from transfers
    from trust funds. While the request for that office will be discussed
    in more detail in a separate statement, it bears mentioning that their
    overall request totals more than $17.9 million and 140 FTE. The bulk of
    that funding, $16.3 million, would represent transfers from trust
    funds, with $1.6 million coming from general funds.
        Notwithstanding our independent relationship with the IG and his
    fine staff, we continue to work cooperatively on issues of mutual
    interest, including maintaining the integrity of our benefits trust
    funds and monitoring the Combined Federal Campaign. We strongly support
    and greatly appreciate the work of his office on such important
    matters.
        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. For those ongoing
    revolving fund responsibilities, the fiscal year 2006 budget includes
    an estimated $1.1 billion in obligations and 2,734 FTE to be financed
    through payments for OPM's services by other agencies.
        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 1.9 million annuitants participating in the Federal
    Employees Health Benefits Program, we estimate that about $8.4 billion
    will be needed to pay the Government's share of the cost of coverage.
    That represents an increase of $570 million over fiscal year 2005. We
    estimate that, for the 500,000 annuitants under age 65 who elect post-
    employment life insurance coverage, an appropriation of $36 million
    will be required.
        It is also worth noting that the President's budget proposes to use
    pension savings provided to the Postal Service by the Postal Civil
    Service Retirement System Funding Reform Act of 2003, Public Law 108-
    18, savings that would otherwise be held in escrow in 2006 and beyond,
    to begin funding the substantial Postal Service liabilities for its
    annuitants.
        Under this plan, the Postal Service would make payments for its
    accruing actuarial costs of post-retirement health benefits coverage
    for its current employees, and amortization payments needed to
    liquidate its liability for the post-retirement health benefits
    coverage of its current retirees.
        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 $26.6 billion dollars.
    This represents an increase of $400 million to cover the service cost
    of the Civil Service Retirement System which is not funded by and for
    active employees.
        Finally, the President's fiscal year 2006 budget proposes a pay
    increase for white-collar Federal employees of 2.3 percent, to be
    distributed between an across-the-board raise and locality pay, as
    determined by the President later in the year. Once again, the
    Government-wide general provisions in the budget include the
    appropriate legislative language to ensure that, if warranted by local
    private sector market rates, blue-collar Federal employees receive pay
    adjustments up to the amount received by their white-collar colleagues.
        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 Honorable Patrick E. McFarland, Inspector General

    FISCAL YEAR 2006 APPROPRIATIONS REQUEST FOR THE OFFICE OF THE INSPECTOR
          GENERAL AT THE UNITED STATES 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 2006 request for appropriations for the Office of the Inspector
    General (OIG) at the Office of Personnel Management (OPM). The total
    request for the Office of the Inspector General is $17,943,000, which
    is the same amount enacted in fiscal year 2005. Of this amount,
    $1,614,000 is from the salaries and expenses/general fund and
    $16,329,000 is from the trust funds. These resources are requested to
    perform our core functions which include:
      --Conducting 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.
      --Providing investigative oversight of the OPM-administered employee
            benefit programs.
      --Issuing 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 $670.7 billion in fiscal year 2004, their receipts were
    $115.1 billion, and their annual outlays were $81.8 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 benefits trust
    fund provides payments to approximately 260 health insurance plans
    nationwide. In turn, the health insurance carriers pay millions of
    claims for services filed by their enrollees and health care providers.
    We have shown through our investigations and audits that such health
    insurance payments may be at risk through improper, inaccurate or
    fraudulent claims.
        We are obligated to Federal employees and annuitants to protect the
    integrity of their earned benefits. Our audit and criminal
    investigative work reduces losses due to fraud and improper payments
    and recovers misspent funds whenever possible. We have a special
    obligation to the Federal agencies and the American taxpayers who
    provide the majority of the funding.
        The Office of the Inspector General has achieved an impressive
    record of cost effectiveness. Audits and criminal investigations of the
    OPM-administered trust fund programs have resulted in significant
    financial recoveries to the trust funds and commitments by program
    management to recover additional amounts. Since fiscal year 1992, these
    recoveries and commitments total $1.1 billion which is approximately
    $10 of positive financial impact for each direct program dollar spent.
    During fiscal year 2004, the positive financial impact exceeded $95
    million, and current estimates for fiscal year 2005 and fiscal year
    2006 are $135 million and $130 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 2006, we will continue to conduct audits of
    pharmacy benefit managers (PBMs). 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 27 percent of
    experience-rated carrier premiums paid for health benefits coverage for
    Federal employees and annuitants. The premiums paid for prescription
    drug coverage have risen exponentially over the last 10 years. However,
    we did not begin to audit prescription drug benefits until late fiscal
    year 2004, because the FEHB Program historically had defined health
    care providers and suppliers as other than Federal subcontractors.
    Since PBMs were not subcontractors, they were not subject to our
    audits. In light of increasing expenditures on prescriptions and
    allegations against PBMs, the FEHB Program recently promulgated
    regulations that will bring PBMs under the umbrella of the FEHB
    Acquisition Regulation and subject them to audit requirements currently
    applicable to carriers and their subcontractors.
        While we are still conducting the initial PBM audit, we believe
    that it will result in the FEHBP recovering inappropriate costs charged
    to it in previous years.
        Also during fiscal year 2006, 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 will provide information enabling our criminal
    investigative staff to react quickly to criminal investigative leads.
    For example, the OIG investigators will be able to determine the
    potential program risks associated with an identified provider or
    subscriber fraud allegation, and take appropriate action in a matter of
    hours instead of the days or weeks currently required.
        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 FEHBP and the
    persons who obtain their health coverage through it.
        Thank you for this opportunity to present my resource request for
    fiscal year 2006.
                                     ______

               UNITED STATES INTERAGENCY COUNCIL ON HOMELESSNESS

          Prepared Statement of Philip F. Mangano, Executive Director

        I appreciate the opportunity to present testimony on the work of
    the United States Interagency Council on Homelessness (``Council'') and
    our budget request for fiscal year 2006.
        The Council was authorized in 1987 in the McKinney-Vento Homeless
    Assistance Act but had been dormant for nearly 6 years before being
    revitalized by the administration in 2002 in accordance with the fiscal
    year 2001 VA/HUD/Independent Agencies Appropriations Act. That Act
    extended the Council's authorization to October 1, 2005. The
    administration is requesting that the authorization for the Council be
    extended and has included a $1.8 million budget request for the Council
    in fiscal year 2006.
        The Council is taking an approach to homelessness that is based on
    partnerships, collaboration, accountability, and results. The full
    Council, comprised of 20 Cabinet Secretaries and Agency directors, has
    held six meetings. A seventh meeting is expected this summer at which
    time a new Chair will be elected. Over the past 3 years, chairmanship
    of the Council has rotated among the Secretaries of Housing and Urban
    Development, Health and Human Services, and Veterans Affairs. Rotating
    the chair among the members is in accordance with an amendment to our
    statute included in the fiscal year 2001 VA/HUD/Independent Agencies
    Appropriations Act and has had both substantive and symbolic meaning,
    reflecting the reality that homelessness has many causes and that
    solutions to homelessness are not fashioned through any one agency but
    only through collaborations by all.
        The Council's work is supported by an Executive Director and seven
    professional and administrative staff in Washington. Our efforts are
    augmented by eight regional coordinators, who are programmatically
    supervised by the Council and administratively supported by the
    Department of Housing and Urban Development.
        In his February 2 State of the Union Address, the President
    underscored the need to restrain spending in order to sustain economic
    prosperity. As part of this restraint, it is important that total
    discretionary and non security spending be held to levels proposed in
    the fiscal year 2006 budget. For fiscal year 2006, the President's
    budget requests $1.8 million for the Council, a $300,000 increase over
    fiscal year 2005 and the first proposed budget increase for the Council
    since fiscal year 2003. The new level of funding is largely accounted
    for by expenses the Council will incur in meeting a congressional
    directive to move into independent space from our temporary space at
    the Department of Housing and Urban Development headquarters building.
        Through our work, the Council is seeking to establish a new
    standard of expectation around the issue of homelessness. That new
    measure requires that resource investments should do more than just
    ``manage'' the problem. We expect those investments to result in
    visible, measurable, quantifiable change in our communities, on our
    streets and in the lives of homeless people. Since enactment of the
    McKinney Act in 1987, billions of dollars have been spent by the
    Federal Government and other billions have been spent by State and
    local governments and philanthropy on this issue. But the fact is that
    despite the expenditure of these funds, there has continued to be tens
    of thousands of persons living long term on the streets, in encampments
    and in our shelters.
        Now the administration has set a new marker on homelessness, the
    goal of working in partnership with States, localities, faith-based and
    community groups, as well as business to end chronic homelessness. The
    chronically homeless are the most vulnerable and disabled, those most
    visible and long term on our streets and in shelters. We also are now
    learning through research that they are some of the most expensive
    people to the public purse.
        To meet our expectations of visible, measurable, quantifiable
    outcomes, our efforts are being guided by a management agenda,
    implemented in partnership across Federal agencies and with other
    levels of government and with the private sector, faith based
    organizations and homeless people. We are focusing resource investments
    on a strategy made whole that includes not only intervention activities
    but prevention initiatives. Our intent is to identify, create and
    invest in the most innovative initiatives that are research and data
    driven, performance based and results-oriented.
        The administration's marker to end chronic homelessness calls for
    us to embrace the moral, spiritual and economic obligations we have to
    taxpayers and to those homeless people on the streets. Chronic
    homelessness is the most visible form of homelessness in our country,
    and is most often the result of individuals' disabilities. People
    experiencing chronic homelessness are the people we see in doorways or
    under bridges day after day, year after year. They populate homeless
    death lists across our country. Over the last few years, research has
    shown that those experiencing chronic homelessness are in fact a finite
    group representing only 10 percent of the adult homeless population.
    However, they consume over 50 percent of all emergency homeless shelter
    services and ricochet randomly around the acute side of very expensive
    primary and behavioral health care systems. As a result, persons
    experiencing chronic homelessness are some of the most expensive people
    to the public purse in communities across the country.
      --In Seattle, 1,200 persons experiencing chronic homelessness were
            tracked for 1 year through emergency rooms and behavioral
            health care systems. Cost of those 1,200 for that 1 year: $12
            million or $100,000 per person.
      --In Asheville, Buncombe County, NC, 10-year planners analyzed the
            service use of 37 homeless men and women over a period of 3
            years and found that these individuals cost the city and county
            more than $800,000 each year including 1,271 arrests generating
            $278,000 in jail costs, 280 episodes of EMS services for a cost
            of $120,000, and hospitalization costs of $425,000.
      --The University of California at San Diego followed the service use
            of 15 chronically homeless people for 18 months. They reported
            300 emergency room visits, taken by ambulance and accompanied
            by EMTs, using multiple day stays and they quantified
            behavioral health costs (substance abuse and mental health) and
            law enforcement. Total cost? $3 million over 18 months or an
            average of $200,000 per person.
      --The Boston Health Care for the Homeless Program tracked 119 persons
            experiencing chronic homelessness over 5 years and discovered
            that they had over 18,000 emergency room visits at an average
            cost of $1,000 per visit.
      --Two concerned Reno police officers tracked the services use of just
            two homeless persons they repeatedly encountered over 1 year.
            When the officers examined law enforcement, emergency room and
            other hospital costs, they found that each person cost over
            $100,000 a year.
        Just as the cost-benefit analysis and research has been helpful in
    quantifying the costs associated with chronic homelessness, so too has
    the research been helpful in identifying interventions that are
    effective in ending chronic homelessness. Research shows that permanent
    supportive housing strategies in tandem with multidisciplinary,
    clinically based engagement strategies, and including employment
    counseling and job placement as appropriate, can be successful in
    sustaining tenancies for this population. These models of housing,
    which involve a rich array of supportive services, are effective in
    moving those experiencing chronic homelessness off the streets and out
    of long term shelter stays into sustainable tenancies and toward
    recovery and self sufficiency. That's the basis of the intervention in
    a growing number of cities across the country, including New York, San
    Francisco, Columbus, Ohio and Chattanooga, Tennessee.
        The administration's goal of ending chronic homelessness is based
    on learning from--and acting on--that research. At the inaugural
    meeting of the revitalized Council, the Secretaries of HUD, HHS and VA
    announced an historic joint funding initiative, that now totals $55
    million, as the first infusion of Federal resources targeted
    specifically toward the goal of ending chronic homelessness. More than
    100 applications were received from communities across the country and
    awards were made to 11 community partnerships.
        Along with the Federal funding partners, the Council has continued
    to monitor the results from this investment. To date, the 11 community
    partnerships have successfully housed over 600 persons. Cumulatively,
    the men and women housed under the Collaborative Initiative represent
    over 3,900 years of homelessness ended and tens of millions of dollars
    in ad hoc health care, corrections and other community costs incurred
    during their years of homelessness.
        The administration submitted legislation for fiscal year 2005 for a
    $70 million Samaritan Initiative as a follow-on to the successful
    Collaborative Initiative effort. While it was disappointing that the
    Congress did not enact this legislation, the administration has a new
    proposal in the fiscal year 2006 budget for the Department of Housing
    and Urban Development that would provide up to $200 million for a new
    Samaritan Housing Initiative to provide new housing assistance paired
    with services. This proposal is included in the administration's
    proposed legislation to consolidate HUD's homeless assistance grants
    programs, which would provide grant recipients with greater local
    control, flexibility and streamlined requirements.
        The HUD/HHS/VA Collaborative Initiative described above is just one
    of a number of Federal collaborations that demonstrate the continuing
    and deepening commitment of a wide array of Federal agencies to get the
    job done. HUD and DOL have collaborated in an effort to combine
    employment training with housing assistance in the Ending Chronic
    Homelessness through Employment and Housing Initiative. DOL and the VA
    are collaborating to target homeless veterans. HUD, Labor and the
    Justice Department are partners in the administration's Prisoner Re-
    entry Initiative. Through its Homeless Outreach Projects and Evaluation
    (HOPE), the Social Security Administration has funded 41 new projects
    across the country to increase access to Supplemental Security Income
    and Social Security disability benefits for persons experiencing
    chronic homelessness who are disabled by severe and persistent mental
    illness, HIV, cognitive impairments or co-occurring disorders.
    Receiving these benefits for which they were eligible by virtue of
    their disability has allowed these chronically homeless individuals to
    leave the streets and shelters, have a place to live, obtain medical
    care and move toward greater self sufficiency.
        The additional resources and interagency collaborative efforts are
    evidence of the administration's ongoing commitment to ending chronic
    homelessness and are an important indicator of the Federal Government's
    good faith in the intergovernmental partnerships we are developing with
    cities and States. The administration's strategy is built on the
    recognition that no one Federal agency, no one level of government and
    no one sector of the community can prevent and end homelessness alone.
    That's why the Council is working to establish an expansive range of
    partnerships, public and private, between Federal agencies,
    statehouses, city halls and county executive offices, downtown
    associations, Chambers of Commerce, faith based and community
    organizations, the United Way, YMCAs, providers and advocates and
    homeless people themselves.
        I am pleased to report that our efforts to establish
    intergovernmental partnerships to end chronic homelessness and reduce
    the incidence of all homelessness have been welcomed by Governors,
    Mayors and County Executives across the country who have committed to
    the creation of State Interagency Councils on Homelessness and to 10-
    Year Plans to End Chronic Homelessness.
        Fifty-two Governors of States and territories have acted in
    response to our encouragement to create State interagency councils on
    homelessness. These State interagency councils mirror the work of our
    Council by providing a formal framework for State secretariats and
    agencies to examine resource allocations and ensure better coordination
    of State resources and Federal block grant funding in their States for
    the benefit of homeless people. The creation of these State interagency
    councils builds on the investment by several Federal agencies including
    HUD, HHS, VA and Labor in a series of Policy Academies that have been
    offered to States since 2001 on improving the access of homeless people
    to mainstream resources.
        The Council's regional coordinators and staff have provided
    technical assistance to facilitate the creation of these State
    interagency councils. This technical assistance has included mentoring
    and peer models as well as producing and distributing a Step-by-Step
    Guide to Developing a State Interagency Council on Homelessness. In
    fiscal year 2005 the Council has been holding a series of regional
    colloquies for State policymakers.
        In addition to our work in helping to foster State interagency
    councils on homelessness, the Council recognizes that communities are
    on the frontlines of homelessness and we are working with mayors and
    county executives to develop outcome-oriented 10-year plans to end
    chronic homelessness.
        One hundred ninety-two mayors and county executives across the
    country, including 46 of the largest 50 cities, have heard and
    responded to the call to create these plans. These mayors and county
    executives are working with the Council, with their State officials,
    with their Chambers of Commerce and other downtown associations, with
    their faith based and community organizations, with providers and
    advocates and with homeless people to create business plans that
    quantify the problem, focus resources on permanent solutions that are
    evidence-based, and track the results. With technical assistance from
    the Council, the ``legitimate larceny'' of innovative ideas is seeding
    the best outcome oriented plans from coast to coast. Moreover, through
    these local planning processes, the private sector is being re-engaged.
    New resources from business and philanthropy are being invested in
    these plans. Nowhere is that more tangible than in Atlanta where Mayor
    Shirley Franklin's plan has attracted $16 million from private
    philanthropic giving in the past year and a half.
        This jurisdictionally-based 10-year planning effort has been
    endorsed by the U.S. Conference of Mayors, the National League of
    Cities, the National Association of Counties, the International
    Downtown Association, the United Way, and national homeless advocacy
    groups, all of whom have passed resolutions or offered direct
    assistance in support of the goal of ending chronic homelessness and
    encouraging communities to develop 10-year plans.
        Just this past January, a Covenant of Partnership to End Chronic
    Homelessness, shaped by the Council to assist local plan
    implementation, was adopted during the Hunger and Homelessness Task
    Force meeting of the U.S. Conference of Mayors, led by Nashville Mayor
    Bill Purcell and Cedar Rapids Mayor Paul Pate. Mayors who sign the
    Covenant commit to collaborating with each other on an ongoing basis to
    exchange data to better quantify the number of chronically homeless
    persons, share best practices, try innovative solutions, and track
    their progress. Sixty-two mayors have signed the Covenant, representing
    communities as large as Philadelphia, San Diego and Dallas and as small
    as Henderson, North Carolina (population: 17,000) demonstrating that
    chronic homelessness is not solely an issue in a few urban areas.
        The Council has produced and distributed a guide to facilitate the
    development of these plans, ``The Ten Year Planning Process to End
    Chronic Homelessness in Your Community: Step by Step Guide'' and
    Council staff are providing substantial direct technical assistance to
    communities. We are encouraging the use of the ``Killer Bs'' in the 10
    year planning process--a business plan that is created around a
    management agenda that establishes baselines to quantify the problem,
    benchmarks to remedy and is attentive to budget. For fiscal year 2005
    and 2006, the Council plans to increase the number of jurisdictions
    undertaking, and most importantly, completing and implementing results
    oriented 10-Year Plans to End Chronic Homelessness. Council staff will
    now support not only the creation of such plans, but will also work to
    insure that the implementation is results-oriented.

                       THE CONTINUING WORK OF THE COUNCIL

        In fiscal year 2006, the Council will continue our efforts to end
    the national disgrace of chronic homelessness and to make homeless
    resource investments strategic and results oriented.
        The Council will continue its statutory activities of Federal
    homeless program review, governmental and private programs evaluation,
    information distribution, and provision of technical assistance.
        During the last year, the Council has launched a weekly e-
    newsletter that is being sent to over 7,000 Federal, State and local
    government, and non-profit, business and philanthropic decision makers.
    The e-newsletter provides rapid dissemination of timely information on
    Federal resource competitions, access to the latest Federal research
    and technical assistance reports, the weekly notice of Title V
    McKinney-Vento surplus properties, and information about replicable
    State and local government homeless prevention and intervention
    efforts.
        The Council will continue to foster new collaborative prevention
    and intervention funding opportunities among Federal agencies as well
    as monitor those initiatives already underway to document outcomes and
    identify innovative and best practices.
        The Council will continue to create national partnerships with
    communities and philanthropic organizations as it has with the
    International Downtown Association, the United Way, NAMI, and the
    Rockefeller Foundation.
        The Council will continue working through its regional coordinators
    to bring together the regional representatives of the various Federal
    agencies as Federal Regional Interagency Councils to mirror the work of
    the Federal partners in Washington.
        The Council will continue to strengthen the Federal partnership
    with State and local governments. Our goal is that every State and
    territory will develop a functioning State interagency council on
    homelessness and we are closing in on accomplishing this goal with 52
    governors having already made the commitment. Our goal is to have more
    than 250 cities and counties create and implement 10-Year Plans to end
    chronic homelessness by the end of fiscal year 2006. We will continue
    to seek out the innovative and results oriented strategies and programs
    existing in this country and in other nations to disseminate to States
    and communities.
        In these intergovernmental partnerships, our aim is to ensure
    jurisdictional accountability for outcomes and results in reducing the
    number of people experiencing chronic homelessness on our streets and
    long term in our shelters.
        As is the case with myriad of other issues and problems facing
    States, counties and cities, the responsibility rests with elected and
    appointed jurisdictional CEOs and leaders to provide the planning and
    leadership to overcome the difficulties in partnership with community
    and faith based groups.
        The Council will continue to develop the ICH website, www.ich.gov,
    as the central Federal website on homelessness and will work with
    member agencies to improve navigation to homelessness information on
    their sites. We have recently upgraded our website to include a special
    Innovations section that provides more detailed descriptions of
    innovative ideas and replicable efforts to eliminate homelessness.
    Among the subjects covered are successful innovative partnerships that
    incorporate a broadening base of stakeholders; permanent housing
    strategies; prevention and discharge planning; employment; and health
    care access strategies for homeless people. We also archive the weekly
    e-newsletter on the website.
        The Council will continue to support and monitor research underway
    by Federal agencies and others to ensure that Federal homelessness
    policies and activities are driven by the latest research findings.
        Guided by a management agenda that incorporates a broad spectrum of
    partnerships, cost benefit analysis, outcome measurement data, sharing
    of evidence based practices, performance based investments,
    strengthened prevention, results oriented interventions, and targeted
    resource investments like the Samaritan Initiative, the partnership
    fostered by the Council's activities are providing a blend of Federal,
    State, county, city and private sector resources to accomplish the
    mission.
        Our work together in the Council is to disrupt the status quo of
    homelessness--crisis interventions that are expensive and inefficient
    in reducing and ending chronic homelessness. Through a management
    agenda that prioritizes research, performance and results, and through
    interagency, intergovernmental, and intercommunity partnerships, ending
    chronic homelessness is achievable.

                                     ______

                         U.S. OFFICE OF SPECIAL COUNSEL

           Prepared Statement of Hon. Scott J. Bloch, Special Counsel

        I am pleased to present testimony on behalf of the U.S. Office of
    Special Counsel (OSC) and our fiscal year 2006 budget request. I look
    forward to another productive year working with the U.S. Senate in my
    role as independent guardian of the merit system of civil service by
    protecting Federal employees from unfair workplace discrimination or
    mistreatment, including reprisal for whistleblowing, protecting
    returning service members' jobs, as well as imposing corrective action
    to protect those employees and bringing disciplinary action against
    negligent supervisors.

                                     GOALS

        My goals for the agency are: (1) To continue to strengthen the
    civil service merit system by vigorously enforcing the three statutes
    for which the Office of Special Counsel bears responsibility: the Civil
    Service Reform Act, the Whistleblower Protection Act, and the Hatch
    Act; (2) To provide an intense, more visible level of enforcement of
    the Uniformed Services in Employment and Reemployment Rights Act
    (USERRA).

                  GUIDING PRINCIPLES FOR ACHIEVING THESE GOALS

        My top priorities have been an agency-wide focus on backlog
    reduction, swifter resolution of cases, and raising the visibility and
    enforcement of employee rights. Soon after taking office, I formed a
    Special Projects Unit (SPU) to begin to investigate the reasons for the
    chronic backlog of cases and to find solutions to the problem.
        On May 17, 2005, we announced in a detailed response to the
    Government Accountability Office (GAO) report (GAO 04-36), that we
    reduced the overall Agency backlog by 82 percent, from 1,121 to 201
    cases (in the Intake and Disclosure units) by the end of calendar year
    2004. We have also eliminated our backlog of FOIA requests.
        We were able to do this without sacrificing quality. We gave a full
    and fair resolution to all claims and we were able to provide even more
    justice to complainants. During the backlog resolution project, we
    doubled the historic percentages of internal referrals for Prohibited
    Personnel Practice (PPP) cases. This meant an even higher percentage of
    claims were investigated. For whistleblower disclosures, we nearly
    doubled the number of cases that were referred back to Agency heads or
    Inspectors General for further investigation. We also gave a more
    common sense interpretation of law and enforcement as Congress intended
    it. The credit for this Herculean effort goes to my career staff that
    worked long and hard to meet our goal.
        We will build on this success by continuing to ask for great energy
    and focus of the current staff, and by bringing on new talent that is
    skilled at locating issues and understanding problem solving and keen
    on protecting rights. In all of this, we will be guided by the
    understanding that this is being done so that we can better service the
    merit system and protect whistleblowers. Reaching full authorized
    strength will enable the agency to operate in a way that prevents
    recurrent backlogs.

                            RELEVANT FUNDING FACTORS

        For fiscal year 2006, the OSC requests $15,325,000--an amount equal
    to its net fiscal year 2005 appropriation after rescission--to fund
    approximately 113 full-time employees (FTE) and related non-personnel
    costs.
        The primary purpose for this level of funding is to manage and
    process the agency's steadily increasing workload (since fiscal year
    2000) of PPP complaints, whistleblower disclosures, Hatch Act matters,
    and new USERRA cases, and to further reduce remaining case processing
    backlogs.
        I will discuss several specific areas that highlight the growing
    workload and the need for the agency to operate at its full authorized
    strength of 113 in order to ensure backlogs do not build up again.
      --After a year of analysis of the existing processes and challenges
            of the agency, under my authority in 5 U.S.C.  1211 and
            1212, I announced an Agency reorganization plan consistent with
            OSC's mission, in early January 2005, and utilizing concepts of
            strategic management of human capital. The reorganization was
            needed to ensure no future case backlogs would occur and to
            create internally consistent procedures and case handling. I
            consulted with all the senior management, career staff, as well
            as my immediate staff repeatedly throughout the past year.
      --Besides implementing critical process improvements, this
            reorganization powered down decision-making to the well-
            qualified career staff of OSC. We strengthened the field
            offices by providing SES leadership and additional personnel to
            the existing offices. We created a team concept of cross-
            trained persons in smaller, more agile field offices. We also
            opened a Midwest field office in Detroit as one of many parts
            of the reorganization that will help OSC better meet our
            mission. In addition, we created a Washington, DC field office.
            We are implementing new standard operating procedures that cut
            out needless reviews and meetings and power down decision
            making to those employees in the best position to make
            decisions, including giving attorney's authority to sign
            routine letters. This effort is a large undertaking and can
            only be accomplished with strong SES leadership in the field to
            ensure that these changes actually occur and become the culture
            of OSC.
      --We have implemented a vigorous new training unit that is starting
            to cross-train personnel to work in other areas of the law. In
            the past, the lack of cross-trained personnel was a major
            impediment to attacking backlogs. Without senior leadership in
            the field offices, the new standard operating procedures and
            cross-training would have little chance of success.
      --A new customer service unit is being created to better serve the
            public and Federal employees. Having specific personnel
            assigned for this purpose will help OSC gain a reputation for
            better customer service within the Federal workforce.
      --The Special Projects Unit will continue to handle the ``silent''
            backlogs in the Investigation and Prosecution (IPD) Division,
            help prevent recurrent backlogs in other Units, and consider
            new methods for increasing the efficiency and effectiveness of
            all other aspects of the OSC. Several of the most experienced
            OSC attorneys will be assigned to the unit, as needed, to help
            with these issues. This includes a careful look at the agency's
            methods of electronic filing.
      --Increased use of Alternative Dispute Resolution (ADR) will ensure a
            continued rate of success with resolving matters through
            mediation, which benefits employees and agencies and saves
            resources.
      --Increased cost factors.--During fiscal year 2006, OSC anticipates
            incurring several continuing unfunded mandates: the new USERRA
            demonstration project, increased benefit costs (transit subsidy
            increases), new requirements for financial statements and
            audits, significant increase in costs under an interagency
            agreement for receipt of administrative services. Salaries and
            benefits make up approximately 84 percent of OSC's operating
            expenses, so the agency has little ability to reprogram funds
            when salaries and benefits for authorized FTE exceed
            appropriations. While these types of costs may be easily
            absorbed by most agencies' budgets that dwarf OSC's, these
            types of expenses can materially affect a small agency's
            ability to achieving goals and core missions.
      --Process automation.--To be successful in meeting our goals of
            vigorously enforcing the statutes for which we are responsible,
            with the least possible headcount, we are moving to further
            automate several steps within our processes. These steps bear
            costs in equipment and development resources and significantly
            contribute to efficiency, and accomplishing our goals.
      --Enforcement litigation.--The increased amount of litigation
            necessary to strongly enforce adherence to the statutes also
            has a cost in terms of employee resources.
      --Outreach.--Outreach to other Federal agencies is critical to the
            mission of OSC. Success in outreach obviously generates a
            greater numbers of complaints, whistleblower disclosures,
            allegations and requests for assistance than in previous years.
            I believe our excellent professional staff will rise to the
            occasion, but agency resources must continually be redirected
            towards important outreach activities at other agencies.

                                 UNITS' SUCCESS

        Complaints Examining Unit (CEU).--The CEU or intake unit, is the
    foundation of OSC. It is responsible for screening approximately 1,700
    PPP cases per year. The cases that have merit and within OSC's
    jurisdiction are referred to the Investigation and Prosecution Division
    (IPD). The cases without merit on their face or not within OSC's
    jurisdiction are closed. It is the largest undertaking of the agency
    and is where it all begins.
        The CEU is a very well organized and efficient unit. The unit has a
    good mix of personnel between the lawyers and the human resource (HR)
    specialists. The lawyers bring analytical skills and the HR specialists
    bring their expertise in Federal human resources regulations.
        In fiscal year 2004, OSC received 1,964 new PPP cases compared to
    1,791 in fiscal year 2003. We processed 21 percent more in fiscal year
    2004--2,093 complaints processed in fiscal year 2004, compared to only
    1,732 in fiscal year 2003.
        Disclosure Unit (DU).--This Unit had severe backlog issues, and
    with hundreds of cases sitting in backlog, sometimes for years, justice
    was not being given to Federal whistleblowers. Although we processed
    hundreds of disclosures in 2004, a majority of these were slated for
    closure by my predecessor as low priority cases as far as severity of
    potential harm and as probable closures that resulted in our giving
    them a second look and, in some cases, taking a closure and turning it
    into a referral to agencies. Many of these cases had languished in the
    Agency for several years, and were the focus of the initial backlog
    resolution efforts. Even so, we nearly doubled the number of referrals
    during the same time.
        During fiscal year 2004, the Disclosure Unit received a 7 percent
    increase of disclosures over those received in fiscal year 2003. Many
    of these disclosures deal with national security issues (some involving
    complex and sensitive classified material) that have required the work
    of more than one DU staff attorney.
        Management of the DU backlog remains a pressing concern for OSC,
    which has implemented several measures to improve upon its timeliness
    in processing whistleblower disclosures. For example, the Disclosure
    Unit has implemented a priority system for matters received; those
    priorities are tracked using the agency's automated case tracking
    system; employees have been detailed to Disclosure Unit work; one
    additional FTE was placed in the unit during fiscal year 2004 and two
    FTE have been added to the unit in fiscal year 2005; and, most
    importantly, the Special Project Unit spent nearly 2 months directly
    assisting the Disclosure Unit by working cases.
        USERRA Investigations and Prosecutions.--Service members that
    believe that their Uniformed Services in Employment and Reemployment
    Rights Act (USERRA) rights have been violated can now come directly to
    OSC with their complaints. Before the new law (Public Law 108-454),
    members had to go through Department of Labor's investigative process
    and only after months and even years were then given the option to seek
    OSC's involvement. Under a 3-year pilot project, OSC will be
    responsible for investigating half of all Federal USERRA claims made.
    Partial funding for this will be reimbursed to OSC from DOL. The
    remainder is unfunded and the agency will have to absorb the costs.
    This function may require a higher number of staff focused on USERRA
    cases. OSC has filed two prosecutions before MSPB, the first-ever
    USERRA prosecutions in USERRA's history at OSC and successfully
    resolved those cases. OSC is aggressively pursuing the rights of
    returning service members in this historic time of mobilization and
    demobilization of Guard and Reserve units.
        Hatch Act Unit.--In the past, Hatch Act complaints were in backlog,
    and investigations would take up to 3 years, during which candidates
    could already have assumed or left office. In one case, the subject
    died. Our Hatch Act Unit has reduced backlogs of older cases to a very
    manageable level, provided a record number of advisory opinions--some
    600 more than the prior year, done extensive outreach during an
    election year and been a model of non partisan enforcement. Truly this
    unit has embodied principles of good government and deterred coercion
    and illegality at a time of harsh partisan rhetoric in the country.
        In fiscal year 2004, the Unit experienced a 26 percent increase in
    Hatch Act complaints over the number of complaints received in fiscal
    year 2003. Likewise, there has been a corresponding increase in the
    number of alleged Hatch Act violations referred for field
    investigation.
        Thirty corrective actions were taken by agencies as the result of
    warning letters from OSC. The Hatch Act Unit also generated lengthy
    MSPB litigation activity, and seven disciplinary actions complaints
    were filed by OSC in fiscal year 2004.
        FOIA.--Freedom of Information Act (FOIA) processing,
    investigations, and enforcements are also increasing, with a
    corresponding increase in the labor required to handle them. OSC has
    eliminated a backlog of over 100 requests that were pending in the
    agency for too long.

                                    SUMMARY

        OSC stands in a good position already in fiscal year 2005--with
    greatly reduced backlogs but with a critical need to fill the remainder
    of its vacancies. With requested funding, the Agency will be able to
    meet the challenge of ever increasing case numbers, prevention of
    recurrent backlogs, and meeting new mandates such as the USERRA pilot
    program.
        OSC requests $15,325,000 for fiscal year 2006, the same as its
    fiscal year 2005 appropriation. With this funding, OSC will manage and
    process the agency's steadily increasing workload. The items below
    highlight the areas in which this funding will be used:
      --1. Increased costs for salaries and benefits;
      --2. Staffing up to 113 FTE, with focus on adding critically needed
            clerical staff, replacing retired investigators, adding
            attorneys where needed, and freeing up resources to handle
            disclosure cases and USERRA enforcement cases;
      --3. A document management system;
      --4. Progress on several other information technology initiatives to
            comply with requirements for increased security and e-
            government (described above);
      --5. Increased cost to investigate and prosecute a larger share of
            USERRA cases. A new law, Veterans Benefits Improvement Act of
            2004 (Public Law 108-454), provides for a 3-year demonstration
            project that authorizes OSC to investigate about half of the
            Federal sector USERRA claims. This project began in February
            2005.
        The Office of Special Counsel exists to ensure good government.
    When people behave in ways that do not promote good government, or
    jeopardize safety and health in the Nation, we must take corrective and
    disciplinary action. We exist to promote good, efficient, fair
    government, and integrity for the Nation among the Federal workforce.
    The fiscal year 2006 budget request will enable OSC to reach its
    mission to promote good government in an expeditious way.
        Thank you for your interest in the Office of Special Counsel.
                                     ______

                 NATIONAL HIGHWAY TRAFFIC SAFETY ADMINISTRATION

     Prepared Statement of Honorable Jeffrey W. Runge, M.D., Administrator

        Mr. Chairman, I welcome this opportunity to testify about the
    Nation's highway and motor vehicle safety priorities, and to present
    the National Highway Traffic Safety Administration's (NHTSA) budget
    request for fiscal year 2006. The President has made his top priority
    the safety and security of the American people. Likewise, Secretary
    Mineta has made transportation safety his top priority in our
    Department. We at NHTSA have a constant sense of urgency to reduce
    fatalities and injuries on our Nation's streets and highways, and we
    appreciate the support you and your staff give our Agency to help us
    attack these problems.
         Highway safety continues to be a major public health problem in
    the United States. Motor vehicle crashes account for 95 percent of U.S.
    transportation deaths and 99 percent of the transportation injuries.
    Even with the progress that has been made, motor vehicle crashes
    continue to be the leading cause of death for every age from 3 through
    33 years old. I want to report to you on the status of traffic safety,
    and describe the progress being made, as well as the challenges ahead.
    I will also lay out NHTSA's priorities for fiscal year 2006, and
    discuss the resources we need to address these challenges.
        We have seen tremendous progress in several areas this past year,
    but many challenges remain. In 2003, the last year for which we have
    complete data, the traffic fatality rate declined slightly to 1.48
    deaths per 100 million miles of vehicle travel (VMT). In June 2004,
    safety belt usage reached 80 percent, an unprecedented high.
    Nonetheless, the number of Americans killed is still unacceptable. In
    2003, 42,643 people were killed in motor vehicle crashes.
        The Secretary has mandated an ambitious Department-wide goal--to
    reduce the traffic fatality rate to no more than 1.0 fatality per 100
    million VMT by the end of 2008. Due in large part to increasing safety
    belt usage, we are making steady progress towards that goal. We must
    also focus on the problem areas that are driving up fatalities and
    represent major impediments to forcing the fatality rate down--alcohol
    impairment, vehicle rollover, motorcycle crashes and vehicle
    compatibility. If we fail to drive down the overall fatality rate, we
    will have 48,000 deaths a year by the end of this decade due to the
    increase in vehicle miles traveled. Simply put, we cannot be satisfied
    with our current progress.
        Traffic crashes produce harsh economic consequences for the Nation.
    The cost to the economy in 2000 was $230.6 billion, or 2.3 percent of
    U.S. gross domestic product. The economic cost included $32.6 billion
    in medical expenses, over $50 billion related to impaired driving, and
    $20 billion (in 2003) for failure to wear safety belts. Only 25 percent
    of overall crash costs were paid by those involved in the crash.
        To address this enormous public health issue, NHTSA is requesting
    $696.3 million for fiscal year 2006 to fund a balanced program of
    vehicle and human factors safety. NHTSA's work on our top five
    priorities--Safety Belts; Impaired Driving; Vehicle Rollover; Vehicle
    Compatibility; and Traffic Records and Data Improvements--will continue
    in fiscal year 2006. The fiscal year 2006 budget is consistent with the
    administration's reauthorization proposal, the Safe, Accountable,
    Flexible and Efficient Transportation Equity Act (SAFETEA).
    Furthermore, the budget is performance-based; our programs and funding
    are linked to clear, measurable safety goals. NHTSA's budget reflects
    our program priorities, and funds the countermeasures that will have
    the greatest yield in lives saved and injuries prevented.
        Mr. Chairman, the balance of my statement describes the initiatives
    planned for all NHTSA programs in fiscal year 2006, including the
    strategies we will implement in each of the priority areas.

                      SAFETY BELT AND CHILD RESTRAINT USE

        The fiscal year 2006 budget proposal for occupant protection is
    $11.774 million. The effectiveness of occupant restraints is well
    established. Wearing a safety belt cuts the risk of death in a crash
    almost in half. Our program for fiscal year 2006 continues support for
    evidence-based strategies to achieve higher safety belt and child
    safety seat usage.
        The reason for our continued progress is clear. Click It or Ticket,
    NHTSA's priority safety belt campaign, is reaching new levels of
    national implementation. Click It or Ticket is not public education
    ``in a vacuum.'' Our data show that non-users are unlikely to respond
    to public education alone, but will respond if they perceive a
    likelihood of a traffic citation. Click It or Ticket is built around
    high visibility law enforcement activity combined with public
    awareness. Awareness surveys show very high market penetration, due to
    the use of paid advertising and earned news media during a nationally
    coordinated mobilization period. In 2004, 47 States followed the Click
    It or Ticket model, with law enforcement officers writing citations to
    those not buckled up during a 2-week period beginning May 24 and ending
    on June 6. In addition, using funds provided by the Congress, NHTSA
    purchased $10 million of national advertising to supplement State
    purchases made with Section 157 funds, for a total of about $20 million
    in enforcement-related advertising during the mobilization period.
        As a result, observed front safety belt use in passenger vehicles
    increased in 35 States compared with the same period in 2003. Four of
    these States (AZ, HI, MI, and NV) reduced non-use more than 30 percent.
    NHTSA estimates that the 2004 belt use increase will save about $900
    million annually if the gains can be sustained.
        NHTSA and our public/private partners will continue to support the
    national Click It or Ticket campaign. In 2005, 47 States qualified for
    grants to fund their Click It or Ticket campaigns. For the third year,
    Congress appropriated funds for NHTSA to purchase national advertising
    to support State and local enforcement campaigns. In addition, the 2005
    Appropriations Act provided the Agency authority to distribute Section
    157 innovative grants before awarding the incentive grants, thus
    providing States with funding for the May enforcement mobilization. We
    appreciate the flexibility granted by Congress to ensure funding for
    the mobilization.
        Our data shows that a State's enforcement success is strongly
    related to the presence of a primary safety belt law. As of April 2005,
    21 States have primary belt laws, which allow police to cite occupants
    solely for failing to buckle up. The remaining States (except New
    Hampshire which continues to have no adult law) have secondary laws,
    which allow belt law citations only if police stop motorists for
    another traffic infraction. States with primary laws can expect use
    rates 11 percentage points higher than those with secondary laws.
    Nearly every State that has achieved greater than 85 percent belt use
    has had the benefit of a primary law. Therefore, the continuing success
    of driving use rates upward is dependent on the enactment of more
    primary safety belt laws. We have thus revised our safety belt goal to
    reflect this reality, basing the goal on the proportion of the
    population covered by primary belt laws (based on VMT). For 2006, we
    have refined our forecasting model and set our goal at 82 percent.
        If all States enacted primary laws, NHTSA estimates about 1,200
    additional lives would be saved annually. To further this goal, the
    administration has proposed incentive grants, including a grant program
    offering States substantial benefits for enactment of primary laws or
    achieving usage rates of 90 percent. States receiving these incentives
    would have significant flexibility to apply the funds to any highway
    safety purpose, including infrastructure projects, according to their
    needs as defined within their Strategic Highway Safety Plan. If the
    United States were to achieve 90 percent belt use (which is commonplace
    in other industrialized nations), about 2,700 additional lives would be
    saved each year. A 90 percent rate for the United States is entirely
    possible, although unlikely to occur without most States adopting
    primary belt laws. In 2004, seven States and Territories achieved rates
    of greater than 90 percent (AZ, HI, WA, OR, MI, CA, and PR).
        The occupant protection program also includes demonstrations of new
    approaches for increasing belt use among high-risk, low-use groups,
    such as pickup truck drivers, rural residents, teens and other high-
    risk populations. NHTSA will use the results of these demonstrations to
    create and refine strategies, programs and materials for use across the
    Nation. Working with many others in the automotive and safety
    communities, NHTSA has been successful in maintaining high rates of
    child restraint use among infants and toddlers. The 2004 National
    Occupant Protection Use Survey (NOPUS) reported 98 percent restraint
    use for infants (under 12 months), 93 percent for toddlers (1-3 years),
    and 73 percent for children ages 4-7. The Agency's child restraint goal
    has been expanded to include children through age 7, and the target for
    2006 is 92 percent restraint use.
        Unfortunately, the 2004 NOPUS survey indicates a decrease in
    restraint use among 4-7 year olds from 83 percent in 2002 to 73 percent
    in 2004, underscoring the need for continued attention to programs to
    increase booster seat use. The Agency plans a range of activities to
    address restraint use by the 4-7 age group, including consumer
    awareness of booster seat benefits, evaluation of booster seat laws,
    and a study of booster seat effectiveness. These activities support the
    goal stated in the Transportation Recall Enhancement, Accountability,
    and Documentation (TREAD) Act to reduce deaths and injuries by 25
    percent among 4- to 8-year-olds by 2006.

                                IMPAIRED DRIVING

        The fiscal year 2006 budget proposal for impaired driving is
    $11.617 million. The number of alcohol-related fatalities has generally
    held steady over the past decade. Demographic changes since the early
    1990's, specifically a greater proportion of the overall population in
    age groups most at risk for alcohol-related crashes, have been a major
    challenge to progress. Fortunately, alcohol-related fatalities dropped
    significantly in 2003, the first such decline since 1999.
        NHTSA is implementing a strategic plan to address the national
    impaired driving problem. The plan, developed by the Integrated Project
    Team (IPT) in 2003, is based on analysis of alcohol-related fatalities,
    information regarding program effectiveness, and input from a range of
    national impaired driving experts. The plan calls for a comprehensive
    approach to the problem, including public education, law enforcement,
    adjudication, legislation, as well as vehicle and roadway based
    technologies. In 2005 and 2006, NHTSA is focusing efforts on three key
    areas described in the IPT Report. One of these priorities, highly
    visible driving while impaired (DWI) law enforcement, will support
    State efforts to conduct such enforcement on a regular basis and secure
    law enforcement participation in a coordinated national enforcement
    mobilization crackdown, under the current theme of You Drink & Drive.
    You Lose. This effort is aimed toward encouraging people to make the
    choice to designate a sober driver.
        The second priority area is to enhance State and local DWI
    prosecution and adjudication. Those who have not complied with the
    social norm of sober driving or responded to highly visible
    enforcement, require attention by the courts. NHTSA is facilitating the
    use of designated Traffic Safety Resource Prosecutors, who provide
    technical assistance to new and/or less experienced prosecutors in
    prosecuting DWI cases. To date, we have 38 Traffic Safety Resource
    Prosecutors and NHTSA will expand these efforts in 2006. The Agency
    will also continue to promote and facilitate widespread adoption of DWI
    Courts for repeat offenders. DWI Courts follow the Drug Court treatment
    model, using offender assessments to identify appropriate sentencing
    and treatment, and enhanced supervision and monitoring to reduce
    recidivism. We now have 177 DWI courts nationwide. In addition, we are
    continuing a pilot program utilizing Judicial Outreach Liaisons to
    improve linkages between judges and State traffic safety professionals.
    We have three Judicial Outreach Liaisons serving three Regions
    throughout the country and will expand this effort to two other regions
    this year. Finally, NHTSA will continue efforts to offer training and
    education to judges on the seriousness of DWI cases and DWI sentencing.
        NHTSA is working with health care professionals across the Nation
    to implement the third impaired driving priority, medical screening and
    brief intervention for alcohol abuse problems. NHTSA encourages
    physicians, nurses, and other health care professionals across the
    country to practice screening and brief intervention in order to
    identify problem drinkers and direct them to appropriate treatment
    before they cause a traffic injury or death.
        NHTSA conducted the second nationwide You Drink and Drive. You
    Lose. crackdown in August and September of 2004. This campaign included
    almost $25 million of combined Federal and State paid media. Congress
    provided $14 million in funding for NHTSA to purchase advertising to
    support the crackdown. NHTSA spent $9 million on airing a national
    advertisement and $5 million on additional purchases in 13 Strategic
    Evaluation States (SES). These States, all of which have high alcohol-
    related fatality numbers or rates, receive special assistance with
    program design, evaluation, and media support for the You Drink &
    Drive. You Lose. law enforcement crackdowns. The success of this
    campaign was evident in the data from 2003. Twelve of the 13 SES States
    had a decrease in alcohol-related fatalities, accounting for 75 percent
    of the total reduction in alcohol-related fatalities that year.
        NHTSA's evaluations have shown that the use of paid advertisements
    is clearly effective in raising awareness of the You Drink and Drive.
    You Lose. impaired driving crackdown. Over 30 percent of drivers saw
    the advertisement and over 50 percent heard or saw the You Drink and
    Drive. You Lose. slogan during the 2003 crackdown. The advertising was
    targeted at age 18-34 males, and our surveys showed higher awareness in
    this target group than in any other age group, and even higher than
    among age 18-34 females.
        NHTSA has expanded the SES program to include 15 States, from the
    13 addressed in 2004. They will continue to be the focus for the 2005
    and 2006 crackdowns scheduled for Labor Day holiday periods. NHTSA is
    supporting the Labor Day 2005 You Drink & Drive. You Lose. law
    enforcement crackdown through the use of $14 million in national paid
    media appropriated by this committee. The message and media buy will
    focus on those who are at highest risk, the 18- to 34-year-old males.
        A component of our revised Section 402 grant program would focus
    significant resources on a small number of States with particularly
    severe impaired driving problems by creating a new $50-million-a-year
    impaired driving discretionary grant program. The grant program would
    include support for up to 10 States with an especially high number of
    alcohol-related fatalities and a high rate of alcohol-related
    fatalities relative to vehicle miles traveled and population. A team of
    outside experts would conduct detailed reviews of the impaired driving
    systems of these States to assist them in developing a strategic plan
    for improving programs and reducing impaired driving-related fatalities
    and injuries. Additional support would be provided for training, for
    technical assistance in the prosecution and adjudication of driving
    while intoxicated (DWI) cases, and to help licensing and criminal
    justice authorities close legal loopholes.
        NHTSA believes that this targeted State grant program and
    supporting activities, together with continued nationwide use of high-
    visibility enforcement and paid and earned media campaigns, would lead
    to a continuation of the downward trend in alcohol-related fatalities.
    Also, through the comprehensive safety planning process, all States
    could elect to use a significant amount of their FHWA Highway Safety
    Infrastructure funding, in addition to their consolidated highway
    safety program funds, to address impaired driving.
        NHTSA is continuing the demonstration of a comprehensive statewide
    repeat offender tracking system. This data system will facilitate
    tracking by allowing immediate transfer and access of information among
    relevant State agencies, including law enforcement, the court system,
    and the motor vehicle departments. Four States (Alabama, Iowa,
    Nebraska, and Wisconsin) began implementing such systems in 2002. One
    additional State, Connecticut, began implementation in 2004.
        The Agency will continue demonstration projects to develop
    innovative strategies for reaching high-risk and hard-to-reach
    populations, especially Hispanics and 21- to 34-year-old males.
    Approaches such as responsible serving practices, behavior modification
    through social norming, and safe ride programs will be evaluated in a
    range of environments.

                                    SPEEDING

        The fiscal year 2006 budget request for the Enforcement and Justice
    Services program is $2.2 million. Of this amount, $500,000 will be
    allocated to speed management. In addition, $300,000, included in the
    highway safety research budget, will be spent on speeding-related
    issues. Over the past several years, NHTSA has focused significant
    resources and attention on addressing the two leading factors in motor
    vehicle fatalities and injuries--lack of occupant protection usage and
    impaired driving. We are now increasing our focus on the third major
    factor in crash-related fatalities and injuries--speeding. Speeding
    continues to be cited as a factor in approximately one-third of all
    crash-related fatalities and is estimated to extract over $40 billion
    in societal costs annually. Data analysis tells us that the major
    safety problem with speeding-related crashes does not occur on
    interstate highways, but on local roadways and collector roads.
        The Department has an interdisciplinary Speed Management Team,
    comprised of members representing NHTSA, FHWA and FMCSA. The
    Administrators of the three sponsoring agencies directed the Team to
    develop specific objectives for addressing speed management. The focus
    of these efforts will be a multi-disciplinary approach addressing
    engineering, enforcement, and education. The Agency will work with
    communities to establish a process to set appropriate speed limits,
    advertise that those limits will be strictly enforced, and enforce
    them. This process will include assessing factors such as travel
    speeds, public attitudes, driver behavior, roadway characteristics,
    enforcement strategies, court sanctions, vehicle technologies, and
    speed zoning. The Agency will also provide technical assistance and
    guidance to States in ensuring that speed enforcement technology meets
    stringent performance standards and operational policies. Additionally,
    the three agencies are co-sponsoring a National Forum on Speeding in
    June 2005 to identify gaps in the data, needed research, and effective
    State strategies to reduce speeding.

                               MOTORCYCLE SAFETY

       The budget request for fiscal year 2006 is $679,000. Even as NHTSA
    makes progress in reducing fatalities and injuries in passenger cars
    and light trucks, due in part to increased safety belt usage, there has
    been a rise in motorcyclist deaths each year since 1997. Our program is
    guided by recommendations contained in the National Agenda for
    Motorcycle Safety and our Agency action plan, and focuses
    countermeasure efforts on impaired riding, training, and licensure.
    NHTSA will continue to work with national motorcyclist organizations
    and the motorcycle industry to implement the recommendations in the
    National Agenda. In May, the Agency will host the first quarterly
    meeting with national motorcycle leaders and manufacturers to join
    together in a coordinated effort to improve motorcycle safety. NHTSA
    has also convened an agency-wide working group to focus on approaches
    to reduce motorcycle crashes, fatalities and injuries, update the
    Agency's action plan, and identify future research and data needs.
        Critical research initiated in fiscal year 2005 will continue in
    fiscal year 2006. We are undertaking a pilot study on motorcycle crash
    causation to test the methodology for conducting a more in-depth study
    of motorcycle crashes. Our research office is also initiating a study
    to examine rider impairment at different BAC levels given that alcohol
    impaired riding remains a major problem. This initiative may shed light
    on potential strategies for addressing the problem.
        Despite our efforts, the Agency faces a daunting task to reduce
    motorcycle crash fatalities and injuries in the face of continuing
    State actions to repeal motorcycle helmet laws. Riders who fail to wear
    approved helmets are 40 percent more likely to suffer a fatal head
    injury in a crash and three times more likely to suffer a brain injury
    than those wearing a helmet. Since 1997, six States have repealed their
    universal motorcycle helmet laws that cover riders of all ages (TX, AR,
    KY, LA, FL, and PA); many of these include a provision that a rider
    must carry at least $10,000 health insurance. Observed helmet use in
    these jurisdictions dropped from near 100 percent compliance to the 50
    percent range within a few short months. In each of these States,
    motorcycle fatality and injury rates increased by far more that the
    national average. Since 1997, motorcyclist fatalities have increased 73
    percent to 3,270 in 2003. According to our projections for 2004,
    motorcycle fatalities will account for over 9 percent of the U.S.
    total, increasing from 5 percent in 1997. Motorcyclists over the age of
    40 have accounted for the largest increase.

                           EMERGENCY MEDICAL SERVICES

        NHTSA has been a leader in EMS for over 40 years. NHTSA's
    involvement with EMS System development stems from recommendations made
    by the President's Committee on Highway Safety in 1960 and again by the
    National Academies in 1966, and the Highway Safety Act of 1966. For
    nearly four decades, NHTSA has fostered collaboration and consensus
    with an array of Federal and non-Federal partners. NHTSA has taken a
    broad approach in supporting EMS system development, to address the
    needs of all patients during an emergency--highway crashes, heart
    attacks, natural or man-made disasters and others. NHTSA has
    consistently demonstrated its national EMS leadership role including
    the: development of national training standards and training for all
    levels of EMS providers, from bystanders to paramedics; implementation
    of Wireless Enhanced 9-1-1; and a national EMS data base (National EMS
    Information System--NEMSIS).
         The fiscal year 2006 budget request, in the amount of $2.305
    million, will support State Emergency Medical Services (EMS) through
    the development of a voluntary national EMS Scope of Practice Model and
    national EMS Education standards, initial development of a National EMS
    Information System (NEMSIS) including a national EMS database to be
    housed at NHTSA, and facilitation of nationwide adoption of wireless
    Enhanced 9-1-1 (E9-1-1) deployment. The fiscal year 2006 Highway
    Traffic Safety grants budget proposes $10 million in EMS grants to
    State EMS offices to improve comprehensive EMS systems performance and
    improved care for EMS patients, implementation of EMS data collection,
    and improved access to wireless E9-1-1. The provision of prompt, high
    quality emergency medical care to persons injured in motor vehicle
    crashes is a critical injury control component resulting in a reduction
    of motor vehicle fatalities and in lessening of injury complications.
    Since the early 1970's, NHTSA has played a prominent role in improving
    the Nation's emergency medical services system including the
    development of national standards for the education of Emergency
    Medical Technicians. The consensus-based EMS Agenda for the Future,
    developed and being implemented by NHTSA, is guiding the EMS
    development efforts of Federal, State and local agencies and national
    organizations.
        Wireless E9-1-1 will improve system performance in caring for
    injured and ill patients, including faster, more precise EMS response
    to vehicle crash victims. Nationwide implementation of a modern
    wireless E9-1-1 system will help provide more coordinated incident
    management, improve the timely sharing of essential public safety
    information among all responding agencies, and contribute substantially
    to the reduction of non-recurring traffic congestion. The national 9-1-
    1 Implementation Coordination Office, required by the ENHANCE 9-1-1 Act
    of 2004, will be housed at the NHTSA EMS Division.
        Finally, SAFETEA establishes a new $10 million-a-year State formula
    grant program to support EMS systems development, including 9-1-1
    nationwide, and provides for a Federal Interagency Committee on EMS to
    strengthen intergovernmental coordination of EMS with NHTSA. The States
    would administer the grant program through their State EMS offices and
    coordinate it with their highway safety offices. This grant program
    would result in comprehensive support for EMS systems, and improved
    emergency response capacity nationwide.

                         HIGHWAY TRAFFIC SAFETY GRANTS

        The fiscal year 2006 budget request of $465 million reflects the
    administration's reauthorization proposal to streamline the highway
    safety grant program by collapsing the eight grant programs
    administered under TEA21 into four programs. The focus is to ease the
    administrative burden on States and provide maximum flexibility for
    States to use the funds according to each State's unique safety program
    requirements. In addition to providing States with great flexibility in
    the use of highway safety grant programs, the proposal emphasizes
    accountability. Beyond the basic formula grants, which would remain
    intact, the administration's fiscal year 2006 budget reflects the
    proposal to tie additional grants to each States' safety performance
    such as increasing safety belt use; reducing overall fatality rates;
    and reducing alcohol-related fatality rates. The proposal also provides
    financial incentives to States to allocate their highway safety
    resources based on the development of a multi-disciplinary,
    comprehensive highway safety plan.

                           VEHICLE SAFETY PRIORITIES

        The Agency's vehicle safety efforts in fiscal year 2006 will be
    guided by the NHTSA Vehicle Safety Rulemaking and Supporting Research
    Plan, 2005-2009, January 2005 Update, which was delivered to Congress
    and posted on the NHTSA website in April, 2005. The Plan identifies the
    research and rulemaking actions that offer the greatest potential for
    saving lives and preventing injury. In the vehicle safety area,
    rollover and vehicle compatibility continue to be our top priorities.
    Other vehicle safety priorities include preventing crashes through
    advanced technologies, making large trucks safer, ensuring the safety
    of hydrogen, fuel cell, and alternative-fueled vehicles, improving
    child protection, and revising crash tests used for rating vehicles in
    our New Car Assessment Program. The initiatives in the plan were
    defined through extensive discussions within the Agency, taking into
    account the views we have heard via public meetings and comments
    submitted to the Agency on rulemaking notices and Requests for Comment.
    We will conduct an annual assessment of the plan. In addition, we
    review all of the Federal Motor Vehicle Safety Standards (FMVSS) on a
    7-year cycle.

                                VEHICLE ROLLOVER

        Rollover crashes are especially lethal; although they comprise only
    2 percent of crashes, they accounted for almost one-third of passenger
    vehicle occupant fatalities (including 59 percent of SUV fatalities) in
    2003. Since light trucks account for an increasing portion of total
    light vehicle sales, deaths and injuries in rollover crashes will
    become a greater safety problem unless something changes.
        Since 2001, NHTSA has provided rollover propensity information on
    light vehicles to the public, through our New Car Assessment Program,
    based on the vehicle's static stability factor (SSF). In October, 2003
    a dynamic rollover test was added and we began providing a combined
    rating. We believe this combined rollover rating provides the American
    public important safety information when choosing a new vehicle and
    will continue to influence manufacturers to design vehicles that have
    increased rollover resistance. In fact, since 2001 when the SSF ratings
    were first used, we have seen vehicle designs that are more rollover
    resistant. In 2003, 10,376 passenger vehicle occupants died in the
    United States in rollover crashes, down 3.3 percent from 10,729 in
    2002.
        New efforts at rollover prevention include investigation of
    Electronic Stability Control (ESC) devices that are now being
    introduced into vehicles, for prevention of single vehicle off road
    crashes that can result in rollover. A recent NHTSA study has shown
    this technology to have the potential to significantly reduce single
    vehicle run off the road crashes. Research is currently underway and a
    rulemaking decision on ESC is planned for 2005.
        We estimate there are 225 fatalities and 800 serious head injuries
    annually resulting from roof intrusion during rollovers. NHTSA will
    issue a Notice of Proposed Rulemaking to upgrade the roof crush
    standard in 2005. In 2003, 8,582 occupants died when they were ejected
    from passenger vehicles and 70 percent of these occurred during
    rollovers. Occupants stand a much better chance of surviving a crash if
    they are not ejected from their vehicles. The upgrade to FMVSS No. 214
    for side impact protection is expected to result in the fleet-wide
    installation of side curtain air bags, and represents the first phase
    of a three-phase approach the Agency is taking to reduce side window
    ejections. Under the second phase of ejection prevention, we are
    conducting research and investigating performance requirements for
    occupant containment for side windows. In the third phase, performance
    requirements for rollover sensors will be investigated, to ensure that
    the air bags will deploy in a rollover crash.
        The first step to improving safety in rollovers is one that
    requires no changes to vehicles, the use of a safety belt. Most people
    killed in rollovers are totally or partially ejected from the vehicle.
    Safety belts can prevent nearly all of these ejections.

                             VEHICLE COMPATIBILITY

        The vehicle fleet has changed dramatically in the last 20 years,
    and these changes have given rise to an unprecedented problem relating
    to vehicle mismatch in vehicle-to-vehicle crashes. The rising
    popularity of light trucks, vans, and SUVs has made the problem
    substantially more complex. In the last decade, for the first time,
    more vehicle occupants are being killed in crashes between passenger
    cars and light trucks than in crashes involving only passenger cars. In
    front-to-front or side crashes, where the light truck or van (LTV)
    strikes the passenger car, passenger car occupants are 3.3 times more
    likely to die than LTV occupants. While LTVs account for 37 percent of
    all registered vehicles, they are involved in approximately half of all
    fatal two-vehicle crashes involving passenger cars. In these
    collisions, nearly 80 percent of the fatalities are passenger car
    occupants. We need to address this problem now since LTVs constitute
    half of all new vehicle sales.
        Reducing the hazards associated with vehicle incompatibility is one
    of NHTSA's top priorities. An IPT Report on Vehicle Compatibility was
    published in the Federal Register (68 FR 36534, Department of
    Transportation docket No. NHTSA-2003-14622). The Compatibility IPT made
    wide-ranging recommendations on ways to mitigate the compatibility
    problem, including several vehicle, behavioral, and roadway strategies
    (on which the Federal Highway Administration [FHWA] has the lead).
    Vehicle strategies include partner protection and self-protection. In
    addition, under the 1998 Global Agreement Program of Work, as well as
    under bilateral agreements with Canada, the European Commission and
    Japan, NHTSA is participating in an exchange of ideas on best
    regulatory approaches, including the possibility of conducting joint
    research and testing in support of potential solutions to vehicle
    incompatibility.
        A key action in self-protection is the upgrade of FMVSS No. 214 to
    improve side impact protection. We published a NPRM in May 2004 and we
    plan to issue a final rule by 2006. NHTSA estimates that the proposed
    upgrade, which adds a new pole test to reflect real world collisions in
    which head injuries are prevalent, will save about 700 to 1,000 lives
    per year. To improve partner protection, NHTSA is conducting research
    in 2005 and 2006 to determine good measures of vehicle aggressivity,
    with a regulatory decision in 2007.
        Several manufacturers have joined with the Insurance Institute for
    Highway Safety to form a technical working group to address this
    problem. They recently published their plan, which includes the
    voluntary addition of side air bags and the promise for improved
    geometric alignment and passenger car safety. We welcome the industry
    efforts to address vehicle compatibility and their recent voluntary
    commitments.

                          CRASH AVOIDANCE INITIATIVES

        The NHTSA Vehicle Safety Rulemaking and Supporting Research Plan,
    2005-2009, recognizes that the most significant vehicle-based
    initiatives will rest on advanced technologies that will help drivers
    avoid crashes, and also reduce severity when crashes do occur. We
    believe that many of the new technologies that are being introduced
    voluntarily by manufacturers have the potential to improve safety, such
    as electronic stability control, crash warning systems, pre-crash
    sensing systems, adaptive cruise control systems and driver assistance
    systems. These advanced technologies present a research challenge for
    the agency, in that the agency must develop proper test and evaluation
    procedures in order to establish their safety benefits and possible
    unintended consequences. This will require new, dedicated effort and
    allocation of resources. Accordingly, the Agency is requesting $500,000
    to support a crash avoidance initiative.

                           NEW CAR ASSESSMENT PROGRAM

        The fiscal year 2006 budget request for the New Car Assessment
    Program (NCAP) is $7.859 million. Providing the public with comparative
    safety information on new vehicles and child safety seats permits
    consumers to make more informed safety decisions and provides a market
    incentive to manufacturers to improve their products.
        In fiscal year 2006, NCAP will continue to provide consumers with
    frontal and side crashworthiness information on approximately 80
    percent of new vehicles. In addition, consumers will be provided with
    light vehicle rollover ratings and child safety seat Ease-of-Use
    ratings. The agency will also continue to investigate and implement
    improvements to NCAP tests and how it presents and disseminates the
    information to consumers. In particular, the agency will publish a
    final decision on what changes, if any, should occur to the frontal
    NCAP test to reflect recent upgrades to FMVSS No. 208. Concerted
    efforts will also be undertaken to promote the SaferCar.gov website and
    to work with safety partners and various media outlets to increase the
    awareness and accessibility of the NCAP information.

                           VEHICLE SAFETY ENFORCEMENT

        The Defects Investigation budget proposal is $10.472 million. In
    2004, the number of vehicles recalled was the largest in the history of
    NHTSA. There were 598 vehicle recalls involving 30.6 million motor
    vehicles, 77 equipment recalls involving 1.2 million items of motor
    vehicle equipment, three child safety seat recalls involving 357,000
    child safety seats, and 16 tire recalls involving 571,000 tires.
        With the routine submission of additional manufacturer data
    pursuant to the requirements of the TREAD Act, NHTSA now has access to
    a substantially increased amount of Early Warning Data (EWD) to help
    detect the existence of safety-related problems. The Early Warning
    Reporting (EWR) rule requires manufacturers to submit aggregate counts
    of production, warranty claims, consumer complaints, property damage
    claims, field reports, fatality and injury claims and notices, lists of
    substantially similar vehicles, foreign campaign information, and
    copies of non-dealer field reports. The system provides a secure, web-
    based environment that allows manufacturers to submit their data
    electronically, Intranet applications for NHTSA staff to monitor
    incoming data submissions, Intranet and Internet applications for data
    entry and query, and standard reports. One of the reports enables NHTSA
    to quickly identify manufacturers that fail to submit complete and
    timely EWR data. EWR data played a supporting role in identifying a
    safety defect trend that led to recent recalls of tires and side
    airbags.
        ODI uses the EWD to spot potential defect trends and to provide a
    basis for requesting additional information from manufacturers. We will
    review the value of the various types of EWD to identify whether any
    changes are necessary in the reporting requirements. This study will
    start after eight quarters of field report data has been submitted
    (Summer 2006).
        ODI keeps all Early Warning Reporting data, Auto Safety Hotline
    complaint data, investigation data and recall data in an electronic
    data base named ARTEMIS. ARTEMIS is a state-of-the-art, data management
    system with interfaces designed to meet the needs of government,
    industry, and the public. ARTEMIS allows owners of motor vehicles,
    child seats, and equipment to advise NHTSA of potential safety defects
    through an internet questionnaire. The public also uses ARTEMIS to find
    safety information related to recalls, investigations, and technical
    service bulletins. Similarly, on a quarterly cycle, industry uses
    ARTEMIS to submit its early warning data to satisfy the reporting
    requirements of the Early Warning Rule. ODI staff uses ARTEMIS
    constantly to query its database of owner complaints and manufacturer
    data to search for potential safety defects, and to store investigation
    and recall information.
        NHTSA is committed to enforcing compliance with the requirements of
    the FMVSS through identification and investigation of non-complying
    vehicles and vehicle equipment. We appreciate the support provided by
    Congress in fiscal year 2005 to add staff and improve processes for
    increased enforcement of vehicle lighting requirements. The Vehicle
    Safety Compliance program proposes funding of $7.727 million to ensure
    that new motor vehicles and motor vehicle equipment comply with the
    performance requirements of Federal motor vehicle safety standards and
    provide the safety benefits intended. The fiscal year 2006 budget
    request includes support for the Agency's compliance test program,
    including advanced air bag testing and support of our tire testing
    facility; development of new test procedures for fuel system integrity,
    side impact, head restraints and tires; and crash test dummy
    maintenance, for dummies used in crash testing.

                              FUEL ECONOMY PROGRAM

        NHTSA is committed to enhancing energy security and maximizing fuel
    savings while ensuring safety and minimizing economic impacts. NHTSA is
    statutorily required to set new light truck standards for model year
    2008 by April 1, 2006. It is possible that NHTSA will set standards for
    more than 1 model year. A NPRM is planned for Summer 2005. The fiscal
    year 2006 budget request of $1.3 million will be used to analyze data
    to determine appropriate light truck standards and possible reforms to
    the regulations. NHTSA published an Advance Notice of Proposed
    Rulemaking in December 2003, seeking comment on alternative approaches
    to reforming the Corporate Average Fuel Economy (CAFE) regulations that
    would facilitate further improvement in fuel economy without
    detrimental safety and economic impacts. NHTSA received over 65,000
    comments and product plan data from eight manufacturers. Part of the
    CAFE reform effort includes collecting manufacturer data through model
    year 2012. These data will be used to set new light truck standards.
    Reforms to the system may or may not be applied to the 2008 light truck
    standards.

                   ALTERNATIVE FUEL VEHICLES--HYDROGEN SAFETY

        NHTSA's program for hydrogen, fuel cell, and alternative fuel
    vehicles is focused on providing critical safety information on
    hydrogen-powered fuel cell and internal combustion engine vehicles.
    NHTSA's hydrogen-fueled vehicle safety research includes development of
    safety performance specifications, test procedures, new technologies,
    and harmonized safety requirements. Safety information is vital to
    support the President's FreedomCAR and Fuel Cell Initiative, announced
    in 2003. NHTSA's safety initiative will conduct risk assessment studies
    of hydrogen-fueled vehicles. The risk assessment studies will quantify
    potential failures that could indicate unsafe conditions.
        NHTSA's 3-year research plan includes codes and standards,
    performance testing, emergency response, and rulemaking. The fiscal
    year 2006 request is $1.35 million. NHTSA created a working group to
    coordinate hydrogen activities with other DOT-wide initiatives, the
    Department of Energy, and the California Fuel Cell Partnership. NHTSA
    is also participating in the United Nation's Economic Commission for
    Europe (UNECE) World Forum for Harmonization of Vehicle Regulations
    (WP.29) for development of an action plan for the development of global
    technical regulations for hydrogen vehicles and is active in the DOE-
    led International Partnership for the Hydrogen Economy (IPHE), to
    leverage resources and share information among countries.

                          CRASH INJURY DATA COLLECTION

        To reach DOT's goal of no more than 1.0 fatality per 100 million
    VMT by 2008, or any future goal, it is absolutely essential that the
    traffic safety community has better data and makes better use of these
    data. We must understand the causes of the fatalities, injuries and
    property damage costs that are occurring now. Accordingly, NHTSA has
    identified Traffic Records and Data Improvements as one of its five
    priority programs.
        Improving the Federal data (FARS, NASS-GES, and State Data System)
    is dependent on improving State data. Therefore, NHTSA has requested
    $50 million for the new Traffic Records/Data Improvement program in
    fiscal year 2006. The new initiative will provide incentive grants to
    States to improve their traffic safety data to make them more timely,
    accurate, complete, uniform, integrated and accessible.
        The fiscal year 2006 budget proposes $10 million to continue data
    collection and processing for a nationally representative Crash
    Causation Survey, which will provide detailed information urgently
    needed to identify the research needs for crash avoidance. This effort
    is critical to understanding the complex events that cause and
    contribute to highway crashes, the last one having been performed in
    the 1970's. NHTSA's fiscal year 2006 budget request also includes
    $469,000 to maintain the base FARS infrastructure and ensure that
    States will be able to provide continuity of data collection services.
    The FARS program collects a census data set of all fatal motor vehicle
    crashes that is used to define data driven highway safety initiatives
    that contribute to the goal of saving lives and reducing injuries.
        Mr. Chairman, this concludes my statement. I thank the committee
    for its continued support of our safety programs. I look forward to
    working with you in developing an effective, results-oriented budget
    that will provide national leadership to solve the major problems of
    traffic safety.
                                     ______

                          FEDERAL ELECTION COMMISSION

             Prepared Statement of Michael E. Toner, Vice Chairman

        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 2006 appropriation request. To begin, on behalf of the
    agency, I thank you for last year's appropriation. Your bipartisan
    support of the FEC budget has enabled us to continue to implement the
    Bipartisan Campaign Reform Act of 2002 (BCRA), which amended the
    Federal Election Campaign Act of 1971.
        Our fiscal year 2006 appropriation request is for $54,600,000, an
    increase of $2,858,272 or 5.52 percent over our enacted fiscal year
    2005 appropriation, and for 391 FTE, the same as our fiscal year 2005
    FTE level. This year, as last year, the FEC is seeking only a modest
    increase over the fiscal year 2005 budget of $51,741,728 ($52,159,000
    less the fiscal year 2005 across-the-board rescission). I am pleased to
    report this request conforms to the President's fiscal year 2006 budget
    request for the FEC.
        The fiscal year 2006 request represents a continuation of fiscal
    year 2005 funding levels, adjusted for inflation, and salary and
    benefit increases ($2,531,823 which represents a 6.77 percent
    increase). As such, it represents a Current Services request for fiscal
    year 2006, with no additional funds or staff for new programs or
    initiatives, and represents an overall increase of only 2.28 percent
    for non-personnel costs. These minimal increases are detailed in our
    fiscal year 2006 Budget Justification.
        It is important to note this budget request does not include funds
    to implement new Homeland Security Presidential Directive 12, issued on
    August 27, 2004, calling for a mandatory, government-wide standard
    secure and reliable identification card. The FEC has estimated the
    first year cost to implement this program to be between $75,000-
    $100,000, with some continuing costs thereafter.
        In its annual review of legislative recommendations, the Commission
    has submitted 16 recommendations for legislative action. Five of those
    were unanimously endorsed as priority recommendations; the remaining 11
    as non-priority. The five priority recommendations, in brief, are that
    Congress: (1) add the Commission to the list of agencies authorized to
    issue immunity orders under Title 18; (2) increase the record retention
    period from 3 years to 5 years; (3) add a provision related to
    enforcement of the Act that makes it a violation for anyone to aid and
    abet another party violating the Act; (4) make permanent the
    Administrative Fine Program; and (5) require mandatory electronic
    filing of Senate reports. The remaining 11 recommendations, while
    placed in the non-priority category are, nonetheless, supported by the
    Commission as substantive or technical in nature. We are confident
    these legislative changes would result in efficiencies, not only for
    the FEC, but also for the regulated community.
        Over the past few years, the FEC has achieved major successes,
    including meeting statutory and court deadlines for the BCRA
    implementation and legal challenges to the BCRA, as well as the
    expansion of the compliance program. These successes are the result of
    FEC efforts and support from our Congressional oversight committees. In
    addition, two programs have received accolades from the regulated
    community--the Administrative Fine Program and Alternative Dispute
    Resolution (ADR) Program. With the addition of these two programs, we
    have been able to successfully streamline the enforcement process. It
    is important to call to your attention that the Administrative Fine
    Program will expire on December 31, 2005, unless Congress takes action
    to either make the program permanent or, at a minimum, extend the
    program through reporting periods ending on December 31, 2008. The
    Program has been in place since July 2000 and has worked extremely
    well, as testified to by many of the regulated community. The
    timeliness of reporting has improved with every election cycle since
    its implementation. If the program were made permanent, this would
    eliminate the need for the Commission to come back to Congress every 2
    years seeking an extension.
        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 2006 budget
    request.

                               DISCLOSURE PROGRAM

        The FEC's disclosure program includes not only the review and
    placement of information on the public record, but also educational
    outreach, including campaign finance workshops and seminars, a toll-
    free line for requests on any topic, and automatic fax transmission of
    our publications 24 hours a day, 7 days a week. FEC meeting agendas and
    related documents also are available on our web site. Our disclosure
    program accounts for over a third of the agency's staffing (146.6 FTE),
    distributed among the Public Records Office, Information Technology
    Division, Reports Analysis Division, Press Office, Information Office
    and those sections of the Office of General Counsel (OGC) that
    formulate proposed regulations and draft responses to advisory opinion
    requests.
        Improvements in productivity, aided by 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
    disbursement by Federal candidates and committees of $310 million in
    the first publicly-funded presidential elections. For the 2004
    Presidential and Congressional elections, it is estimated that the FEC
    regulated the disbursement of approximately $5 billion--an increase of
    more than 1,500 percent in just eight Presidential election cycles. The
    2006 cycle, a congressional cycle, should be slightly lower in volume
    than the 2004 presidential cycle. Every election cycle since 1992 has
    seen a new record in total spending in Federal elections for
    Congressional and Presidential elections. With your help, we are
    building an impressive system capable of handling our Information
    Technology (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. The average annual cost is about $1
    million to maintain the electronic filing system.
        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 12 (2000 cycle) to 6 (2002 cycle) to 3 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 is the foundation of the FEC's
    strategic and performance plans, and is at the core of our mission
    statement. A credible enforcement program, however, is necessary to
    provide sufficient incentive to the regulated community to achieve this
    voluntary compliance. In fiscal year 2006, we anticipate assigning
    181.1 FTE to the compliance function, including enforcement,
    supervisory and support staff from OGC, Information Technology
    Division, Reports Analysis and the Audit Division. In the audit track
    of the compliance program, we are pleased to report sufficient
    resources have been provided to allow the Commission to initiate 40 to
    45 audits ``for cause'' for the 2004 election cycle, as opposed to 25
    in the 1998 cycle. Details on the compliance program are contained in
    the fiscal year 2006 Budget Justification.
        The first major overhaul of the FEC's enforcement program occurred
    in May 1993. Faced with a large number of complex cases, the Commission
    developed the Enforcement Priority System (EPS), to prioritize cases
    for substantive enforcement action. This system is designed to provide
    a consistent and impartial ranking of cases based on the relative
    seriousness of the alleged violations, and gives us a tool to match the
    seriousness of a particular case to the resources available to
    undertake the investigation. We use the EPS in conjunction with the
    Case Management System, which enables the Commission to measure
    performance with regard to the substantive resolution of cases by issue
    and to measure timeliness of enforcement actions. Under the EPS, the
    Commission has activated more cases, closed more cases with substantive
    action, and resolved some cases that would otherwise have been
    dismissed.
        The EPS has enabled the Commission to focus limited OGC enforcement
    resources on the more important enforcement uses. The increased level
    of civil penalties assessed by the Commission following implementation
    of the EPS has demonstrated the benefits of pursuing this course. In
    fiscal year 1995, there were 229 OGC cases closed and a total of
    $1,966,600 in civil penalties. By fiscal year 2004, there were 72 OGC
    cases closed, and civil penalties totaled $3,024,595.
        Prior to 2000, the FEC's enforcement program was administered
    solely by the Office of General Counsel. Since that time, the Staff
    Director has been responsible for administering two new components of
    the Commission's enforcement efforts--the Administrative Fine Program
    and the ADR program. The goal of the ADR Program is to resolve matters
    quickly and effectively through bilateral negotiations. Both the ADR
    and Administrative Fine programs are designed to expand the FEC's
    enforcement presence and resolve certain types of cases without
    resorting to the more lengthy traditional OGC enforcement process.
    Today, the Commission focuses its OGC resources on the more complex
    enforcement matters, while using administrative processes to handle
    less complex matters. For example, from fiscal year 1995 through fiscal
    year 2000, the FEC closed an average of 197 cases each fiscal year. In
    fiscal year 2001, with the addition of the Administrative Fine and ADR
    Programs, the FEC closed 516 cases, a 163 percent increase over the
    fiscal year 1995-2000 annual average of 197 cases. In fiscal year 2002,
    the FEC closed 226 cases, including enforcement, ADR and Administrative
    Fine cases. (The number of administrative fine case closings is smaller
    in even-numbered fiscal years.) The total in fiscal year 2003 was 529,
    and in fiscal year 2004 it was 250 closed cases. We are confident the
    figure for fiscal year 2005 will be higher than the fiscal year 2003
    number.
        Since fiscal year 2001, the Administrative Fine Program has
    resolved 1,009 cases of late and non-filed reports. During this time
    period the Commission has assessed administrative fines totaling
    $1,891,148. This program, when viewed in combination with reporting
    violations resolved through the traditional enforcement process, has
    resulted in a six-fold increase in the number of reporting violation
    actions resolved by the FEC.
        The ADR program seeks to resolve certain types of matters in a
    collaborative and expeditious manner. While the potential exists for
    civil penalties, the focus of ADR is to correct behavior. As a
    consequence, ADR employs non-financial solutions such as training,
    adoption by the reporting entity of additional or revised policies and
    procedures, and audits to reduce the likelihood of future violations.

                             PUBLIC FUNDING PROGRAM

        The Commission also administers the program providing a public
    subsidy to Presidential election campaigns. During fiscal year 2006,
    approximately 63.3 FTE from the Audit Division, Office of General
    Counsel, and Information Technology Division, will be directly involved
    in this program, which will entail audits of the eight candidates
    receiving matching funds for the 2004 election. In addition, two
    general election candidate committees are to be audited, as will two
    host committees and two convention committees, for a total of 14
    Presidential audits. This program began processing matching fund
    requests for eligible primary candidates in 2003. The first payments
    occurred on January 2, 2004.
        On a related matter, we believe it is appropriate to bring to your
    attention the potential shortfall in the Presidential Public Funding
    Program. There was a brief shortfall with the February primary matching
    payments for the 2004 Presidential election, which was restored 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 for calculating payout resources. 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 2006 budget request.
    For a more detailed review of this request, I would urge members of the
    committee to consult our more detailed Budget Justification, which
    includes charts delineating how our budget request would be allocated
    and how it compares to previous years. It also demonstrates how the FEC
    has developed and used strategic and performance planning.
        Again, I thank you, Mr. Chairman and the committee, for your
    continued support and the opportunity to present our fiscal year 2006
    budget request.
                                     ______

                     FEDERAL DEPOSIT INSURANCE CORPORATION

       Prepared Statement of Patricia M. Black, Acting Inspector General

        Mr. Chairman and members of the subcommittee, I am pleased to
    present the fiscal year 2006 budget request totaling $29.9 million for
    the Office of Inspector General (OIG) at the Federal Deposit Insurance
    Corporation (FDIC). This OIG budget reflects a decrease for the tenth
    consecutive year, after adjusting for inflation. This budget has been
    possible because of the improved health of the banking industry since
    the early 1990's, the major 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. The FDIC insures individual deposits of up to $100,000. As of
    December 31, 2004, the FDIC insured $3.623 trillion in deposits for
    8,988 institutions, of which the FDIC supervised 5,263. 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.
    Assets held in receiverships following bank failures are at
    comparatively low levels, and significant progress has been made in
    closing older receiverships. The insurance funds are now comfortably
    above the designated reserve ratio that could otherwise trigger
    increases in premiums assessed on insured depository institutions.
    These are important indicators of a healthy banking system, and the
    Corporation can take pride in its positive contributions in each of
    these areas.
        The FDIC OIG was established in 1989 in accordance with amendments
    added to the Inspector General Act. The OIG's program of independent
    audits, investigations, and other reviews assists and augments the
    FDIC's mission. Our efforts promote economy, efficiency, and
    effectiveness of FDIC programs and operations and protect against
    fraud, waste, and abuse.
        In December 2004, Gaston L. Gianni, Jr. retired after serving for
    over 8 years as the FDIC Inspector General. Since then, I have been the
    Acting FDIC Inspector General and will continue to dedicate myself to
    carrying out the mission of the OIG until the President appoints an
    Inspector General. In this capacity, I look forward to supporting the
    Congress, the FDIC Chairman, and other corporate management in meeting
    current and future challenges facing the FDIC and the banking industry.
        This statement discusses OIG accomplishments during fiscal year
    2004, our contributions to assist FDIC management, internal initiatives
    to improve the OIG, and management and performance challenges facing
    the FDIC. I am also providing additional details about our fiscal year
    2006 budget and how it will be spent.
          a review of the fdic oig's fiscal year 2004 accomplishments
        The OIG's fiscal year 2004 achievements include the following:
      --$95.8 million in actual and potential monetary benefits;
      --137 non-monetary recommendations to FDIC management;
      --32 referrals to the Department of Justice;
      --24 indictments;
      --24 convictions; and,
      --4 employee/disciplinary actions.
        More specifically, our accomplishments included 56 completed
    investigations that led to the above indictments and convictions as
    well as fines, court-ordered restitution, and recoveries that
    constitute slightly over $40 million from our work. Also, we issued a
    total of 48 audit and evaluation reports, which included about $4.4
    million in questioned costs and $51.1 million in recommendations that
    funds be put to better use. The nonmonetary recommendations in these
    reports aim to improve the internal controls and operational
    effectiveness in diverse aspects of the Corporation's operations,
    including automated systems, contracting, bank supervision, financial
    management, and asset disposition.
        Further, the OIG accomplished many of its organizational goals
    during the fiscal year as outlined in our annual performance plan. Our
    2004 Performance Report shows that we met or substantially met 31 of
    our 41 goals, or 76 percent. 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.
    Audits, Investigations, and Evaluations
        Examples of the OIG's audit, investigation, and evaluation work
    that contributed to these accomplishments follow.

                Investigation into Fraud at Hamilton Bancorp and Hamilton
                        Bank, N.A. (Hamilton Bank)

        In 2004, a Federal grand jury in Miami, Florida, returned a 42-
    count indictment for conspiracy, wire fraud, securities fraud, false
    filings with the Securities and Exchange Commission, false statements
    to accountants, obstruction of an examination of a financial
    institution, and making false statements to the Office of the
    Comptroller of the Currency (OCC). Named in the indictment were three
    former senior executive officers of Hamilton Bancorp and Hamilton Bank,
    N.A. and the former Managing Director, Deutsche Morgan Grenfell, and
    the advisor to Hamilton Bancorp Board of Directors. The indictment
    alleges that, in 1998 and 1999, the defendants fraudulently inflated
    the reported results of operations and financial condition of Hamilton
    Bancorp and defrauded the investing public and the bank and securities
    regulators, so that the accused would unjustly enrich and benefit
    themselves through higher salaries, bonuses, and stock options, and
    would facilitate an upcoming registered securities offering to the
    investing public.
        In February 2005, the former President of Hamilton Bank pleaded
    guilty of two counts of securities fraud and could get 10 years for
    each count, a maximum fine of $1 million, and restitution. The three
    other defendants are scheduled for trial on June 27, 2005. This case is
    being investigated by the FDIC OIG and prosecuted by the U.S.
    Attorney's Office for the Southern District of Florida.

                Investigation into the Failure of Sinclair National Bank

        In August 2004, a Federal jury returned guilty verdicts against a
    former owner who was also a board member of Sinclair National Bank and
    the former Chief Executive Officer of Stevens Financial Group. The jury
    found the former owner guilty of conspiracy to submit a false statement
    and making a false statement to the OCC during her application for the
    purchase of a predecessor bank. On September 7, 2001, after only 18
    months under new ownership, the OCC closed the bank, and the FDIC was
    named receiver. Sinclair's failure caused a loss of approximately $4.5
    million to the Bank Insurance Fund. The former owner was sentenced to 2
    years' probation, fined $5,000, and ordered to surrender her passport.
        The former Chief Executive Officer of Stevens Financial Group was
    found guilty of conspiring to commit bank fraud. Through his company,
    he sold over $15 million in sub-prime loans to Sinclair National Bank.
    He was found guilty of conspiracy to defraud Sinclair in the purchase
    of these sub-prime loans and making false and misleading statements to
    the Missouri Division of Securities. The Chief Executive Officer was
    sentenced to 5 years in prison and ordered to pay $4.2 million in
    restitution.
        In November 2004, the former in-house counsel for Sinclair National
    Bank and Stevens Financial Group was sentenced both in State and
    Federal court to 5 years' probation and was ordered to surrender his
    law license.
        The Federal case was investigated by the FDIC OIG, Treasury OIG,
    FBI, and the Missouri Attorney General's Office. The case was
    prosecuted by the U.S. Department of Justice, Washington, DC.

                Audits of FDIC's Allocation of Records Storage Costs and
                        Records Management and Storage

        The OIG issued two reports dealing with records management and
    storage costs that resulted in $51.1 million in funds put to better
    use. The audit of the FDIC's allocation of records storage costs
    determined that records storage costs were not correctly charged to the
    appropriate insurance and resolution funds.
        In another audit, we concluded that the FDIC's contract with Iron
    Mountain Records Management, Inc. for records storage could be more
    cost-effective. We reported that the FDIC could avoid costs of $5.1 to
    $5.5 million by moving records from climate-controlled storage,
    renegotiating certain contract terms, and obtaining permission to
    destroy thrift records not associated with goodwill litigation. We made
    recommendations to the FDIC to make the contract with Iron Mountain
    more cost effective and to improve contract oversight. We also
    recommended that the General Counsel and Division of Administration
    expedite efforts related to the destruction of records for thrifts not
    involved in the goodwill litigation.

                Audit Report on Observations from FDIC OIG Material Loss
                        Reviews Conducted 1993 Through 2003

        In January 2004, we issued an audit report that discussed the
    recurring and root causes of failure for the 10 FDIC-supervised
    institutions that caused material losses to the Bank Insurance Fund
    (BIF) during the past 10 years. Estimated losses to the BIF from these
    10 failures total over $584 million. We concluded that the major causes
    of failure were inadequate corporate governance, poor risk management,
    and lack of risk diversification.
        Our semiannual reports to the Congress provide many other examples
    of OIG accomplishments. These reports can be found on our Web page at
    http://fdicig.gov/reports.shtml or by contacting our office.

    Assistance to FDIC Management
        In addition to 2004 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 43 proposed corporate policies and 3 draft regulations and
            offered comments and suggestions when appropriate.
      --Provided advisory comments on the FDIC's 2004 Annual Performance
            Plan and 2003 Annual Report.
      --Participated in division-level conferences and meetings to
            communicate about 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.
      --Coordinated with the FDIC's Division of Information Technology and
            agency officials to establish appropriate processes in
            addressing cyber crimes.

    OIG Management and Operational Initiatives
        An important part of our stewardship over the funding we receive
    includes our continuous efforts to improve OIG operations.
        The OIG has continued to downsize with the Corporation. In this
    environment, the OIG has had to emphasize aligning our human resources
    to achieve the OIG mission. The OIG will 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:
    creating a mentoring program; providing training and development
    related to the OIG core competencies and business knowledge needs; and
    creating a strategy to improve the supervisor-staff feedback process.
        During the past year, the OIG published its first comprehensive
    Employee Survey Report. The survey collected information on how
    employees who work for the OIG view and appraise their work and
    workplace. The survey was designed to provide information comparable to
    certain major benchmark surveys of other government employees.
        Other internal initiatives include our hosting an interagency
    symposium on the Federal Information Security Management Act (FISMA) of
    2002. Representatives from more than 40 Federal agencies attended the
    symposium to share information, ideas, and best practices related to
    the implementation of FISMA. We also co-sponsored a third Emerging
    Issues in Banking Symposium with the Offices of Inspector General of
    the Department of the Treasury and the Board of Governors of the
    Federal Reserve System, bringing 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 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. We also conducted our sixth external
    customer survey regarding satisfaction with OIG operations.
        The OIG's Office of Audits received an unqualified opinion on a
    peer review of the system of quality control for the audit function of
    the FDIC OIG. According to the Department of Energy OIG, the system of
    quality control for the audit function in effect for the year ended
    March 31, 2004, was designed in accordance with quality standards
    established by the President's Council on Integrity and Efficiency and
    provided the OIG with reasonable assurance of material compliance with
    professional auditing standards in the conduct of the FDIC OIG's
    audits.

             MANAGEMENT AND PERFORMANCE CHALLENGES FACING THE FDIC

        In the spirit of the Reports Consolidation Act of 2000, the OIG
    annually identifies the top management and performance challenges
    facing the FDIC. We have worked with the FDIC to prepare our annual
    assessment. The challenges set forth below capture the risks and
    opportunities we see before the Corporation in the coming year or more.
    In addition, these challenges serve as a guide for our work.
    Corporate Governance in Insured Depository Institutions
        Corporate governance is generally defined as the fulfillment of the
    broad stewardship responsibilities entrusted to the Board of Directors,
    officers, and external and internal auditors of a corporation. A number
    of well-publicized announcements of business and accountability
    failings, including those of financial institutions, have raised
    questions about the credibility of management oversight and accounting
    practices in the United States. In certain cases, board members and
    senior management engaged in high-risk activities without proper risk
    management processes, did not maintain adequate loan policies and
    procedures, and circumvented or disregarded various laws and banking
    regulations. The FDIC's effort in to achieve sound corporate governance
    without undue regulatory burden remains a management challenge.
        Several of our audits focused on issues relating to external
    governance. One audit focused on the process that the FDIC uses to
    assess bank management and controls during examinations of FDIC-
    supervised financial institutions. We concluded that the process is
    adequate. However, based on our review of six open banks with high-risk
    composite ratings, we found opportunities for improvement pertaining to
    banks that have a dominant official with significant influence in bank
    operations. We made recommendations to address these concerns, and the
    corrective actions that FDIC management proposed were responsive. We
    also conducted an audit to examine the FDIC's issuance of implementing
    guidelines to financial institutions and examiners for applicable
    provisions of the Sarbanes-Oxley Act. We concluded that the FDIC took
    adequate steps to issue implementing guidance for applicable provisions
    of the Act both to FDIC-supervised institutions and to FDIC examiners.
    In addition, the Act did not have a major impact on FDIC-supervised
    financial institutions because of pre-existing audit committee and
    internal control reporting requirements imposed by the FDIC Improvement
    Act of 1991.
        Likewise, our investigative work also addresses corporate
    governance issues. In a number of cases, financial institution fraud is
    a principal contributing factor to an institution's failure. Our Office
    of Investigations plays a critical role in investigating such cases and
    has been very successful in identifying bank fraud cases involving
    corporate governance weaknesses.

    Management and Analysis of Risks to the Insurance Funds
        A primary goal of the FDIC under its insurance program is to ensure
    that its deposit insurance funds do not require augmentation by the
    U.S. Treasury. Achieving this goal is a considerable challenge that
    requires effective communication and coordination with the other
    Federal banking agencies. The FDIC engages in an ongoing process of
    proactively identifying risks to the deposit insurance funds and
    adjusting the risk-based deposit insurance premiums charged to the
    institutions.
        We completed an evaluation of the FDIC's supervisory approach for
    examining limited-charter depository institutions, which include
    industrial loan companies. This evaluation was completed in September
    2004 and contained eight recommendations for strengthening the quality
    of the Division of Supervision and Consumer Protection's program for
    supervising industrial loan companies. In addition, we completed an
    audit of the Maximum Efficiency, Risk-focused, Institution Targeted
    (MERIT) Examination Program to assess the adequacy of processes,
    reports, and other data that the FDIC uses in monitoring MERIT
    examination coverage of financial institutions.

    Security Management
        The FDIC relies heavily upon automated information systems to
    collect, process, and store vast amounts of banking information. This
    information is used by financial regulators, academia, and the public
    to assess market and institution conditions, develop regulatory policy,
    and conduct research and analysis on important banking issues. Ensuring
    the confidentiality, integrity, and availability of this information in
    an environment of increasingly sophisticated security threats requires
    a strong, enterprise-wide information security program at the FDIC and
    insured depository institutions.
        As a result of focused efforts over the past several years, the
    FDIC has made significant progress in improving its information
    security controls and practices and addressing current and emerging
    information security requirements mandated by FISMA. The OIG has
    completed its fourth annual security evaluation pursuant to FISMA and
    its predecessor legislation. Also, the FDIC's external auditor, the
    Government Accountability Office, for the first time in several years
    did not cite information systems security as a reportable condition in
    its audit of the Corporation's financial statements. However, the FDIC
    recognizes that continued improvements in its information security
    program and practices are needed. The FDIC Annual Report 2004
    identified information security as a high vulnerability issue within
    the Corporation. The FDIC also identified improvements in its
    information security program as a major corporate priority in its 2004
    Annual Performance Plan.
        The OIG recently completed an audit of security controls over the
    FDIC's e-mail infrastructure. In addition, we have completed one audit
    and a follow-up review of the Virtual Supervisory Information on the
    Net application. This is a major application that provides access to
    financial, examination, and supervisory information on financial
    institutions. FISMA 2005 work is ongoing.

    Money Laundering and Terrorist Financing
        In today's global banking environment, where funds are transferred
    instantly and communication systems make services available
    internationally, a lapse at even a small financial institution outside
    of a major metropolitan area can have significant implications across
    the Nation. The reality today is that all institutions are at risk of
    being used to facilitate criminal activities, including terrorist
    financing.
        On June 3, 2004, the OIG testified before the Senate Committee on
    Banking, Housing, and Urban Affairs, on Bank Secrecy Act (BSA)
    compliance and enforcement. Also, in March 2005, we completed an audit
    that addressed the FDIC's supervision of one institution's compliance
    with the BSA. This audit determined that responsibilities to ensure
    compliance with the BSA were not adequately fulfilled by either
    institution management or the FDIC. Corporate governance at the
    financial institution and two former institutions was not sufficient to
    ensure that the institutions met BSA requirements. The FDIC's
    examinations identified significant BSA violations and deficiencies,
    but the examinations generally lacked sufficient follow-up on
    corrective measures promised but not implemented by institution
    management. Consequently, weak BSA compliance programs persisted for
    extended periods. In addition, the FDIC should have more thoroughly
    considered the impact of BSA compliance violation and deficiency
    histories in connection with its decision to qualify the potential
    acquirers of a failed institution. The FDIC concurred with our findings
    and recommendations and is making significant improvements in its
    supervision of institution BSA compliance programs in response to our
    recommendations and its own initiatives.
        The FDIC anti-money laundering supervision program is a matter for
    continued monitoring in the FDIC Annual Report 2004. The OIG has
    additional audits and investigations planned in this area to help
    ensure that financial institutions, through efficient and effective
    supervision by the FDIC, will remain vigilant in implementing BSA
    programs that assist in preventing money laundering and terrorism.

    Protection of Consumer Interests
        In addition to its mission of maintaining public confidence in the
    Nation's financial system, the FDIC also protects the interests of
    consumers through its oversight of a variety of statutory and
    regulatory requirements aimed at protecting consumers from unfair and
    unscrupulous banking practices. The FDIC is legislatively mandated to
    enforce various statutes and regulations regarding consumer protection
    and civil rights with respect to State-chartered, non-member banks and
    to encourage community investment initiatives by these institutions.
        The OIG's recent coverage in this area includes reviews of
    compliance with the Gramm-Leach-Bliley Act, Community Reinvestment Act,
    and the Fair Lending Act. In 2004, we examined the FDIC's Supervision
    and Appeals Review Committee's decision regarding a financial
    institution's appeal of a fair lending violation. In addition, we have
    an ongoing audit on predatory lending.
        The OIG's involvement with consumer protection matters includes our
    investigative cases regarding misrepresentations of FDIC insurance or
    affiliation to unsuspecting consumers. Additionally, our Office of
    Investigations' Electronic Crimes Team has been involved in
    investigating ``phishing'' identity theft schemes that have used the
    FDIC name in an attempt to obtain personal data from unsuspecting
    consumers who receive the e-mails. Our investigations have also
    uncovered multiple schemes to defraud depositors by offering them
    misleading rates of return on deposits. These abuses are effected
    through the misuse of the FDIC's name, logo, abbreviation, or other
    indicators suggesting that the products are fully insured deposits. Our
    experience with such cases prompted us to submit a legislative proposal
    to prevent misuse of the Corporation's guarantee of insurance. This
    proposal was incorporated in H.R. 1375: Financial Services Regulatory
    Relief Act of 2003. On March 24, 2004, it was passed by the House of
    Representatives and referred to the U.S. Senate.

    Corporate Governance in the FDIC
        Corporate governance within the FDIC is the responsibility of the
    Board of Directors, officers, and operating managers in fulfilling the
    Corporation's broad mission functions. It also provides the structure
    for setting goals and objectives, the means to attaining those goals
    and objectives, and ways of monitoring performance. Management of the
    FDIC's corporate resources is essential for efficiently achieving the
    FDIC's program goals and objectives.

                Management of Human Capital
        The FDIC, like other organizations, continues to be affected by
    changing technology, market conditions, initiatives designed to improve
    its business processes, an aging workforce, and the changing financial
    environment. Such events impact needed staffing levels and required
    skills going forward. Workforce management is a matter for continued
    monitoring in the FDIC Annual Report 2004. Recent OIG work in this area
    includes an evaluation of the effectiveness of the FDIC's Division of
    Supervision and Consumer Protection workforce planning and an
    evaluation of the FDIC Corporate University.

                Competitive Sourcing
        The FDIC has awarded long-term contracts to consolidate outsourced
    information technology activities. While these contracts permitted the
    FDIC to solicit among well-qualified sources under task orders, the
    FDIC's ability to compete was generally limited to a small number of
    firms. We recently completed a pre-award audit of these consolidated
    contracts. We have ongoing work to determine whether the FDIC achieves
    adequate price competition and complies with the Acquisition Policy
    Manual's bid solicitation and evaluation requirements.

                Improved Financial Management
        The FDIC has begun to field a new financial management system in
    2005 that will consolidate the operations of multiple systems. Named
    the New Financial Environment (NFE), this initiative will modernize the
    FDIC's financial reporting capabilities and cost about $58 million.
    Implementing NFE and interfacing other systems with NFE will require
    significant efforts and poses major challenges. We have reported on
    several NFE matters in the past and are currently monitoring the
    Corporation's ongoing NFE efforts. We plan to provide audit coverage of
    NFE implementation after the system is deployed.

                E-Government
        The FDIC's E-Government Strategy is a component of the enterprise
    architecture that focuses on service delivery for the external
    customers of the FDIC. The FDIC issued Version One of its E-Government
    Strategy in November 2002 and established a task force to update the
    strategy. The FDIC has initiated a number of projects that will enable
    the Corporation to improve internal operations, communications, and
    service to members of the public, businesses, and other government
    offices. The projects include: Call Report Modernization, Virtual
    Supervisory Information on the Net, Asset Servicing Technology
    Enhancement Project, New Financial Environment, Corporate Human
    Resources Information System, and FDIConnect. We have an audit in
    process that will determine if the FDIC is adequately implementing E-
    Government principles in its operations and in its information exchange
    with insured financial institutions.

                Risk Management and Assessment of Corporate Performance
        Within the business community, there is a heightened awareness of
    the need for a robust risk management program. Enterprise risk
    management is a process designed to: identify potential events that may
    affect the entity, manage identified risks, and provide reasonable
    assurance regarding how identified risks will affect the achievement of
    entity objectives. The migration from internal control to enterprise
    risk management perspectives and activities presents challenges and
    opportunities for the FDIC. We recently completed an audit on
    strategies for enhancing corporate governance and we have two
    evaluations planned that will assess the FDIC's approach to enterprise
    risk management and the FDIC's use of performance measures. We also
    provide input to the FDIC's annual performance plans.

                Security of Critical Infrastructure
        To effectively protect critical infrastructure, the FDIC's
    challenge in this area is to implement measures to mitigate risks, plan
    for and manage emergencies through effective contingency and continuity
    planning, coordinate protective measures with other agencies, determine
    resource and organization requirements, and engage in education and
    awareness activities.
        The OIG has performed several evaluations to assess the FDIC's
    physical security program and information technology (IT) contingency
    planning. A follow-up to two prior OIG evaluations to assess the FDIC
    physical security program and implementation of physical security
    concluded that the FDIC had implemented our recommended improvements to
    security policies for FDIC-owned and leased space in the Washington, DC
    area and in the regional and field offices.
        With respect to IT contingency planning, the FDIC has continued
    capability to recover its mainframe and server platforms necessary to
    restore operations in the event of a disaster. However, testing for
    data restoration is an area needing continuous attention. The FDIC's
    Business Continuity Plan addresses critical business functions in key
    divisions and offices. The Corporation has updated its business impact
    analysis and updated the plan accordingly. Continued testing and
    updates of the plan must be part of a sound business continuity
    planning process. The OIG has further work planned in this area.

                Management of Major Projects
        Project management involves defining, planning, scheduling, and
    controlling the tasks that must be completed to reach a goal and
    allocating resources to perform those tasks. The FDIC has engaged in
    several multi-million dollar projects, such as the New Financial
    Environment discussed earlier, Central Data Repository, and Virginia
    Square Phase II Construction.
        We have done several reviews of these projects and identified the
    need for improved defining, planning, scheduling, and controlling of
    resources and tasks to reach goals and milestones. Project management
    is a matter for continued monitoring in the FDIC Annual Report 2004.
    Also, the Corporation included a project management initiative in its
    2004 performance goals and established a Program Management Office to
    address the risks and challenges that these kinds of projects pose.

                Cost Containment and Procurement Integrity
        As steward for the BIF, the Savings Association Insurance Fund
    (SAIF), and the FSLIC Resolution Fund (FRF), the FDIC strives to
    identify and implement measures to contain and reduce costs, either
    through more careful spending or by assessing and making changes in
    business processes to increase efficiency. A key challenge to
    containing costs relates to the contracting area.
        The OIG has performed several audits and evaluations that have
    addressed procurement issues, all in the interest of enhancing the
    effectiveness of contracting and reducing costs of contracted goods and
    services. These audits and evaluations addressed local
    telecommunications, price reduction on laptop computers, procurement of
    administrative goods and services, and the FDIC's use of consultants.
    These audits and evaluations resulted in questioned costs, funds put to
    better use, or cost savings for the Corporation.

    Resolution and Receivership Activities
        One of the FDIC's primary responsibilities includes planning and
    efficiently handling the resolutions of failing FDIC-insured
    institutions and providing prompt, responsive, and efficient resolution
    of failed financial institutions. These activities maintain confidence
    and stability in our financial system. Three of our recent audit
    reports addressed resolution and receivership activities. These audits
    addressed internal loan servicing, receivership dividend payments, and
    asset write-offs and each made recommendations for improvement.
        The OIG's Office of Investigations coordinates closely with the
    FDIC's Division of Resolutions and Receiverships and with the Legal
    Division regarding ongoing investigations involving fraud at failed
    institutions, fraud by FDIC debtors, and fraud in the sale or
    management of FDIC assets. In particular, investigators address issues
    arising in connection with the prosecution of individuals who have
    illegally concealed assets in an attempt to avoid payment of criminal
    restitution to the FDIC. As of September 30, 2004, the FDIC was owed
    approximately $1.7 billion in criminal restitution. In most cases, the
    individuals subject to restitution orders do not have the means to pay.
    We focus our investigations on those who do have the means to pay but
    hide their assets from and/or lie about their ability to pay.

                   THE OIG'S FISCAL YEAR 2006 BUDGET REQUEST

        The proposed fiscal year 2006 OIG budget includes funding in the
    amount of $29,965,000 or $160,000 less than fiscal year 2005. This
    budget will support an authorized staffing level of 160. Since this
    budget is less than the fiscal year 2005 budget and will fund the same
    staffing level, the budget absorbs higher projected expenses for
    salaries, employee benefits, and other costs that will increase by
    reducing funds for travel, contracts, and equipment purchases. The
    graph below shows the OIG's budget history from fiscal year 2003
    through fiscal year 2006.

        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.''
    This funding approach is part of the statutory protection of the OIG's
    independence. The FDIC OIG is the only appropriated entity in the FDIC.
    The OIG's appropriation would be derived from the BIF, SAIF, and FRF.
    These funds are the ones used to pay for other FDIC operating expenses.
    Budget by Strategic Goals and Major Spending Categories
        For fiscal year 2006, the OIG developed the budget based on the
    four strategic goals outlined in our Strategic Plan found on our Web
    page at http://fdicig.gov/gpra/StratFY04-08.pdf. The four strategic
    goals, along with their associated percent of budget dollars follow:

        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.

        As I discussed earlier, the OIG has continued to downsize during
    the last few years. The OIG has decreased its authorized level of 190
    staff for fiscal year 2003 to 160 for fiscal year 2006--about a 16
    percent reduction. Years 2005 and 2006 are critical periods of change
    for the FDIC, and the OIG resources will be needed to ensure an
    efficient and effective rollout. However, OIG resource requirements may
    realize benefits from the FDIC's restructuring and downsizing, which
    could mean fewer OIG staff and smaller budgets, and we will be
    reviewing that issue.

                               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 been
    able 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 working with this subcommittee beginning
    with this budget. Like many governmental organizations, we are faced
    with downsizing and succession planning challenges for which the OIG
    will assess whether further downsizing may be necessary. We seek your
    support so that we will be able to effectively and efficiently conduct
    our work on behalf of the Congress, the FDIC Chairman, and the American
    public.
                                     ______

                      NATIONAL TRANSPORTATION SAFETY BOARD

            Prepared Statement of Mark V. Rosenker, Acting Chairman

        Thank you, Chairman Bond and members of the subcommittee for
    allowing me the opportunity to present testimony on behalf of the
    National Transportation Safety Board (NTSB) regarding the agency's
    appropriation needs for fiscal year 2006. It is truly an honor and a
    pleasure to represent an agency dedicated to the care and safety of our
    Nation and it's citizens.
        The NTSB is an independent Federal agency charged by Congress with
    investigating every civil aviation accident in the United States and
    significant accidents in other modes of transportation--railroad,
    highway, marine and pipeline--and issuing safety recommendations aimed
    at preventing future accidents. The Safety Board is responsible for
    maintaining the government's database of civil aviation accidents;
    serves as the ``court of appeals'' for any airman, mechanic or mariner
    whenever certificate action is taken by the Federal Aviation
    Administration (FAA) or the U.S. Coast Guard (USCG) Commandant, or when
    civil penalties are assessed by the FAA; and is tasked with ensuring
    that transportation disaster survivors and victims' families receive
    timely, effective, complete and compassionate assistance from the
    operator, other government agencies, and community service
    organizations. In addition, the NTSB Academy, now in its second year of
    operation, provides quality training for accident investigations. The
    Academy also provides a platform for accident reconstruction and
    evaluation and uses its training resources to facilitate family
    assistance and first responder training programs.
        Since its inception in 1967, the NTSB has investigated more than
    124,000 aviation accidents and over 10,000 surface transportation
    accidents. In addition, the Safety Board has issued more than 12,000
    safety recommendations in all modes of transportation with an 82
    percent adoption rate for recommendations made. In fiscal year 2004,
    the Safety Board issued 151 new safety recommendations and closed 308
    recommendations. For the first time since 1975, the number of open
    safety recommendations is under 800.

                                ACCOMPLISHMENTS

        I would like to begin by highlighting just some of the NTSB's
    accomplishments in 2004-2005.
      --The Office of the Chief Financial Officer achieved an unqualified
            clean opinion on our audited Consolidated Financial Statements.
            This is the second year in a row the Board received a clean
            audit.
      --Nearly 2,000 aviation accident investigations were completed by the
            Office of Aviation Safety, including Air Sunshine flight 527,
            which ditched into the Atlantic Ocean near Great Abaco Island,
            Bahamas, causing three minor injuries and two fatalities; two
            non-fatal crashes involving FedEx freighters--flight 1478,
            which crashed near Tallahassee, Florida and flight 647, which
            crashed while landing at the Memphis International Airport in
            Tennessee; American Airlines flight 587, which crashed into a
            residential area near Belle Harbor, New York--with 265
            fatalities; and Air Midwest flight 5481, which crashed shortly
            after takeoff at Charlotte, North Carolina with 21 fatalities.
      --Six major investigations were completed by the Office of Highway
            Safety, including a vehicle intrusion into a farmers market in
            Santa Monica, California resulting in 10 fatalities and 63
            injuries; a school bus run-off-bridge accident near Omaha,
            Nebraska resulting in 4 fatalities; a motorcoach accident and
            rollover near Victor, New York with 5 passengers killed; the
            towboat Robert Y. Love allision that collapsed a highway bridge
            near Webbers Falls, Oklahoma resulting in 14 fatalities and a
            15-passenger child care van accident near Memphis, Tennessee
            with the driver and 4 children sustaining fatal injuries.
      --The Office of Marine Safety completed four marine investigations
            including a fire aboard the passenger ferry, Columbia, in
            Alaska; the grounding and sinking of a small passenger vessel,
            Safari Spirit, also in Alaska; the sinking of the small
            passenger vessel Panther near Everglades City, Florida; and the
            allision of the Staten Island Ferry, Andrew J. Barberi, off St.
            George, Staten Island, New York.
      --The Office of Railroad, Pipeline and Hazardous Materials
            Investigations completed over 18 accident investigations.
        --Some of the rail investigations completed included the derailment
                of runaway railcars near the City of Commerce, California;
                a CSX freight train derailment and subsequent fire in the
                Howard Street Tunnel in Baltimore, Maryland; the derailment
                of an Amtrak train near Kensington, Maryland; the
                derailment of a Canadian Pacific Railway freight train near
                Minot, North Dakota; and the derailment of a Canadian
                National freight train in Tamaroa, Illinois.
        --Major pipeline investigations completed included the release of
                crude oil and the rupture of a pipeline near Cohasset,
                Minnesota; and a storage tank explosion and fire in
                Glenpool, Oklahoma.
        --Major hazardous materials investigations completed included a
                nurse tank failure and release of anhydrous ammonia near
                Calamus, Iowa; and the rupture of a rail tank car
                containing hazardous waste near Freeport, Texas.
      --The Office of Research and Engineering supported 292 accident and
            incident investigations in all modes of transportation;
            developed four safety studies in issues pertaining to aviation
            and pipeline transportation; examined over 150 items in the
            laboratory; and read out more than 160 vehicle recorders and
            responded to over 2,500 information requests and over 500 FOIA
            requests.
      --The Board, in conjunction with the Office of Safety Recommendations
            and Communications, testified 32 times in 14 States in 2004 and
            has already testified 16 times in 9 States in 2005.
      --Our SWAT (Safety With A Team) teams held 33 meetings with 7 Federal
            agencies and 6 industry groups, discussed over 350
            recommendations, closing 49 of them.
      --The Academy hosted 3 public forums in 2004-2005--Air Cargo Safety,
            Personal Flotation Devices in Recreational Boating (2004) and
            Positive Train Control (2005). In 2004, during its second year
            of operation, the NTSB Academy delivered 15 courses with over
            1,000 individuals, including 65 students from 35 foreign
            countries, in attendance.

                                  MOST WANTED

        The Office of Safety Recommendations and Communications is
    responsible for coordinating strategies for implementing safety
    recommendations, supporting victims of transportation disasters,
    keeping the media apprised of important safety developments and
    ensuring that Congressional, Federal and State government leaders are
    provided with timely and accurate information. The office also manages
    the most critical open safety recommendations on the NTSB's list of
    Most Wanted Transportation Safety Improvements.
        The NTSB's Most Wanted list was established in 1990 to increase the
    public's awareness of, and support for, recommendations having the
    greatest potential for preventing accidents and saving lives. The Most
    Wanted list also focuses attention on recommendations that may have
    become stalled, but if accomplished, would significantly reduce deaths
    and injuries.
        In 2003, the Safety Board separated Federal and State issues on the
    Most Wanted list to maximize its utility and to allow the Board to
    focus on a more manageable number of recommendations. In September
    2004, the Board Meeting on the Most Wanted List of State issues, the
    Board reviewed 319 actions emanating from 10 safety recommendations and
    197 recommendation classifications, including 173 safety improvements
    that were completed. Further action, however, still needed by the
    States includes improving child occupant protection, enacting primary
    seat belt laws, eliminating hard-core drinking driving, enhancing
    recreational boating safety and, added to the list during the meeting,
    improving school bus/grade crossing safety.
        The meeting on the Most Wanted List of Federal issues was held in
    November 2004. Two items were removed from that list: the
    recommendation for marine voyage data recorders, which was almost
    complete and the recommendation to enhance the safety of locomotive cab
    voice recorders, which the Federal Railroad Administration refuses to
    adopt. The Board also revised the classifications of two FAA responses
    on runway incursions and aircraft icing from ``Open-Acceptable
    Response'' to ``Open-Unacceptable Response'' because of lack of
    progress by the FAA. In addition to reducing dangers to aircraft flying
    in icing conditions and stopping runway incursions, improvements still
    need to be made by Federal agencies include eliminating flammable fuel/
    air vapors in aircraft fuel tanks, implementing positive train control,
    and preventing medically unqualified drivers from operating commercial
    vehicles.
        The Board will review its Most Wanted State issues list in
    September 2005 and Federal issues list in November 2005. We will keep
    the subcommittee informed of any changes made during those reviews.

                                ADVOCACY PROGRAM

        The goal of NTSB's advocacy program is to implement safety
    recommendations. The expeditious implementation of recommended safety
    improvements remains a priority at the Board. Paramount in our efforts
    to achieve this goal is our work with the modal administrations of the
    Department of Transportation to focus on open recommendations,
    particularly those from our Most Wanted List. The Board's persistence
    in this endeavor has yielded significant safety benefits. For example,
    following a series of Safety With A Team (SWAT) meetings, the FAA took
    positive actions and 7 aviation recommendations were reclassified from
    open-unacceptable to closed-acceptable or closed-acceptable-alternate.
    Two examples include A-00-39, which recommended that Air Traffic
    Control facilities retain recorded voice communications and radar data
    for 45 days whenever equipment for properly archiving the data is
    available, was classified closed-acceptable; and A-01-54, which
    required the use of automatic brakes, if available and operative, on
    aircraft for landings during wet, slippery, or high crosswind
    conditions, was classified closed-alternative action. SWAT is a
    communication plan that seeks to implement open safety recommendations
    so that they can be closed-acceptable. Safety Board staff meets with
    appropriate Federal agencies, some of whom staff has never met with
    before, such as the American Association of State Highway and
    Transportation Officials, to discuss open recommendations and focus on
    what causes the delays, objections and issues that are holding up
    implementation of the recommendations.
        With all five Board Members and NTSB staff working as a team, we
    have seen significant progress in State legislatures advancing the
    adoption of our recommendations. Each Board Member focuses on advocacy
    activities in 10 States. Board Members meet with State officials,
    departments and public advocacy groups to encourage support for our
    recommendations. From January 2004 to date, Board Members and staff
    have testified 48 times in 23 different States. During the same time
    period, 47 States have enacted 14 booster seat laws, 3 primary seat
    belt enforcement laws, 11 teen driving laws, 8 laws addressing hard
    core drunk driving, 5 laws to require personal flotation devices for
    children on boats and 6 laws for mandatory boater education. Since 1993
    in response to our safety recommendations, 40 States and the District
    of Columbia have enacted graduated driver licensing laws,
    revolutionizing the way States license young drivers. In addition, the
    Board has provided leadership to several national coalitions promoting
    recreational boating safety, highway safety and the reduction of hard-
    core drunk driving.

                              MAJOR INVESTIGATIONS

    Office of Aviation Safety (OAS)
        The NTSB is required by law to investigate and determine the
    probable cause of all of the nearly 2,000 civil aviation accidents and
    certain public-use aircraft accidents that occur each year.
        Earlier I mentioned the accident investigations closed by OAS last
    year. I would like to briefly discuss two of those accidents--American
    Airlines flight 587, in Belle Harbor, New York, and Air Midwest flight
    5481 in Charlotte, North Carolina.
        On November 12, 2001, American Airlines flight 587, an Airbus A300-
    605R (N14053) crashed in Belle Harbor, New York shortly after taking
    off from John F. Kennedy International Airport on a flight to Santo
    Domingo. All 260 people aboard the plane died, as did five persons on
    the ground. It was the second deadliest aviation accident in American
    history. On October 26, 2004, the Safety Board determined that flight
    587 crashed because the plane's vertical stabilizer separated in flight
    as a result of aerodynamic loads that were created by the first
    officer's unnecessary and excessive rudder pedal inputs after the
    aircraft encountered wake turbulence. The Board said that contributing
    to the crash were characteristics of the airplane's rudder system
    design and elements of the airline's pilot training program. As a
    result of the investigation, the Safety Board issued 13 safety
    recommendations.
        On January 3, 2003, an Air Midwest (U.S. Airways Express) flight
    5481, a Raytheon (Beechcraft) 1900D (N233YV) crashed on takeoff at
    Charlotte-Douglas International Airport. Two crewmembers and 19
    passengers aboard the airplane were killed and one person on the ground
    received minor injuries. Impact forces and a post-crash fire destroyed
    the airplane. On February 26, 2004, the Safety Board determined that
    the probable cause of the accident was the airplane's loss of pitch
    control during takeoff. The loss of pitch control was the result of
    incorrect rigging of the elevator control system compounded by the
    airplane's center of gravity, which was substantially aft of the
    certified aft limit. As a result of the investigation, the Safety Board
    issued 21 safety recommendations.
        Currently, the Safety Board has 8 ongoing major investigations
    including a Canadair crash near Montrose, Colorado, a Gulfstream jet
    crash at Houston, Texas, and the Platinum Airlines Challenger jet crash
    at Teterboro Airport, New Jersey.
        The NTSB also assisted in several foreign investigations in the
    past year. These include the China Northern CRJ, which crashed on
    takeoff from Baotou, China; the Flash Airlines B737-300, which crashed
    on take-off near Sharm-el-Sheikh, Egypt; and the Air Transat charter
    flight 961, an Airbus A-310-308, en route from Varadero, Cuba to Quebec
    City, Canada, which lost a rudder and returned to Cuba.

    Office of Highway Safety (OHS)
        OHS investigates highway accidents involving issues with wide-
    ranging safety significance, such as bridge collapses, multiple
    fatalities on public transportation vehicles, heavy trucks and at grade
    crossings. The office also examines the safety programs of the Federal
    Highway Administration, Federal Motor Carrier Safety Administration and
    the National Highway Traffic Safety Administration.
        Highway fatalities account for about 95 percent of all
    transportation deaths in the United States per year, causing about 120
    fatalities a day. As I mentioned earlier, OHS completed six major
    accident investigations in 2004, including a school bus run-off-bridge
    accident in Omaha, Nebraska which resulted in four fatalities; a
    daycare van run-off-road accident near Memphis, Tennessee with five
    fatalities; a fatigued driver in a motorcoach near Victor, New York
    resulting in five fatalities; an elderly driver who crashed into a
    farmer's market near Santa Monica, California, which resulted in 10
    fatalities and 63 injuries; a barge/bridge collapse with 14 fatalities
    near Webbers Falls, Oklahoma; and six accidents involving drivers'
    seizures and medical issues that resulted in 8 fatalities, and 27
    injuries.
        Each of these accident investigations yielded significant safety
    improvements as a result of our recommendations. The accident near
    Memphis, Tennessee involved a 15-passenger van, operated by a childcare
    center, which ran off the road, killing the driver and 4 children. The
    Board's report made recommendations for improved oversight of child
    care transportation, improved vehicle crashworthiness standards,
    improved vehicle inspections, better driver qualifications and medical
    exams, the use of age-appropriate child restraints, and improved guard
    rail anchorages.
        Two similar accidents near North Hudson, New York occurring 7
    months apart, involved a motorcoach and a tractor semi-trailer that
    collided with stopped traffic on a congested interstate. The congestion
    was created by a U.S. Border Patrol checkpoint. Four persons were
    killed and 56 people were injured in these two accidents. The Board
    made urgent recommendations to immediately develop comprehensive
    traffic control guidelines specifically tailored to U.S. Border Patrol
    checkpoints located on highways. These urgent recommendations were
    issued approximately 1 month after the second accident.
        The Office of Highway Safety has 17 on-going investigations,
    including a motorcoach collision with an SUV near Hewitt, Texas, a
    truck that rear-ended a bus near Hampshire, Illinois and two school bus
    accidents, one in Arlington, Virginia and another in Liberty, Missouri.

    Office of Railroad, Pipeline and Hazardous Materials Investigations
            (ORPH)
        Since January 2004, ORPH completed 18 accident investigations,
    including 12 railroad, 3 pipeline and 3 hazardous materials reports.
        By law, the Safety Board determines the probable cause of railroad
    accidents involving passenger trains or any train accident that results
    in at least one fatality or major property damage.
        I'd like to discuss two railroad accident investigations by the
    Safety Board: the derailment of a Canadian Pacific Railway freight
    train near Minot, North Dakota and the derailment of a Norfolk Southern
    Railway freight train in Graniteville, South Carolina.
        On January 18, 2002, an eastbound Canadian Pacific Railway freight
    train traveling about 41 miles an hour derailed 31 cars about \1/2\
    mile west of the city limits of Minot, North Dakota. Five tank cars
    carrying anhydrous ammonia catastrophically ruptured and a vapor plume
    covered the derailment site and surrounding area. The plume affected
    about 11,600 people who occupied the area. One resident was fatally
    injured and 60-65 residents of the neighborhood nearest the derailment
    site were rescued. As a result of the accident, 11 people sustained
    serious injuries and 322 people sustained minor injuries. The probable
    cause of the derailment was an ineffective inspection and maintenance
    program that did not identify and replace cracked joint bars before
    they completely fractured and led to the breaking of the rail at the
    joint. Contributing to the severity of the accident was the
    catastrophic failure of five tank cars and the instantaneous release of
    about 146,700 gallons of anhydrous ammonia. The Safety Board made 8
    safety recommendations to improve track inspections and tank car
    performance.
        On January 6, 2005, a northbound Norfolk Southern Railway freight
    train collided with a locomotive that was parked on an industrial
    siding in Graniteville, South Carolina. Hours before the accident,
    another Norfolk Southern Railway train had used the same main track to
    enter the industrial siding. The local train crew secured their train
    and departed the area. About 8 hours later, the accident train
    proceeded toward Graniteville with authority to use the main track
    without restrictions. The engineer of the accident train initiated an
    emergency application of the brakes as the train neared the switch. The
    train was diverted onto the sidetrack and struck the lead locomotive of
    the parked local train. The two locomotives and 16 head cars derailed.
    Included in the derailment were three pressure tank cars filled with
    chlorine. One chlorine tank car was breached, which prompted an
    evacuation of about 5,400 people for an extended period. The engineer
    and eight other people died from inhalation injuries due to the
    chlorine gas release. The conductor and 72 other people were
    hospitalized. The investigation is on-going.
        In addition to launching on 17 investigations and completing 18
    major reports, ORPH held a symposium in March 2005 on Positive Train
    Control at the NTSB Academy and held a public hearing on April 26-27,
    2005 regarding a Union Pacific train derailment near Macdona, Texas.
        Currently, the Office of Railroad, Pipeline and Hazardous Materials
    Investigations has 18 railroad, 2 pipeline and 3 hazardous materials
    accident investigations on-going.

    Office of Marine Safety (OMS)
        OMS investigates marine accidents on navigable waters and
    territorial seas of the United States and accidents involving U.S.
    merchant vessels worldwide. Recently, the NTSB and the USCG reached an
    agreement making the Board responsible for the investigation of
    accidents that risked high loss of life to innocent third parties such
    as passenger vessel accidents and accidents that involve significant
    safety issues related to USCG safety functions.
        Passenger vessel accidents have constituted 80 percent of the 21
    marine accidents investigated by the Board in the past 4 years. Since
    March 2003, four of the Board's major accident investigation launches
    have been marine accidents, all of which were of major consequence: the
    boiler explosion aboard the Bahamian Flag cruise ship, Norway, in
    Miami, Florida, the allision of the Staten Island Ferry near St.
    George, Staten Island, New York and the Taki-Tooo which capsized while
    transiting Tillamook Bar near Garibaldi, Oregon.
        At approximately 6:48 A.M. on May 25, 2003, a boiler room explosion
    aboard the S/S Norway, docked in the port of Miami-Dade, killed 4 and
    injured at least 20 crewmembers. Nearly 50 fire-rescue units from
    Miami-Dade County, the City of Miami, and Miami Beach responded to the
    explosion in the boiler room. An additional 4 crewmembers died of
    injuries over the next 3 weeks after the accident. The investigation is
    on going.
        On October 15, 2003, the Staten Island Ferry Andrew J. Barberi was
    at the end of its regularly scheduled trip from Manhattan to Staten
    Island when it allided with a maintenance pier at the Staten Island
    Ferry terminal. Fifteen crewmembers and an estimated 1,500 passengers
    were on board. Ten passengers died and 70 were injured in the accident.
    An eleventh passenger died 2 months later as a result of injuries
    sustained in the accident. Damages totaled over $8 million, with repair
    costs of $7 million for the Barberi and $1.4 million for the pier. The
    probable cause of this accident was the assistant captain's unexplained
    incapacitation and failure of the New York City Department of
    Transportation to implement and oversee safe, effective operating
    procedures for its ferries. As a result of its investigation, the
    Safety Board made eight safety recommendations.
        On June 14, 2003, at about 7:15 A.M., the small passenger vessel
    Taki-Tooo capsized while transiting Tillamook Bar near Garibaldi,
    Oregon. The Taki-Tooo was one of four U.S. Coast Guard-inspected small
    passenger vessels leaving the bay at the same time for charter fishing
    excursions. Rough bar warnings were posted and had prohibited
    recreational and uninspected commercial vessels from transiting the bar
    that morning. One of the rescue units could not launch because
    conditions were too rough. The Taki-Tooo's course took her close to the
    North Jetty as the vessel turned to the north. The Taki-Tooo capsized
    after being struck on its port side by a large wave. Of the 19 persons
    aboard, 9 died and 2 are missing and presumed drowned. The Board will
    be considering this report in June.
        In addition to investigating 21 accidents and completing 5 marine
    reports, OMS completed a major reconsideration of the collision between
    the U.S. Coast Guard Cutter, Cowslip, and the foreign flag vessel,
    EverGrade, and issued two early recommendations related to the
    availability of children's lifejackets aboard small passenger vessels
    and small passenger vessel stability.
        The OMS currently has 10 on-going accident investigations.

                                 CRITICAL NEEDS

        The increasing demands of a growing transportation environment and
    advancements in transportation technologies, coupled with our needs to
    adjust mission resources to accommodate inflation, salary increases,
    and the strain of a static budget, create significant challenges for
    the NTSB to investigate the accidents that Congress requires us to
    investigate under our mandate.
        For example, there is a 24 percent staffing shortage in the Office
    of Aviation Safety (OAS) alone. With a forecasted activity growth of
    between 4 and 5 percent in world aircraft by the year 2015, OAS will be
    overloaded and it will be increasingly difficult to keep on schedule
    with current investigations and reports. Additionally, without
    additional resources, the Safety Board will struggle to maintain its
    currency with emerging technologies, and the Board's focus on incidents
    that, if investigated, may prevent major accidents.
        Similarly, our Office of Highway Safety (OHS), due to shrinking
    resources, is unable to fully staff all three major highway
    investigation teams. Without sufficient personnel in key technical
    areas, our highway office can only select a limited number of accidents
    and incidents to investigate. These investigations can yield
    significant life-saving lessons learned; consequently, fewer
    investigations will reduce our prospects for identifying these life-
    saving lessons. The opportunities to improve highway safety in our
    Nation with over 42,000 deaths per year are significant. However,
    resources are necessary to ensure that the NTSB can continue to focus
    on those highway issues that will make meaningful improvements for our
    citizens. Likewise, resource limitations impact our Office of Railroad,
    Pipeline and Hazardous Materials Investigations and our Office of
    Marine Safety. In both of these modal offices, managers have had to
    either curtail some investigations or repeatedly launch the same
    investigators to multiple accidents. In the end, the timeliness of our
    recommendations may suffer.
        The Board appreciated the support of the committee in providing
    approximately $3.7 million above the fiscal year 2004 appropriation
    level. However, the Board had to absorb $3.9 million, which included a
    government-wide pay increase, an inflationary increase and a fiscal
    year 2005 across-the-board rescission. Consequently, the increase only
    allowed us to maintain our fiscal year 2003 staffing level.

                                TRAINING ACADEMY

        The NTSB Academy is in its second year of operation in Ashburn,
    Virginia, with a record number of individuals (over 1,500) attending
    classes, training sessions, symposiums, forums and other programs. This
    number far exceeded all expectations. During the year, 15 courses were
    taught on topics such as the sciences involved in accident
    investigations and techniques used to assist survivors and victims'
    families following a transportation disaster. Sixty-five students, from
    35 foreign countries, attended Academy courses in 2004, more than
    doubling the 16 countries represented in 2003. Additionally, 9 new
    courses and partnership programs are currently scheduled for the 2005
    calendar year; more will be added as they are identified. Yet, the
    Academy has only 6 staff to develop and deliver these programs.
        In addition, the Academy has formed alliances and partnerships with
    other Federal agencies and private organizations to meet the training
    needs of other government agencies and the transportation and emergency
    response communities including Airports Council International of North
    America, the Air Transport Association, the Aviation Safety Alliance,
    the Civil Aviation Administration of China, the Federal Bureau of
    Investigation, the National Association of State Boating Laws
    Administrators, the National Aeronautics and Space Administration,
    Transportation Safety Institute and the Society of Automotive
    Engineers.
        As a developing center of excellence for accident and
    transportation safety training, the Academy has been sought out as a
    venue for other organizations' training and outreach use. Recently, the
    Society of Automotive Engineers conducted its forum on developing
    transportation-related technologies and the Armed Forces Institute of
    Pathology taught its annual course for medical examiners at the
    Academy. NTSB, as the chair of the International Transportation Safety
    Alliance, hosted the Chairman's meeting with 10 countries that have
    independent safety boards at the Academy in March of this year.

                    TRANSPORTATION DISASTER ASSISTANCE (TDA)

        In 1996, Congress passed the Aviation Disaster Family Assistance
    Act that gave the NTSB the responsibility of assisting the victims of
    aviation disasters and their families. The Board's primary
    responsibility involves coordination between Federal agencies,
    commercial airlines, State and local authorities and the families of
    victims. Additionally, in 1997, Congress enacted the Foreign Air
    Carrier Support Act to ensure foreign air carriers operating to the
    United States meet the same standards for victim assistance as their
    domestic U.S. counterparts. The TDA team's mandatory responsibilities
    include assistance at all major aviation accidents as well as accidents
    in other modes of transportation. TDA staff launched on 16 major
    accidents providing support to all modes and responded to approximately
    1,500 inquiries from family members. In one instance, a TDA staff
    member launched to three major investigations within a 10-day period.
        In addition, the TDA provides comprehensive courses at the NTSB
    Academy for professionals who support families of major transportation
    accident victims following a tragedy. These courses bring together
    leading experts in the field and cover a wide range of topics including
    initial accident notification, grief and trauma, forensic procedures,
    multi-cultural memorial services and effective family briefings.

                             APPROPRIATION REQUEST

        The President's budget for fiscal year 2006 requests $76.7 million
    for the National Transportation Safety Board. This level is the same as
    the amount appropriated for the Board's Salaries and Expenses account
    for the current year. This level will fund 401 full-time equivalent
    (FTE) positions, requiring a reduction of 15 FTEs. As other expenses
    are relatively fixed, the Board must reduce staff to offset salary
    increases and inflation.
                                     ______

                          SURFACE TRANSPORTATION BOARD

                  Prepared Statement of Roger Nober, Chairman

        Mr. Chairman, members of the subcommittee, thank you for the
    opportunity to submit for the record this testimony on the Surface
    Transportation Board's (Board) fiscal year 2006 budget request.

                            BACKGROUND ON THE BOARD

        As all of you know, the Surface Transportation Board was created 8
    years ago by this committee in the ICC Termination Act of 1995. It has
    three members and is bipartisan. Structurally, the Congress determined
    that the Board should be decisionally independent but administratively
    affiliated with DOT.
        The Board provides an efficient and effective forum for the
    resolution of disputes arising from surface transportation regulation.
    It serves as both an adjudicatory and a regulatory body. 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 rate matters; certain intercity
    passenger bus company structure, financial, and operational matters;
    and certain pipeline matters not regulated by the Federal Energy
    Regulatory Commission.
        The Board's Section of Environmental Analysis performs
    environmental reviews on the Board's construction, abandonment, and
    merger matters as required by the National Environmental Protection
    Act. These reviews have become more complex and require significant
    resources.

                  THE BOARD'S FISCAL YEAR 2006 BUDGET REQUEST

        The Board requests budget resources of $26,622,000 and authority to
    continue to operate at 150 full time equivalents (FTEs). The Board's
    budget request for fiscal year 2006 reflects its fiscal year 2005
    budget, adjusted for the fiscal year 2006 pay raise and increased to
    the extent necessary for the Board to physical relocate due to the
    expiration of its current building space lease. The 150 FTEs is the
    level approved by Congress for fiscal year 2005. Unlike many agencies,
    there is little room at the Board's current budget level to absorb a
    pay increase without the additional resources, because fixed costs,
    including salary and rent, comprise about 95 percent of the agency's
    expenses. Absorbing even a small amount of the pay increase impairs the
    Board's ability to perform its statutory mission.
        Of the requested $26,622,000, 81 percent of the increase in budget
    resources requested would be used to cover the Board's relocation
    expenses. The Board is requesting $4,500,000 for services related to
    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 will be forced to 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
    expects to advertise the lease solicitation during the summer of 2005
    and award the lease by the fall of 2005. GSA will then begin the design
    and interior construction beginning in 2006 with an anticipated move-in
    date of January 2007. The requested funds will provide GSA with the
    resources to schedule the network and telecommunication connections and
    interfaces and perform needed structural changes to the leased space to
    support the Board's mission. The Board will request 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 requested authorization for 150 FTEs also will provide the
    Board with the discretion to hire staff to replace tenured, retirement-
    eligible staff prior to their anticipated retirement date. Currently,
    75 employees, or 57 percent, of the Board staff are retirement
    eligible. Several retirements can be expected in the near future, and
    having the flexibility to hire qualified people when they are available
    is particularly important for a high-rated agency that must hire
    economic and technical expertise when they are available in the labor
    market. Consistent with appropriation acts for past fiscal years, the
    Board requests a provision allowing user fee collections to be credited
    to the appropriation as offsetting collections and used for necessary
    and authorized expenses, to the extent that they are collected.
        The overall budget request reflects the workload that is expected
    and the statutory and regulatory deadlines associated with the
    resolution of the cases filed.

                           OVERALL GOALS OF THE BOARD

        In the performance of its functions, the objective of the Board is
    to ensure that, where regulatory oversight is necessary, it is
    exercised efficiently and effectively. In doing so, the Board strives
    to integrate market forces into the overall regulatory model, where
    possible.
        In particular, the Board seeks to resolve matters brought before it
    fairly and expeditiously. The Board seeks to facilitate commerce by
    providing an effective forum for efficient dispute resolution and
    facilitation of appropriate business transactions. It does so by using
    of its regulatory exemption authority, streamlining of its decisional
    process and the regulations applicable thereto, and consistently
    applying legal and equitable principles. Through rulemakings and case
    disposition, the Board continues to work to develop new and better ways
    to analyze unique and complex problems, to reach fully justified
    decisions more quickly, and to reduce the costs associated with
    regulatory oversight.
        To be more responsive to the surface transportation community by
    fostering governmental efficiency, innovation in dispute resolution,
    private-sector solutions to problems, and competition in the provision
    of transportation services, the Board will:
      --Continue to strive for a more streamlined process for the
            expeditious handling of rail rate reasonableness and other
            complaint cases, in an effort to provide additional regulatory
            predictability to shippers and carriers;
      --Continue to process diligently cases before the Board and to ensure
            that appropriate market-based transactions in the public
            interest are facilitated;
      --Continue to develop new opportunities for the various sectors of
            the transportation community to work cooperatively with the
            Board and with one another to find creative solutions to
            persistent industry and/or regulatory problems involving
            carriers, shippers, employees, and local communities; and
      --Continue to work to ensure the provision of rail service that is
            responsive to the needs of customers.
          significant workload that impacts the board's budget request
        Under the Interstate Commerce Act, the Board must authorize the
    construction of new rail lines that are part of the national rail
    system. The Board has been named a cooperating agency in the
    environmental review associated with building a rail line to the
    repository at Yucca Mountain, in Nye County, Nevada. The Department of
    Energy (DOE) has been working for years on a program to use Yucca
    Mountain as a repository for spent nuclear fuel and high-level
    radioactive waste that would be transported there from throughout the
    United States.
        In April 2004, DOE announced that its preferred mode to transport
    the radioactive materials from throughout the United States to Yucca
    Mountain was ``mostly rail,'' and it selected as its preferred corridor
    for a new rail line to Yucca Mountain one beginning near Caliente,
    Nevada. DOE announced its intent to prepare an Environmental Impact
    Statement (EIS), as required by the National Environmental Policy Act,
    for construction and operation of this rail line.
        In May 2004, DOE formally requested that the Board, along with two
    other agencies, become a cooperating agency on the environmental review
    of the Caliente Corridor leading to the Yucca Mountain facility. DOE
    made this request due to the Board's statutory authority to review
    certain rail construction projects and its expertise in doing so. Our
    responsibilities as a cooperating agency have been ongoing since 2004.
    The Board's Section of Environmental Analysis has had numerous meetings
    this year and throughout the EIS process, which the DOE expects to last
    at least 2 years.
        DOE has not yet determined whether it will structure the line in a
    way that would trigger Board review. While the Board receives many
    applications to build new rail lines that are subject to the Board's
    jurisdiction, not every rail line construction project requires Board
    approval. The Board has jurisdiction over and must approve the
    construction of any common carrier rail line--a rail line on which the
    railroad must provide service to any shipper who requests it. However,
    the Board does not license the construction of a private rail line--a
    line over service is not available to the general public.
        When the Board receives an application to build and operate a new
    rail line, it conducts the required environmental review of these
    projects and, unless the project is not in the public convenience and
    necessity, licenses the project. In the typical case, the Board is the
    lead agency for any necessary environmental review, but an
    environmental review that meets the Board's standards could be used if
    the Board were a cooperating agency.
        In conducting the environmental review, the Board is usually able
    to accept certain services that are paid for by the project proponent.
    For example, to complete the environmental review of a rail
    construction project, the applicant selects a third-party contractor
    from the Board's list of pre-approved contractors and retains it.
    Although the contractor works at the direction of the Board's Section
    of Environmental Analysis, the project proponent pays the contractor.
    The Board is not reimbursed for its staff time or travel.
        In discharging our duties as a cooperating agency, the Board will
    require a third party contractor who will assist the Board by attending
    meetings regarding the EIS, evaluating the environmental concerns, and
    providing the specialized, technical expertise concerning issues
    affecting the rail line construction that would supplement the work of
    the Board's Section of Environmental Analysis. The Board has received
    funding from DOE to reimburse the Board for the costs associated with
    this contractor. The Board's review of such a proposal must be
    independent. Otherwise, if the Board issued a license, that issuance
    could be subject to challenge in court on grounds that the agency's
    independence was jeopardized by its acceptance of reimbursements beyond
    those reimbursements that are ordinarily permissible in any rail
    construction case. A successful challenge could be costly to the
    taxpayers and delay the project.
        The Board's participation in the Yucca Mountain EIS will require 25
    percent of the Board's current environmental staff, which could
    adversely affect the Board's ability to conduct the environmental
    reviews required for abandonment and rail line construction cases
    currently pending before the Board and those that may be in the
    pipeline awaiting formal filing.
        Another significant construction case is The Alaska Railroad
    Corporation's proceeding. In that case, The Alaska Railroad Corporation
    seeks authority from the Board to construct and operate approximately
    80 miles of new rail line that would connect Eielson Air Force Base
    near North Pole, Alaska, to a point at, or near, Fort Greely and the
    Donnelly Training Area near Delta Junction, Alaska. The proposed
    project would include a 15-mile spur from Flag Hill to the Blair Lakes
    Military Training Area. The project area is located in a sub-arctic
    region with diverse environmental, geological and geotechnical
    conditions. The proposed rail line would cross several rivers and
    numerous streams and wetland areas. The project area also provides
    habitat to moose, caribou, black and brown bears, raptors and numerous
    other wildlife. The Board's Section of Environmental Analysis is in the
    early stages of the environmental review process for the project.

                       AMTRAK DIRECTED SERVICE PROVISION

        The fiscal year 2005 Transportation Appropriations Act directed the
    Secretary of Transportation to reserve $60 million of Amtrak's fiscal
    year 2005 appropriation to fund directed service of commuter and
    freight operations in the event of a cessation of service by Amtrak.
    The fiscal year 2006 President's budget request proposes to provide the
    Board with $360 million to support commuter rail service along the
    northeast corridor should Amtrak cease commuter rail 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 taken a number of steps since Congress' action last
    year. Among other things, the Board set up a joint working group with
    the FRA to coordinate issues. That group has met with all major
    stakeholders--including Amtrak, the affected commuter and freight
    railroads, and representatives of labor--to identify issues. We have
    compiled all of the services Amtrak provides to commuter and freight
    railroads, and we have 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 the law does alter some administrative
    procedures to allow the Board to act cooperatively and quickly. Of
    course, because the Board may be called on to consider these issues, I
    cannot say how the Board would resolve them. I can only identify those
    issues which we currently know would have to be resolved. Nevertheless,
    the Board and its staff would work to the best of our abilities to
    carry out these responsibilities in a fair and impartial manner.

               FISCAL YEAR 2005 AND 2006 ACTIVITIES OF THE BOARD

        Building upon the Board's success in fiscal year 2004--including
    issuing 1,108 decisions in fiscal year 2004, developing regulations to
    expedite processing for small rate cases \1\ and informally resolving
    disputes between railroads and between railroads and their customers--
    the Board will continue to look for ways to streamline and to improve
    applicable regulations and the 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.
    ---------------------------------------------------------------------------
        \1\ Ex Parte No. 646, Rail Rate Challenges in Small Cases.
    ---------------------------------------------------------------------------
        The workload involving rail rates and services is expected to
    remain stable through fiscal year 2006, particularly given the likely
    continuing expiration of long-term coal transportation contracts.
    Currently, the Board's rail rate docket is as follows:
      --4 coal rate complaint cases that are at various stages of
            adjudication under the stand-alone cost constraint of the
            Board's Coal Rate Guidelines;
      --3 complaint cases that have already been decided under the stand-
            alone cost constraint and are now being tested at the request
            of the complaining shippers under the alternative ``phasing''
            constraint; and
      --4 additional coal rate complaints that are currently being
            contested by the parties and defended by the Board in court.
        These proceedings will require significant staff attention, given
    the complex nature of the cases, the numerous steps such as motions and
    discovery resolution, and the tight 9-month statutory timeframes for
    completion once the record is closed. Indeed, the bulge in rate cases
    is already producing a strain on our resources, which have historically
    been geared to handle two rate cases at a time.
        Additionally, the Board will continue to handle rail cases
    involving questions of whether certain rail activity cannot be
    regulated at the State or local level because such regulation is
    preempted by Federal law.
        The Board continues to have success in resolving scheduling and
    operational issues between freight railroads and between those
    railroads and their customers. The Board's Rail Consumer Assistance
    Program is an informal mechanism for resolving disputes that has proven
    very effective, by having a special toll-free telephone number and a
    specific website connection, to assist rail customers and others with
    concerns involving railroads and has resolved 123 rail consumer issues
    during 2004. Board staff expeditiously handles and brings to a
    successful conclusion 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 has also worked to facilitate better communications
    between railroads and shippers regarding service issues and plans to
    resolve them. The Board participated in forums between railroads and
    their customers in Kansas City, San Francisco, and Atlanta. And the
    Board continues to assist parties in devising private-sector solutions
    to their disputes outside of the Board's formal processes.
        With respect to rail carrier consolidations, we are not aware of
    any major rail mergers in the immediate future. Therefore, the workload
    in this category is expected to remain somewhat stable through fiscal
    year 2006 because this category includes a broad array of control
    transactions among larger railroads and smaller railroads. Of course,
    it is impossible to know whether a major merger may be proposed during
    fiscal year 2006. As noted, the Board continues to resolve issues
    related to past Class I rail mergers. Also, the Board will continue to
    handle other rail consolidations involving smaller railroads that are
    filed with it.
        With the notable exception of the Yucca Mountain rail line
    construction project, the Board projects that its line construction
    docket will remain constant through fiscal year 2006. The Board has an
    unprecedented number of railroad line construction proposals, along
    with the associated environmental review work currently under review.
    These 12 proposals currently under review varied in size and scope,
    ranging from less than a mile to 260 miles of new rail line. The Board
    has been working on environmental issues raised by the U.S. Court of
    Appeals for the 8th Circuit in STB Docket No. 33407, Dakota, Minnesota
    & Eastern Railroad Corporation Construction Into The Powder River
    Basin. The Board has issued a draft supplemental addressing the issues
    remanded by the Court and is awaiting public comments on the Board's
    analysis. We emphasize that demands on the Board to conduct
    environmental reviews for such transactions continue to grow, and that
    such activities require a significant number of resources to complete.
        Other line transaction activity is expected to increase slightly
    through fiscal year 2006 as more carriers continue to sell unprofitable
    or marginally profitable lines as an alternative to service
    abandonment. In the past few years, the Board has seen a number of line
    acquisitions by both small carriers and noncarriers as rail carriers
    restructure their rail systems.

                                    SUMMARY

        The Board's budget request would ensure the resources needed for
    the Board to continue to implement its responsibilities expeditiously
    and effectively as Congress intends. I appreciate the opportunity to
    submit this statement about the Board's fiscal year 2006 budget request
    and would be happy to answer any other questions that the committee may
    have.
                                     ______

                           MORRIS K. UDALL FOUNDATION

                 Prepared Statement of Terrence L. Bracy, Chair

        Mr. Chairman, members of the subcommittee, thank you for the
    opportunity to present testimony regarding the fiscal year 2006 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.
        I am enormously proud of the accomplishments of the Foundation,
    produced by a small, dedicated staff working with a budget based on a
    combination of appropriations, fees and interest.
        There are two major program areas, supported by two distinct
    appropriations funds: the U.S. Institute for Environmental Conflict
    Resolution (the Institute), supported by a combination of annual
    appropriations and fees charged for services, and the Education
    Programs, supported by the annual interest from a Trust Fund (invested
    solely in Treasury obligations). In fiscal year 2006, the Institute
    will generate an estimated $3.6 million in gross revenues, of which an
    estimated $2.7 million will fund extramural mediation services and
    $900,000 will be applied to intramural costs. The Trust Fund will earn
    an estimated $1.5 million in interest. In consideration of these
    projections the President's Budget requests no new appropriation for
    the Trust Fund and $700,000 for the Institute. This funding is expected
    to allow the Foundation to maintain current programs in fiscal year
    2006. In this testimony, I would like to address some of the new
    developments at the Udall Foundation over the last year.
        The U.S. Institute for Environmental Conflict Resolution has become
    established as a national resource for assistance in resolving and
    preventing environmental conflicts involving Federal agencies. For
    example, the U.S. Institute has assisted the Federal Highway
    Administration's Environmental Streamlining and Stewardship Program by
    conducting 11 regionally customized workshops 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. Similar workshops featuring State-
    specific topics, co-funded by FHWA and a local sponsor, are continuing
    through fiscal year 2005. The Institute also has provided conflict
    resolution services on 2 of the 13 high priority transportation cases
    identified by the interagency task force on Environmental Stewardship
    and Transportation Infrastructure Project Reviews (St. Croix River
    Crossing and the Community Environmental Transportation Acceptability
    Project).
        The U.S. Institute has recently been retained to provide conflict
    resolution services in two projects in the Missouri River Basin
    (affecting Kansas, Missouri, Montana, Nebraska, North Dakota, South
    Dakota and Wyoming)--the first is facilitating an intergovernmental
    process to develop agreement on a ``spring rise'' proposal, and the
    second is an assessment for development of a Missouri River Recovery
    Implementation Committee. Other major projects under way in fiscal year
    2004-2005 included the Grand Canyon overflight noise controversy, the
    impact of endangered species issues on flight training at the Barry M.
    Goldwater Range, Everglades collaborative water use planning, and the
    Upper Klamath Basin Watershed recovery planning effort.
        Also in fiscal year 2004, President Bush signed into law the
    Environmental Policy and Conflict Resolution Advancement Act of 2003
    (Public Law 108-160), authorizing $3 million a year in operating
    appropriations for the U.S. Institute and $1 million a year for grants
    to assist non-Federal stakeholders to participate in Federal conflict
    resolution processes.
        Because of the increase in the number and size of its cases, the
    U.S. Institute's gross revenues from services tripled in fiscal year
    2004 over fiscal year 2003. About 25 percent of gross revenue is used
    by the U.S. Institute to fund intramural costs, and the rest is paid
    out to contracted private sector mediators with whom the Institute
    partners on projects. (The U.S. Institute's enabling legislation
    directs that it use mediators located in geographic proximity to the
    dispute whenever practicable.) Ultimately, the net revenues from
    services are equal to about one-third of the Institute's basic
    operating budget.
        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 756 college
    scholarships have been awarded through fiscal year 2005 to students
    from all 50 States and 255 colleges. The Native American Congressional
    Internship Program has placed 114 interns from 30 States and 73 tribes
    in Congressional offices, the Executive Office of the President, and
    high-placed offices at the Departments of Interior, Education and
    Defense.
        Native Nations Institute, a joint project of the Udall Foundation
    and the University of Arizona, has conducted executive education
    sessions for more than 1,000 councilors, presidents and senior managers
    from more than 100 Indian nations over the last 4 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 will have sufficient carryover
    funds in fiscal year 2006 to maintain current program levels; the
    President's Budget has not requested an fiscal year 2006 appropriation.
        I am pleased to report to the subcommittee that, in its first full
    audit, as required by the Accountability of Tax Dollars Act of 2002,
    the Foundation received an unqualified ``clean'' opinion for fiscal
    year 2004, and no material inadequacies were identified by the
    independent auditor, Clifton, Gunderson, LLP. In addition, the
    Foundation met all programmatic goals and nearly all management goals
    for fiscal year 2004, as reported in its Performance and Accountability
    Report to Congress.
        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 best value out of its limited
    funds. We will continue to operate in that spirit, recognizing that we
    have a responsibility to Congress to make the best use of each dollar.
        Thank you again for the opportunity to submit testimony. I look
    forward to working closely with you and your staff as you consider
    fiscal year 2006 appropriations.
                                     ______

                      NATIONAL CREDIT UNION ADMINISTRATION

            Prepared Statement of Honorable Joann Johnson, Chairman

        Chairman Bond, Ranking Member Murray, members of the subcommittee,
    I am pleased to submit this testimony that presents NCUA's request for
    fiscal year 2006 funding of $950,000 for the Community Development
    Revolving Loan Fund (CDRLF) and to request $1.5 billion in fiscal year
    2006 borrowing authority for the Central Liquidity Facility (CLF), and
    an administrative limitation of $323,000 in CLF operational expenses
    for the year.

     NATIONAL CREDIT UNION ADMINISTRATION COMMUNITY DEVELOPMENT REVOLVING
                                   LOAN FUND

        NCUA remains committed in our efforts to promote and facilitate the
    extension of affordable financial services to individuals and
    communities throughout America. ``Low-income'' designated credit unions
    use the loans to further community development by providing funding for
    member loan demand, additional member services, and increased credit
    union capacity to serve members and the community. The grants are used
    for verifiable and need-based technical assistance purposes by low-
    income designated credit unions.
        Congress established the CDRLF in 1979 to provide low-interest
    loans to credit unions that have been designated low-income by NCUA.
    NCUA has administered the CDRLF for 15 years. By year-end 2004, the
    CDRLF had provided 244 loans totaling $35 million to low-income
    designated credit unions. In 1992, NCUA initiated a technical
    assistance grant (TAG) program in conjunction with the CDRLF which
    funded grants from the interest generated from outstanding CDRLF loans.
    To date, NCUA has disbursed 1,510 TAGs totaling $3.4 million.
        NCUA views the CDRLF as a resource for incubation monies for low-
    income designated credit unions to initiate or develop services for
    members, thereby providing further opportunities to self-fund or obtain
    more substantial funding. Low-income designated credit unions use CDRLF
    loans to further community development efforts by funding member loan
    demand, provide additional member services, increase capacity to
    service members and improve the financial condition of low-income
    credit union members. TAGs support many of the services low-income
    designated credit unions provide to their members, including member
    financial literacy programs and electronic delivery systems.

    Background
        The CDRLF was established by Congress (Public Law 96-124, Nov. 20,
    1979) through an initial $6 million appropriation to stimulate economic
    development in low-income communities. In 1990 the sole administration
    of the CDRLF was transferred to NCUA after having been administered by
    various Federal agencies.
        Congress did not provide additional appropriations for the CDRLF
    from 1979 to 1996. For fiscal year 1997, Congress appropriated an
    additional $1 million for the loan program with subsequent
    appropriations as follows:

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

    ------------------------------------------------------------------------
    Fiscal Year 1997.............               $1,000,000  Loans
    Fiscal Year 1998.............                1,000,000  Loans
    Fiscal Year 1999.............                2,000,000  Loans
    Fiscal Year 2000.............                1,000,000  Loans
    Fiscal Year 2001.............                  350,000  TAG
                                                   650,000  Loans
    Fiscal Year 2002.............                  350,000  TAG
                                                   650,000  Loans
    Fiscal Year 2003.............                  300,000  TAG
                                                   700,000  Loans
    Fiscal Year 2004.............                1,000,000  TAG
                                                   200,000  Loans
    Fiscal Year 2005.............                  800,000  TAG
                                                   200,000  Loans
    ------------------------------------------------------------------------

        Administrative expenses related to the CDRLF are fully absorbed by
    NCUA. All appropriations, as well as any earnings generated from the
    CDRLF's assets, are provided to the intended low-income designated
    credit unions after any necessary adjustments to recognize potential
    losses in the loan portfolio.

    Qualifying Applicants
        In order to qualify for participation in the CDRLF, credit union
    applicants must have a low-income designation and must serve
    predominantly low-income members. NCUA regulations define low-income
    members as those persons either earning less than 80 percent of the
    average for all wage earners as established by the Bureau of Labor
    Statistics or those whose annual income falls at or below 80 percent of
    the median household income for the Nation. The NCUA standard for 2004
    income for a household was $35,080 and $21,389 for an individual.

    Revolving Loan Component
        The revolving loan component of the CDRLF is designed to assist as
    many qualifying credit unions as possible. Therefore, loans are limited
    to $300,000 and no credit union may have more than two separate loans
    at any one time. Loans must be repaid within 5 years, although a
    shorter repayment period may be considered.
        Generally, loans are required to be paid in semiannual installments
    with no principal balance repayment due during the first year. To
    combat the potential misuse of funds, NCUA regulations require that
    recipient credit unions must match the loan with funding from member
    share deposits or non-member deposits within the first year.
        Interest rates are set annually by the NCUA Board at a rate between
    1 and 3 percent. Due to the current interest rate environment, the NCUA
    Board has set a 1 percent interest rate for 2005.
        NCUA has authorized an open application period for participation in
    the loan program. This unrestricted application period enables low-
    income credit unions--most of which have very few employees and limited
    resources--to develop and present a viable plan for better serving
    their fields of membership. The open application period also allows
    credit unions to implement projects and services on a timelier basis.
        During 2002, NCUA revised the loan program in an effort to achieve
    greater flexibility and mitigate risk. Although loan repayments
    accelerated during this period of time, the revised program offset the
    anticipated loss of loans with increased interest and applications for
    the loan program. During 2004, twenty-three credit union loan
    applications were received.
        To help ensure equality in loan approvals, a scoring system judges
    the purpose of the proposed use of funds, the financial condition of
    the credit union and management's capability of achieving the stated
    objective and operating the credit union in a safe and sound manner. As
    a regulator, NCUA has the added advantage of using credit union
    examinations to ensure the financial stability of loan grantees.

    Technical Assistance Grants (TAGs)
        TAGs are generally awarded in amounts less than $5,000 and are made
    directly to low-income designated credit unions requiring assistance to
    further their outreach into the communities they serve. The grants
    assist these credit unions, generally less than $18 million in assets,
    in their efforts to improve service to their members by providing
    training opportunities to credit union staff; supplying funds for
    operational upgrades in recordkeeping; offering stipends to credit
    unions for summer student intern programs; promoting credit union
    services; developing training and consulting services for members and
    other worthwhile programs. With assistance provided through the TAG
    program, credit unions have also realized improved service in the
    delivery of financial products and services through enhanced
    technology. In 2004, 106 credit unions received more than $448,000
    specifically designated for technology improvements which includes
    upgrades in hardware and software, debit card programs and automated
    response systems.
        To ensure the funds are used solely for the purpose approved,
    grants are issued as reimbursements for goods or services previously
    approved by NCUA and much like the loan component of the CDRLF, various
    TAG initiatives are available to low-income designated credit unions
    throughout the year.
        Beginning in 2001, Congress specifically designated a portion of
    its annual appropriations for TAGs. Prior to 2001, the grant program
    was funded solely through earnings from outstanding CDRLF loans and
    never exceeded $250,000.
        Grant requests continue to exceed all available resources. In 2004,
    NCUA received requests for more than $3.4 million. Due to limited
    resources, NCUA was forced to decline requests for more than $2.2
    million that could have been used to provide much needed services in
    low-income areas. Congress, recognizing the high demand for technical
    assistance, specifically designated $800,000 of the $1 million total
    appropriation for the grant component of the CDRLF for fiscal year
    2005. From its inception in 1992, the CDRLF has disbursed 1,510
    technical assistance grants totaling $3.4 million to low-income
    designated credit unions. In 2004, NCUA disbursed grants totaling over
    $600,000.

    Student Intern Program
        In 1996, NCUA established a student intern program funded entirely
    by the grant component of the CDRLF. The program is designed to provide
    low-income designated credit unions the opportunity for college
    students to contribute to the operations of the credit union while
    learning about the credit union community. In 2004, the program
    approved grants totaling $63,000, with 26 low-income designated credit
    unions and their 26 credit union partners participating. Student
    interns participating in the program work at both the low-income
    designated credit unions and their partnering credit unions, affording
    them with the opportunity to share best practices between the
    institutions. Response from student and credit union participants has
    been extremely positive. The program is reevaluated annually to assess
    its ongoing impact and feasibility.

    VITA Program
        In 2004, NCUA designated funds for low-income designated credit
    unions establishing VITA (Volunteer Income Tax Assistance) sites. The
    VITA program is administered by the Internal Revenue Service to assist
    low-income and elderly taxpayers with income tax preparation, and to
    encourage low-wage earners to file for the Earned Income Tax Credit
    (EITC). Last year, NCUA granted 12 credit unions a total of $56,322
    dollars to offset some of the administrative burden associated with
    setting up these taxpayer clinics. Due to the success of last year's
    program, NCUA designated $60,000 for credit unions to set up VITA
    programs for 2005.

    Financial Education Program
        A new initiative offered last year was the Financial Education
    Program. Last year, NCUA granted 19 credit unions, a total of $80,683
    to offset some of the costs associated with initiating and/or
    maintaining a financial education program. Grants provided under this
    initiative were granted to facilitate credit unions in providing
    members and potential members with practical money-management skills
    and an introduction to financial planning through course work that
    covers the fundamentals of money management.

    Other TAG Programs
        In addition to the above three programs and the Enhanced Technology
    Program, NCUA offered a Home Ownership Program, Individual Development
    Account Program, International Remittance Program, Officials and Staff
    Training Program, Mentoring Program, and Service to Underserved Areas
    Program in 2004.

    2005 TAG Programs
        In 2005, there will be five specific grant initiatives made
    available to low-income designated credit unions, entitled as follows:
    Urgent Needs Grant, Student Internship Initiative, Volunteer Income Tax
    Assistance (VITA) Initiative, Building Internal Capacity
    (Infrastructure) Initiative, and Enhancing Member Services (Outreach)
    Initiative.
        NCUA plans to use both appropriated funds and funds derived from
    income from assets to cover the costs of these initiatives. These
    specialized TAG programs emphasize initiatives that help communities
    develop self-sufficiency.
        Credit unions receiving funds through the Student Internship
    Initiative are provided an opportunity to introduce college students to
    credit unions and credit union operations. The purpose of the VITA
    Initiative is to provide financial assistance to credit unions wishing
    to help existing and potential members prepare their tax returns,
    especially those eligible for the Earned Income Tax Credit. The
    Building Internal Capacity Initiative grants will cover the costs of
    projects which improve the overall operations or financial condition of
    the credit union and ultimately enable the credit union to better
    deliver services to its members. Grant awarded under this initiative
    may include enhancing and improving technologies; preparing emergency
    and business resumption strategies or training and developing
    management. Credit unions receiving funds through the Enhancing Member
    Services Initiative are provided an opportunity to provide new or
    better services to existing members and those projects which will
    extend services to potential members and the community. Grant awarded
    under this initiative may include financial education, homeownership
    opportunities and developing marketing and outreach programs.
        The CDRLF continues to provide low-income designated credit
    unions--particularly those of smaller asset size--the opportunity to
    obtain loans and technical assistance grants to improve and enhance
    services to their members. Though a small program, it provides valuable
    aid and assistance for those credit unions benefiting from this support
    while striving for self-sufficiency. Credit unions, through their
    cooperative structure, are funded through the share deposits of their
    members. The CDRLF provides needed assistance to further growth and
    viability of participating credit unions serving low-income fields of
    membership. Access to affordable financial services can provide
    underserved communities with a much needed alternative to high-cost
    lenders, allowing the residents to keep more of their money in their
    communities.

        NATIONAL CREDIT UNION ADMINISTRATION CENTRAL LIQUIDITY FACILITY

        The National Credit Union Administration Central Liquidity Facility
    (CLF) was created by the National Credit Union Administration Central
    Liquidity Facility Act (Public Law 95-630, Title XVIII, 12 U.S.C. 1795,
    et seq.). The CLF is a mixed ownership government corporation managed
    by the National Credit Union Administration Board. It is owned by its
    member credit unions who contribute all of the capital by the purchase
    of stock. The CLF became operational on October 1, 1979.
        The purpose of the CLF is to improve general financial stability by
    meeting the liquidity needs of credit unions and thereby encourage
    savings, support consumer and mortgage lending and provide basic
    financial resources to all segments of the economy. To accomplish this
    purpose, member credit unions invest in CLF stock which is used for
    investment purposes and the funding of some lending activity. The
    proceeds of borrowed funds from the Federal Financing Bank are used to
    match fund significant loan requests from member credit unions.
        In addition to serving its direct members, the CLF works through
    agents to serve substantially all natural person credit unions. CLF
    agents are a private financial network of 29 State and federally
    chartered corporate credit unions with approximately $69.6 billion in
    assets. The corporate credit union network provides operational and
    correspondent services, investment products and advice and short-term
    loans to its approximately 9,324 natural person credit unions. The CLF
    provides this network with funds to meet abnormal savings outflows if
    temporary liquidity shortages or public confidence issues arise. As a
    specialized lender housed within NCUA, the CLF has the ability to draw
    upon the supervisory and insurance resources of the agency. However,
    CLF assistance is generally a secondary source of funds after the
    corporate system or other sources of credit have been utilized.
        The borrowings of the CLF have the ``full faith and credit'' of the
    United States government. The Federal Financing Bank of the U.S.
    Treasury is available as a source for the CLF to fund its lending
    programs. The CLF is financially self-supporting and does not use
    government funds to support any of its administrative and operational
    expenses.

    Lending Activities
        Loans are available to credit unions directly from the CLF or
    through its agent corporate credit union members. Credit unions rely on
    market sources to meet their demands for funds. The CLF normally is not
    an active participant in the on-going daily operations of this system.
    Rather, its role is to be available when unexpected, unusual or extreme
    events cause temporary shortages of funds. If not handled immediately,
    these shortages could lead to a larger crisis in individual credit
    unions or even the system as a whole. With its knowledge of credit
    unions and its immediate access to the supervisory information of NCUA,
    the CLF plays a vital role in maintaining member and public confidence
    in the health of the U.S. credit union financial system.
        During 2004, the CLF did not receive any requests for loans. Credit
    union liquidity remained strong in 2004. Although credit union member
    loan demand moderately exceeded share growth in 2004, share growth
    exceeded loan growth in the 3 prior years. However, the CLF remains
    ready and able to meet the liquidity needs of the credit union system
    when unusual, unexpected or extreme events occur.

    Factors Influencing Credit Union Borrowing Demand
        Under the Federal Credit Union Act, the CLF is intended to address
    unusual or unpredictable events that may impact the liquidity needs of
    credit unions. Since these events are not generally foreseen, it is
    extremely difficult to forecast potential loan demand. Throughout the
    history of the CLF, loan demand has widely fluctuated in both volume
    and dollar amount.
        The CLF is authorized by statute to borrow from any source up to 12
    times its subscribed capital stock and surplus. Since fiscal year 2001,
    a borrowing limit of $1.5 billion has been approved by Congress. The
    continuation of the $1.5 billion cap for fiscal year 2006 will further
    assure that the CLF continues as a reliable, efficient backup liquidity
    source in times of need.
        It is important to note that CLF loans are not used to increase
    loan or investment volumes because by statute the proceeds from CLF
    loans cannot be used to expand credit union portfolios. Rather, the
    funds are advanced strictly to support the purpose stated in the
    Federal Credit Union Act--credit union liquidity needs--and in response
    to circumstances dictated by market events.

    Administrative Expenses
        Total operating expenses for fiscal year 2004 were $214,000, below
    the budget limitation of $310,000. Expenses were under budget in 2004
    due to a vacancy in the NCUA/CLF Board in the third and fourth quarters
    and travel expenses were not incurred as anticipated.
        Total operating expenses for fiscal year 2005 are projected to be
    within our budget limitation of $309,000. In fiscal year 2005, pay and
    related benefits are higher than 2004 due to salary increases.
        For fiscal year 2006, the CLF is requesting an administrative
    expense limitation of $323,000 and borrowing authority not to exceed
    $1,500,000,000.

    Additional Background
        Credit unions manage liquidity through a dynamic asset and
    liability management process. When on-hand liquidity is low, credit
    unions must increasingly utilize borrowed funds from third-party
    providers to maintain an appropriate balance between liquidity and
    sound asset/liability positions. The CLF provides a measure of
    stability in times of limited liquidity by ensuring a back-up source of
    funds for institutions that experience a sudden or unexpected shortage
    that cannot adequately be met by advances from primary funding sources.
    Two ratios that provide information about relative liquidity are the
    loan-to-share ratio and the liquid asset ratio. Liquid assets are
    defined as all investments less than 1 year plus all cash on hand.
    Managing liquidity risk is a major priority for credit unions and has
    become an increasingly important risk issue in the past decade as the
    charts below indicate.

        Chart 1 shows the ratio of loans to shares in all federally insured
    credit unions. As the ratio of loans to shares increases, the amount of
    funds maintained in short-term liquid investments declines. Liquidity
    risk has increased on average in the past decade as on-hand liquidity
    in federally insured credit unions gradually declined due to increased
    lending. Weak share growth during 2004 increased the ratio from the
    year-end 2003 low of 69.8 percent to a mid-year 2004 level of 71.8
    percent. Liquidity risk management remains a significant obligation for
    credit unions.

        Chart 2 shows the ratio of liquid assets to total assets in all
    federally insured credit unions (using mid-year data for 2004). As this
    ratio decreases, liquidity risk and the potential need for borrowed
    funds conversely increases. Credit unions utilize various market
    sources for funding needs including the repurchase market,
    correspondent relationships with corporate credit unions and other
    financial institutions, and, to a growing extent, membership in the
    Federal Home Loan Bank system. CLF serves as a back-up source of
    liquidity when an unexpected need for funds arises and primary sources
    are not available.

                                    SUMMARY

        NCUA greatly appreciates the subcommittee's continued support of
    NCUA's efforts to keep credit unions safe and sound, enhance credit
    union liquidity and provide needed assistance through loans and grants
    to low-income credit unions.
                                     ______

                     NEIGHBORHOOD REINVESTMENT CORPORATION

         Prepared Statement of Kenneth D. Wade, Chief Executive Officer

        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 235 nonprofit, community-based organizations
    that comprise the NeighborWorks network. In fiscal year 2004, we
    served over 2,700 communities and generated over $2 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 homeownership, 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 homeownership
            education counselors, creates a national force of homeownership
            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 235 members active in
    more than 2,700 communities across the country. NeighborWorks
    organizations operate in our Nation's largest cities, suburban
    neighborhoods and rural areas across 49 States as well as 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 homeownership 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 2006

        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 $118 million will allow the NeighborWorks
    system to:
      --Triple the number of certified homeownership educators and
            counselors to serve 2 million people each year by 2007 to
            ensure that the largest investment of an individual's life is
            successful.
      --Generate $19.60 in other investment for every dollar appropriated
            to NeighborWorks America, for a total reinvestment of over
            $2.3 billion in American communities.
      --Establish a national foreclosure prevention center (the
            NeighborWorks Center for Foreclosure Solutions) to identify
            the most common causes of foreclosure and deploy effective
            prevention and intervention strategies.
      --Train thousands of community leaders across the country in
            community development and housing; homeownership 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 become preeminent
            practitioners.
      --Increase financial fitness education in underserved markets to
            build better money management skills that position families to
            build assets and achieve financial independence.
      --Work with government and private sector partners to provide
            affordable loans, rental housing and community development that
            improve job retention and buoys local economies.
        For fiscal year 2005, NeighborWorks America received an
    appropriation of $115 (minus an across-the-board rescission). The
    proposed increase for fiscal year 2006 will further NeighborWorks
    America's work to create and sustain minority homeownership 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 2006

        In developing the Corporation's fiscal year 2006 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.
      --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 2005, NeighborWorks America is
    taking a major step forward in enhancing 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--235 NeighborWorks organizations across 49 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 recently 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, homeownership 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.

                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 154 community-based NeighborWorks
    organizations. Since 1993, the combined efforts of the Campaign have
    created more than 90,000 new homeowners (the majority of whom are low-
    and moderate-income minority families) and provided counseling to more
    than 500,000 individuals. As a result, $8.5 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
        NeighborWorks HomeOwnership Centers throughout the Nation offer
    one-stop shops for a broad range of homeownership 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 2006. On average, after becoming
    fully operational, each HomeOwnership Center will produce over 100 new
    homeowners per year.
        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 Homeownership Initiative. We are making great
    strides in achieving this goal.
      --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.

    NeighborWorks Homeownership Activities for Fiscal Year 2006
        In fiscal year 2006, 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 homeownership-
            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 2006 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.

                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 homeownership 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-plus 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. In the past 18 months, the
    HOPI campaign prevented 650 foreclosures through innovative outreach
    and counseling efforts.
        The Center for Foreclosure Solutions seeks to expand successful
    initiatives to reduce foreclosures and its many negative impacts on
    borrowers and communities.

                Housing Choice Voucher Homeownership
        Through June 2004, almost 3,000 Section 8 households have completed
    homeownership education training through local NeighborWorks
    organizations and 555 have purchased homes through this program.
        This is the result of NeighborWorks organizations forging
    partnerships with 75 local public housing authorities to develop and
    implement comprehensive local and regional Housing Choice Voucher
    Homeownership programs, formerly known as the Section 8 to
    Homeownership program. These partnerships are built upon the
    NeighborWorks network's solid experience in pre- and post-purchase
    counseling, innovative mortgage financing and in leveraging public
    resources with private investment.
        In addition to national funding, the NeighborWorks America is
    assisting local Section 8 administrators and NeighborWorks
    organizations to develop Housing Choice Voucher Homeownership Programs
    through national and regional training, technical assistance, ongoing
    evaluation and publication of lessons learned. With support from the
    U.S. Department of Housing and Urban Development, NeighborWorks
    America has hosted numerous training sessions at its NeighborWorks
    Training Institutes and other venues to help build capacity in the
    Housing Choice Voucher Homeownership Program.

                Rural Development
        The NeighborWorks network has become increasingly active in rural
    communities around the country. Today, 70 out of 230 chartered
    NeighborWorks organizations--about 30 percent of the network--serves
    rural populations. 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.
        During fiscal year 2006, direct investments by NeighborWorks
    organizations serving low-, very low- and moderate-income residents in
    rural communities across America are again expected to surpass $500
    million. At this rate of leveraged direct investments, NeighborWorks
    America expects to achieve the benchmark goal of providing $1 billion
    into underserved rural markets over the 2-year period ending December
    31, 2005. The Corporation will continue to support the needs of
    NeighborWorks organizations serving rural populations (74 as of
    December 2004) by implementing a plan for at least one pilot expansion
    into a perennially underserved rural region not currently being served
    by a chartered NeighborWorks organization.

                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 Homeownership Education and
                        Counseling
        NeighborWorks is the Nation's largest certifier of high-quality
    homeownership educators and counselors, working to empower consumers to
    make the biggest investment of their lives a successful one. Although
    the value of homeownership 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
    homeownership 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 Homeownership Education and Counseling
    (NCHEC) to create a national force of high-quality homeownership 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 homeownership.
        NCHEC aims to increase the number of homeownership 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. The total number of counselors and educators provided both
    certification training and continuing education will increase to more
    than 3,000 per year.
        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 homeownership and community-
    lending training offered at the NeighborWorks Training Institutes,
    NCHEC will partner with other intermediaries, statewide 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.

                                   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 235 community development organizations and more
    than 2,700 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.
        The need for NeighborWorks has never been greater. Federal and
    State policies are aggressively promoting home ownership. Mortgages are
    becoming increasingly complex and risky. Personal debt is rising. And,
    stubborn homeownership and wealth gaps persist despite economic
    improvements and recent increases in minority homeownership.
        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.
                                     ______

                    U.S. CONSUMER PRODUCT SAFETY COMMISSION

              Prepared Statement of Thomas H. Moore, Commissioner

        Mr. Chairman, Ranking Member, and members of the subcommittee,
    thank you for providing me with this opportunity to submit testimony on
    the U.S. Consumer Product Safety Commission's (CPSC) fiscal year 2006
    appropriations request. The full details of our fiscal year 2006
    appropriations request are set out in our budget document submitted
    earlier this year to the subcommittee. These details reflect the
    agency's initial efforts to outline possible impacts of the
    administration's broad efforts to reduce non-security Federal spending.
    We anticipate that we will be able to provide more specificity after we
    perform a more careful and systematic review of our costs and our
    safety programs later this summer.
        In summary, for fiscal year 2006, the President's request for our
    agency is for $62,499,000 which is an increase of $350,000 above our
    fiscal year 2005 appropriation and will support the agency at
    approximately 446 FTEs. If measured from our fiscal year 2005 funded
    FTE level, the request for fiscal year 2006 represents a FTE reduction
    of 25 FTEs. However, the average FTE level for fiscal year 2004 was 461
    FTEs and because we now have no intention of staffing up to our planned
    2005 level, actual reductions will be around 15 FTEs. We estimate that
    we will be able to achieve these reductions through attrition and we
    are very hopeful that with a careful review of our costs and our safety
    programs we will be able to achieve these reductions with our safety
    programs largely intact and with minimal disruption to our agency
    operations.

                            IMPACT OF BUDGET REQUEST

        CPSC is a staff intensive organization with about 90 percent of its
    funding allocated to staff salaries and office rent. At the heart of
    CPSC's operation is its staff, without question, our greatest and most
    important asset. In order to keep our staff intact and sustain our
    safety programs at our fiscal year 2005 authorized level we would need
    additional funding of $2.4 million above our fiscal year 2005 level.
    This $2.4 million increase would simply fund salary and rent increases
    in support of 471 FTEs. Any funding level which does not contemplate an
    increase or contemplates an increase less than $2.4 million will
    require some staff adjustments. The requested increase of $350,000,
    instead of the needed $2.4 million, will certainly mean a reduction in
    our FTEs but we are confident that we can manage this reduction without
    forced layoffs.
        In presenting our budget request to the subcommittee today we are
    mindful of our Nation's present state of affairs. Considering our
    Nation's prevailing budget priorities there are certainly some positive
    implications in the President's recommendation for CPSC. Our product
    safety work and safety guidance provide a sustained, uniform measure of
    protection for our Nation's families, and also provide businesses a
    national, level playing field for both domestic and imported consumer
    products. Taking into account that the administration proposes to cut
    the Nation's non-security discretionary accounts by nearly 1 percent in
    its fiscal year 2006 budget, the President's budget request of a
    $350,000 increase shows some confidence in CPSC and its programs and we
    at the Commission are dedicated to continue earning that confidence.
        However, we must put the consequences of our increase in the proper
    perspective. Since 1994, CPSC has been forced to reduce its funded FTE
    level by 14 percent from 518 to the fiscal year 2006 proposed level of
    446. This erosion of our most valuable asset comes despite the fact
    that we still have over 15,000 types of consumer products under our
    jurisdiction; creative new technologies constantly introduce
    potentially new product hazard issues; new consumer uses for products
    originally created for commercial use are being introduced; imports are
    increasing, many from countries that may not have similar consumer
    product safety standards; and despite the fact that we still face over
    25,100 deaths and over 33.3 million injuries each year associated with
    consumer products under CPSC's jurisdiction.

                   CPSC'S IMPORTANT SAFETY WORK MUST CONTINUE

        By all current measures, CPSC provides both tremendous service and
    tremendous value to the American people. Each year through reductions
    in deaths, injuries, and other costs associated with unsafe products,
    such as health care costs and property damage, CPSC saves the Nation
    many times the agency's annual budget. Our agency is the major factor
    in the overall 30 percent decline in the rate of deaths and injuries
    related to consumer products since 1974. During that time, through our
    standards work, compliance efforts, industry partnerships, and consumer
    information, there has been a 42 percent reduction in residential fire
    deaths, a 72 percent reduction in consumer product-related
    electrocutions, a 36 percent reduction in consumer product-related
    carbon monoxide deaths, an 86 percent reduction in poisoning deaths of
    children younger than 5 years of age, an 88 percent reduction in baby
    walker injuries and a 92 percent reduction in crib-related deaths. We
    expect the annual number of deaths and injuries prevented by just these
    examples to reduce societal costs by almost $16 billion. These savings
    by themselves are over 250 times CPSC's proposed fiscal year 2006
    funding request.
        To further illustrate how successful CPSC's staff is in protecting
    American consumers by addressing the unreasonable risk of harm posed by
    many, many consumer products we can look at some fiscal year 2004
    numbers. For example, CPSC completed 356 cooperative recalls involving
    over 216 million product units. The Commission staff also obtained many
    other corrective actions that did not involve a consumer level recall.
    We completed 10 civil penalty cases that resulted in almost $4.2
    million in fines for failure to report hazardous defects and other
    violations associated with our various statutes and regulations. We
    assisted in securing 2 criminal convictions for violations of the
    Federal Hazardous Substances Act. In addition, CPSC staff, working with
    the U.S. Customs, conducted 278 seizures and detained over 6.7 million
    units of imported products that were in violation of U.S. safety
    standards.
        Moreover, we informed the public of hazardous products through 312
    press releases, 13 video news releases, 2 million distributed
    publications, specific consumer product safety discussion appearances
    on network TV shows, and through CPSC's consumer hotline, web site, and
    National Injury Information Clearinghouse. We had 11.9 million visitors
    to our Web site, 159,200 readers of our Consumer Product Safety Review,
    and 140,000 callers to our consumer hotline.
        I would like to note that thus far, for fiscal year 2005, in our
    enforcement area, the Commission is on a record pace for assessing
    civil penalties against companies who fail to report product hazards to
    the Commission as required by our statutes. We have completed five
    civil penalty cases that have resulted in $8.5 million in fines
    including our largest assessing ever issued of $4 million.
        These numbers by themselves demonstrate the indisputable consumer
    product safety role that the Commission has performed for the American
    consumer over the years. We at the Commission also strongly feel that
    many, many more deaths and injuries have been prevented as a result of
    the heightened attention given to safety issues by manufacturers and
    consumers due to CPSC's leadership. These results clearly illustrate
    the benefits of CPSC's Federal presence in today's consumer product
    marketplace and therefore provide substantial justification for present
    and future consideration for keeping our safety programs intact.

                             FUTURE CONSIDERATIONS

        Given future funding considerations, there is one particular
    funding area that I have mentioned in previous budget submissions and I
    still strongly feel that we can provide better service to the American
    public if this area is funded in the future. It is crucial to our
    mission and continued success that we are able to upgrade and establish
    a modernization cycle for our information technology (IT)
    infrastructure and databases. As a data-driven agency, we are dependent
    on information technology and therefore must continually invest in the
    tools we use to identify and analyze hazards.
        For fiscal year 2005, because a Commissioner's office remained
    vacant for 7 months and, because we are taking steps now to reach the
    anticipated fiscal year 2006 FTE level, we estimate that we will have
    some financial flexibility to reallocate funds from salary savings to
    address some of our IT needs. However, with the anticipated reductions
    in our FTE funding, we certainly will no longer have that sort of
    financial flexibility to reallocate funds from salary savings in the
    future. Depending on temporary salary savings is no way to fund IT
    needs. The lack of a permanent capability to maintain and enhance our
    systems will jeopardize our future work. The long-term benefit to our
    work of a strong, proactive IT program can not be overstated.

                                   CONCLUSION

        Our small agency has found that cooperative partnerships,
    innovative initiatives, and open, voluntary participation of the
    interested community contribute to a successful, cost-effective and
    least burdensome regulatory scheme appreciated by both those whom we
    serve as well as those whom we regulate. For example, www.Recalls.gov
    results from a CPSC partnership with five other Federal agencies and
    features a website which provides a one-stop shop for all government-
    regulated product recall information. This information is helpful to
    both consumers and businesses. In 2004, over 900,000 visitors logged on
    to this site.
        Additionally, we continued other cooperative initiatives the ``Fast
    Track Product Recall Program'' and the annual ``Recall Roundup
    Program.'' Both of these initiatives are designed to remove unsafe
    consumer products from the marketplace and the homes of consumers. For
    example, nearly 950 firms have participated in our ``Fast Track Product
    Recall Program'' resulting in over 1,679 recalls involving over 190
    million consumer product units.
        In conclusion, Mr. Chairman, we all recognize that the Nation is
    again facing very difficult decisions regarding its allocation of
    resources. The President, Congress, and the American public have all
    shown confidence in CPSC and its consumer product safety programs.
    However, despite all the progress the Commission has made, and is
    currently making, in reducing deaths and injuries related to consumer
    products, the marketing of unsafe consumer products remains a major
    national problem. We still have a long way to go to prevent hazardous
    consumer products from killing and injuring people. The continued
    support of this subcommittee is essential to a successful fulfillment
    of our mission.
        I strongly urge the subcommittee to fully support our activities by
    providing the $62.5 million requested.
                                     ______

             Prepared Statement of Honorable Hal Stratton, Chairman

        I am pleased to have the opportunity to present the appropriation
    request for the U.S. Consumer Product Safety Commission (CPSC) for
    fiscal year 2006. Most Senators are generally familiar with the mission
    of the CPSC, but because we are new to your subcommittee, I would like
    to give you an overview of our agency and the work that we do to reduce
    product hazards and to increase product safety for Americans young and
    old.
        The Consumer Product Safety Commission is a bipartisan, independent
    agency charged with protecting the public from unreasonable risks of
    serious injury or death from more than 15,000 types of consumer
    products under the agency's jurisdiction. Deaths, injuries and property
    damage from consumer product incidents cost the Nation more than $700
    billion annually. Since its inception, the CPSC has delivered critical
    safety benefits to America's families and has made a significant
    contribution to the 30 percent decline in the rate of deaths and
    injuries related to hazardous consumer products. We are proud of our
    mission and our achievements, and we appreciate the support that
    Congress has extended to the Commission and to its goals over the
    years.
        The CPSC performance budget request for fiscal year 2006 is
    $62,499,000. Compared to some of the other agencies under your
    subcommittee's jurisdiction, this is not a relatively large amount, but
    I can assure you that we respect the fact that these dollars come from
    hard-working American taxpayers, and we will spend these dollars
    efficiently and effectively in assuring consumers that the products
    they are bringing into their homes, and into other aspects of their
    lives, are as safe as possible.
        This year's requested level of funding is an increase of $350,000
    over our fiscal year 2005 budget. This is a smaller increase than we
    have requested in the past; however, I am confident that with strong
    leadership and good management, we will not only continue to maintain
    our basic safety mission but also continue to make progress on the
    priorities that we have established for the upcoming year.
        We are a small agency with a big mission. We currently have
    approximately 460 FTE staff who work in our headquarters and our
    laboratory site in suburban Maryland, and at our field locations across
    the country. CPSC is a staff intensive organization with about 90
    percent of its funding going to staff salaries and office rent. To
    accommodate expected staff salary and office rent increases in 2006, we
    are planning to reduce our staffing numbers during the year through
    attrition with a goal of 446 FTE staff by the start of 2006. The final
    FTE staffing figure may end up higher than that since we are seeking to
    identify other efficiencies throughout the agency. For example CPSC is
    in full compliance with the Telework Act, and this has led to rent
    savings at our field locations.
        As I noted earlier, I would like to take this opportunity to give a
    brief overview of the agency for the Senators who did not serve on our
    previous appropriations subcommittee. The CPSC has three core
    functions: hazard identification and reduction, compliance activities,
    and consumer information.
        The CPSC's Office of Hazard Identification and Reduction (HIR)
    collects information needed to assess product hazards and develop
    injury reduction strategies. The staff collects data on consumer
    related injuries and deaths, as well as hazard exposure information,
    for those products under our jurisdiction. The basis of our injury
    information is our National Electronic Injury Surveillance System
    (NEISS) which provides national estimates for injuries related to
    consumer products. Along with CPSC's field staff, HIR also investigates
    specific injury cases to gain additional knowledge and data about
    injuries or hazards and how the reported product was involved.
        Because quality data is central to the execution of CPSC's mission,
    we are continuing to strengthen our data collection and analysis
    process. Recent improvements include the development of new statistical
    systems for fire deaths and injuries and the implementation of our
    National Burn Center Reporting System which focuses on children's
    clothing. Staff also conducts several types of studies each year,
    including special investigations and emerging hazard evaluations. Taken
    together, these activities lay the groundwork for our standard setting
    and other hazard reduction activities.
        I should mention at this point that the Commission is currently
    working on two new flammability standards that if promulgated would be
    the most significant safety regulations that the CPSC has ever issued.
    Mattresses and bedding materials continue to be one of the main
    contributors to residential fire deaths. The Commission recently issued
    a proposed standard addressing open flame mattress flammability and an
    Advance Notice of Proposed Rulemaking on bedclothes.
        Residential fires involving upholstered furniture are another
    leading cause of fire deaths and injuries. CPSC staff is developing a
    revised draft flammability standard containing performance requirements
    to address both cigarette and open flame ignition of upholstered
    furniture and is preparing a package of regulatory options for the
    Commission's consideration.
        When a safety standard or ban is established, it is CPSC's Office
    of Compliance, working closely with the agency's field staff, that
    enforces the law. The Compliance office also conducts investigations of
    product hazards to determine whether corrective action (recall) is
    necessary. CPSC may initiate an investigation based on information we
    have received from outside sources such as letters and calls from
    consumers, newspaper reports, trade complaints, and inquiries from
    State and local governments. Alternatively, CPSC staff may start an
    investigation based on statutorily required product hazard reports from
    manufacturers and retailers. The Office of Compliance has recently
    announced a new model for reporting by retailers; it has already
    resulted in many more reports.
        CPSC staff conducts programs to monitor compliance with safety
    standards by conducting field inspections of manufacturing facilities
    and distribution centers and making purchases at retail establishments
    or via catalogs or the internet. Additionally, staff conducts
    surveillance and sampling of imported products at ports of entry. In
    2004, CPSC staff conducted 278 seizures and detained over 6.7 million
    units of imported products for possible safety hazards.
        Our governing statutes permit the Commission to assess civil
    penalties and to seek public notice and corrective action for defective
    products that create a substantial risk of injury to consumers.
    Recently, we announced the largest civil penalty ever issued by the
    CPSC, $4 million, against a company that failed to report to the agency
    some 12 million products that posed a danger to young children. Due to
    aggressive enforcement of our safety laws, 2005 is likely to be the
    highest penalty year in the history of the Commission. I should note
    that all of these amounts are returned to the U.S. Treasury and none
    are retained by the CPSC.
        Also in 2004, the CPSC announced 356 recalls that involved a record
    218 million product units. The largest of these recalls involved toy
    jewelry that contained accessible lead, a serious health threat to
    children. Other recalls involved a range of products including bunk
    beds that posed a strangulation hazard, floor fans that posed a fire
    hazard, and strollers that posed a head injury hazard.
        One key element of any recall is targeted public notices to inform
    owners of a recalled product of the hazard and the remedies available.
    That effort is led by our Office of Information and Public Affairs
    using a wide range of resources to publicize the recall.
        CPSC continues to be pro-active in improving recall effectiveness.
    Last year, we launched the Neighborhood Safety Network (NSN), a
    grassroots effort to communicate important safety messages to
    vulnerable and hard-to-reach populations. In partnership with other
    government agencies and private sector organizations, NSN is reaching
    populations categorized by age, region, culture or economic status. The
    goal of NSN is to get safety information to larger audiences quickly
    and efficiently. I am especially proud that CPSC has been very
    successful in improving outreach to the Nation's Hispanic community. In
    the last 2 years, visits to the CPSC website's Spanish home page have
    jumped 155 percent. Phone calls from Spanish-speaking consumers to
    CPSC's Hotline tripled in fiscal year 2004 from the previous year.
        Another initiative that I am proud of is Recalls.gov. Over 1
    million visitors have logged on to Recalls.gov, which provides
    consumers with one single source to get information on all the recalls
    conducted by the Federal Government. The site also allows consumers to
    report a problem with a consumer product, motor vehicle, food or
    environmental product.
        CPSC led the way in bringing together the EPA, FDA, NHTSA, the
    Coast Guard and Department of Agriculture to create Recalls.gov in the
    Fall of 2003. In November 2004, we added a new ``Recent Recalls''
    feature, which provides your constituents and consumer reporters with a
    link to breaking news about product recalls. To build on the success of
    Recalls.gov and further expand the reach of the Web site, CPSC is
    creating a feature that allows parents and consumers to sign-up for e-
    mail notifications when recalls occur of products about which they are
    concerned.
        Another important outreach effort is our annual Recall Roundup
    Campaign which focused last year on resale outlets such as thrift
    stores. CPSC joined forces with the National Association of Resale and
    Thrift Shops, the National Safe Kids Campaign, and the Danny Foundation
    to stop resale, consignment and thrift shop stores from selling
    previously recalled or banned products. Additionally, safety seminars
    were conducted across the country to educate store employees about how
    to check their stores for hazardous products. The CPSC also continues
    to work with companies like eBay to ensure that dangerous products are
    not sold on public auction websites.
        On another front, recognizing that the market is global and that
    the vast number of our consumer products are imported from overseas, I
    established a new office, the Office of International Programs and
    Intergovernmental Affairs, to focus on these challenges. Through this
    initiative, CPSC has established working relationships with our
    counterparts in other countries through the execution of formal
    memoranda of understanding, or MOUs, with China, the European
    Commission, Costa Rica and Taiwan. The agency expects to formalize MOUs
    with other countries including India, Canada, Mexico, Peru and Chile in
    the near future.
        As the first CPSC Chairman to visit China, my goal is to get beyond
    the American ports of entry and get to the actual sites around the
    world where these products are produced and make certain that our
    safety message and safety standards are understood and respected
    globally. For example, last June I had the opportunity to return to
    China to address the International Organization for Standardization on
    toy safety. China is now the No. 1 toy producing country in the world,
    and the United States is the No. 1 toy consuming country in the world.
    It is critical that we work to make certain that these products are
    safe for American families before they are ever put on a ship bound for
    an American port.
        As Chairman of the CPSC, I am committed to openness and
    transparency in government. Prior to my tenure, it was not the practice
    to have oral testimony by citizens or stakeholders at most agency
    regulation briefings. We changed that policy because I believe it is
    critical that we hear from the families and the businesses that are
    impacted by our decisions.
        Further, last October, we launched two pilot programs to invite
    public comments on product safety voluntary standards positions and
    research reports. At present, CPSC staff is involved in the development
    of over 60 consumer product voluntary standards. This pilot program is
    inviting public comment on a number of staff's voluntary standards
    activities including those on smoke alarms, pool safety, portable
    generators, bunk beds and child resistant gasoline containers.
        Before closing, I would like to update the committee on the status
    of CPSC's laboratory modernization. No funds for this project are
    requested in this year's budget request; however, a feasibility study
    has just been received that includes a final design that CPSC staff,
    the General Services Administration (GSA) and the design contractor
    agree would meet the agency's needs. The projected cost of this
    proposal is approximately $23 million dollars which would be divided
    equally between the GSA building fund and the CPSC providing specific
    laboratory build-outs. Construction could begin as early as 2009. CPSC
    staff will keep the committee advised during the year on the status of
    this proposal as additional information becomes available.
        I appreciate the committee's support of our work, and I want to
    again assure the Senators that we at the CPSC are committed to our
    mission to reduce product hazards and to assure the safety of consumer
    products in American homes.
                                     ______

                        U.S. OFFICE OF GOVERNMENT ETHICS

            Prepared Statement of Marilyn L. Glynn, Acting Director

        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 2006 resources of $11,148,000 and 80 FTEs. This request is the
    same as OGE's fiscal year 2005 appropriated amount.
        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 of 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 2006

        We would like to highlight some of the major programs we anticipate
    for fiscal year 2006.
        Although the influx may not be as great as that anticipated for the
    current fiscal year, OGE expects that there will continue to be a
    significant number of Presidential nominees to positions requiring
    Senate confirmation during the second 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/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.
        The Intelligence Reform and Terrorism Prevention Act of 2004
    (Public Law 108-458) directed OGE to prepare and submit two reports to
    Congress in fiscal years 2005 and 2006. The first report, which was
    delivered in March 2005, evaluated the executive branch financial
    disclosure requirements. The second, which OGE will compile in
    consultation with the Department of Justice, is due in fiscal year 2006
    and will examine 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 needed changes identified by these two reports,
    including possible hearings and legislation. In addition, OGE will take
    the necessary steps to revise its financial disclosure forms and
    regulations to implement any changes in existing law.
        OGE expects to purchase some new hardware and software, including
    security software to protect our network and keep it 100 percent FISMA
    compliant, software necessary to keep our network up to date, and
    hardware to replace computers that fail. We will also obtain contract
    support as necessary for making OGE documents accessible in compliance
    with Section 508 of the Rehabilitation Act, particularly if major
    publications require revision following any changes in executive branch
    financial disclosure requirements. OGE takes its responsibilities under
    the Rehabilitation Act seriously and makes every effort to ensure that
    its web site is fully compliant with section 508 accessibility
    requirements.
        As part of its 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 plan the 16th 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.
        OGE will continue to provide international technical assistance at
    the request of the Departments of State and Justice. The United States
    is being evaluated under two separate international anti-corruption
    instruments. One of these, the Council of Europe's Group of States
    Against Corruption (GRECO), will conduct its on-site review of the
    United States in fiscal year 2006. The Office of Government Ethics has
    been a lead agency with the Department of Justice in responding to the
    questionnaire associated with this evaluation; in fiscal year 2006, we
    will be heavily involved in reviewing the draft report, and will be a
    member of the U.S. delegation in the GRECO evaluation when the report
    reaches the plenary stage for this process. OGE will also be a key
    participant in the meetings with the GRECO on-site review teams, and
    will help coordinate the necessary meetings in Washington and at the
    State and local level during the review.
        OGE desk officers will maintain their day-to-day communications
    with agencies assigned to them. This continuing liaison between OGE and
    agency ethics staffs enables OGE to respond to the needs of the
    agencies in a timely and accurate manner. In addition, this interaction
    provides OGE with an early warning that an agency ethics program is
    deficient or has problems that require specialized attention. We also
    plan to conduct on-site ethics program evaluations in 35 Federal
    agencies, regional offices and military commands.
        As we noted earlier, OGE's request for fiscal year 2006 is at the
    same level as the fiscal year 2005 appropriated amount. In fiscal year
    2004, resources freed up by vacant positions and other savings allowed
    OGE to conduct employee surveys regarding individual agency ethics
    programs. The information gathered through these surveys provided 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 hope to be able to conduct additional employee surveys in
    fiscal year 2005 and fiscal year 2006.
        The programs and activities we have described are just some of
    those envisioned for fiscal year 2006. 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.
                                     ______

                          FEDERAL MARITIME COMMISSION

           Prepared Statement of Honorable Steven R. Blust, Chairman

        Mr. Chairman and members of the subcommittee, thank you for this
    opportunity to present the President's fiscal year 2006 budget for the
    Federal Maritime Commission.
        The President's budget for the Commission provides for $20,499,000
    for fiscal year 2006. This represents an increase of 6 percent, or
    $1,158,968, over our fiscal year 2005 appropriation. This budget
    provides for 133 workyears of employment, a straight-line of the 2005
    level.
        Our fiscal year 2006 budget request contains $15,218,000 for
    salaries and benefits to support the Commission's programs. This is an
    increase of $874,968 over our fiscal year 2005 appropriation, i.e.,
    approximately 76 percent of the total increase. This includes all
    salaries, including those for employees hired in fiscal year 2005, and
    2006 promotions, within-grade increases, and an anticipated 2.4 percent
    cost of living adjustment. The funding also includes annualization of
    the fiscal year 2005 increases. As mentioned earlier, our fiscal year
    2006 budget does not contain funding for any additional positions; it
    only will fund the number of positions anticipated to be on board at
    the beginning of the fiscal year. We believe the agency can provide the
    same high quality of service to its stakeholders during an era of
    increasing outreach and compliance activity without increasing its
    staff; we are doing this by refocusing staff efforts as the result of
    our recent agency realignment, and by a staff commitment to exploring
    means of working ``faster, better, cheaper.''
        Official travel has been straight-lined at $180,000, our fiscal
    year 2005 level. 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.
        Lastly, administrative expenses have increased $284,000 over fiscal
    year 2005, to $5,101,000. The Commission is planning for an increase of
    $160,000 to accommodate GSA rental rate increases, as well as an
    increase of $55,000 for maintaining government and commercial
    contracts, primarily to fund Homeland Security charges. Other
    administrative expense increases of $99,000 will be incurred in fiscal
    year 2006 to support increases in our customary business expenses, such
    as telephones, postage, and supplies, as well as to pay for the lease-
    to-own of agency computers. These increases are partially offset by a
    reduction of $30,000 for furniture and equipment.
        As we have noted in prior years, the Commission's budget contains
    primarily non-discretionary spending. It is composed of mandatory or
    essential expenses such as salaries and benefits, rent and guard
    services, health services, accounting services, telephone and other
    communication costs, supplies, mandatory training, and printing and
    copying costs. 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.
        I am pleased to advise you that as of January 19 of this year, non-
    vessel-operating common carriers (``NVOCCs'') are now permitted to
    enter into confidential arrangements with their shipper customers
    detailing the terms and conditions of their international ocean
    transportation. As you know, the Shipping Act permits ocean common
    carriers, or vessel-operating common carriers (``VOCCs''), to enter
    into service contracts with one or more of their shipper customers, and
    the Ocean Shipping Reform Act (``OSRA'') provides that these contracts
    be filed confidentially with the Commission. While NVOCCs may enter
    into service contracts as shippers with ocean carriers, the Act does
    not grant NVOCCs the right to offer service contracts in their capacity
    as carriers to their shipper customers.
        As you might recall, the Commission had received eight petitions,
    seven from individual NVOCCs and one from the National Customs Brokers
    and Forwarders Association of America, a national trade association
    representing NVOCCs, seeking various types of relief from this
    disparate treatment. These petitions generated hundreds of comments
    from the industry as well as Members of Congress. Subsequently, several
    of the petitioners, along with the Transportation Intermediaries
    Association and the National Industrial Transportation League, filed a
    joint proposal with the Commission suggesting a unified approach to
    this issue. After assessing that proposal, the Commission issued a
    proposed rule to grant the relief the industry was seeking within the
    parameters of the Shipping Act.
        In order to grant an exemption from the requirements of the
    Shipping Act, the Commission must find that it will not result in a
    substantial reduction in competition or be detrimental to commerce.
    Based on these criteria, the proposed rule set forth a conditional
    exemption from the tariff publication requirements of sections 8 and 10
    of the Shipping Act. The Commission made minor modifications to its
    proposal based on comments received from the industry, and I am pleased
    to report that a final rule is now in effect. NVOCCs otherwise in
    compliance with the licensing, financial responsibility, and tariff
    publication requirements of the Shipping Act may now enter into
    confidential NVOCC Service Arrangements (``NSAs'') with their shipper
    customers in lieu of publishing those 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 regulatory scheme is consistent with the 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.
        To ensure that NSAs are consistent with the statutory scheme
    established by Congress in the Shipping Act, the regulations proscribe
    certain types of discriminatory conduct similar to the prohibitions
    applicable to service contracts in section 10 of the Shipping Act. In
    addition, the rule does not permit unrelated NVOCCs jointly to offer
    NSAs, nor does it allow NVOCCs or shippers associations with NVOCC
    members to participate in NSAs as shippers. We are certainly mindful of
    industry concerns over these limitations. However, we believe they are
    necessary as a result of 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. As we indicated when we issued the final
    rule, we will monitor the judicial developments and continue to work
    with the industry to address this issue as circumstances warrant.
        Also in January, the Commission implemented new regulations
    governing agreements among ocean common carriers and marine terminal
    operators. The new rules reduce the burden and cost of complying with
    the agreement filing requirements of the Shipping Act while ensuring
    that the Commission receives the information necessary for effective
    oversight. The rules provide the shipping industry with enhanced
    certainty as to FMC requirements, continued flexibility in commercial
    relationships, and sufficient confidentiality for sensitive commercial
    information. The provisions governing modifications and exemptions have
    been clarified, and include a new exemption for low market share
    agreements among ocean common carriers that do not contain pricing or
    capacity rationalization authority. Further, the information,
    monitoring report and minutes reporting requirements have been
    reformulated, reducing the overall burden of complying with the
    Commission's rules. We continue our vigilant review of carriers'
    utilization of their antitrust immunity to ensure that their collective
    activities do not result in market-distorting practices, and the new
    regulations will further our efforts in this area, while permitting
    agreement parties the flexibility they need for successful commercial
    relationships.
        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 and rules of government-controlled carriers to ensure that they
    are not unjust or unreasonable.
        With respect to the People's Republic of China, recently there have
    been 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. 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. We received positive feedback from the U.S.
    industry in this regard. I am pleased to report to you that many of the
    issues we raised have been adequately addressed. In particular, 29 U.S.
    NVOCCs have availed themselves of the opportunity provided for in the
    Commission's rules to file proof of additional financial responsibility
    with the Commission as an alternative to meeting China's requirements
    for the deposit of at least $96,000 in a Chinese bank.
        As a result of diplomatic efforts which positively addressed
    numerous matters of concern, the Commission recently terminated its
    proceeding which investigated shipping restrictions, requirements and
    practices of the People's Republic of China. I am encouraged that the
    Commission's traditional practice of allowing for a diplomatic
    resolution to the issues we have raised in the foreign trades has again
    been fruitful. Although the Commission is optimistic that recent
    developments will yield positive effects for vessel operators,
    intermediaries and the U.S. shipping public, we will take seriously our
    statutory duty to respond to any future allegations of unreasonably
    restrictive practices with respect to this, or any other, U.S.-foreign
    trade.
        The Commission continues to promote its 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 have been successful in
    creating a forum for continued and enhanced dialogue between the
    industry and the Commission. I am pleased to report that we have
    started a new program where we have invited representatives from
    various segments of the industry to brief our staff on current issues
    and concerns affecting U.S. international liner shipping. Thus far, we
    have met with representatives from the ocean transportation
    intermediary, vessel operator, port authority, and shipper communities,
    and we are planning additional briefings later in the year with marine
    terminal operators, passenger vessel operators, and other segments of
    the maritime industry. 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.
        Likewise, the agency's new organizational structure has proven
    beneficial. As I reported to you last August, the Commission refined
    the agency's organizational structure to reallocate existing resources
    to maximize the effectiveness of the staff and facilitate agency
    efforts to better serve the ocean transportation industry. This was the
    result of a several-month effort to review the Commission's work
    processes and practices in light of changes in the industry. To better
    carry out the Commission's compliance and outreach initiatives, our
    Area Representatives, previously assigned to the Bureau of Enforcement,
    now report to the Director of Operations. In addition, to more
    effectively address the rapid growth of the Commission's consumer
    complaints program, that program and the alternative dispute resolution
    function were combined into a new Office of Consumer Affairs and
    Dispute Resolution Services. Through this office, we are able to
    provide a mechanism for parties involved in ocean transportation to
    settle their disputes without the need for costly and time-consuming
    litigation. The Commission's consumer affairs staff is able to assist
    in the resolution of informal disputes and formal proceedings involving
    cruises and the shipment of cargo. Additionally, the Office of
    Administration now has oversight over the four administrative offices:
    the Office of Budget and Financial Management; the Office of Human
    Resources; the Office of Information Technology; and the Office of
    Management Services. I am pleased to report that these modifications
    have resulted in greater communication and effectiveness between the
    Commission and the shipping public. Our new structure not only provides
    an effective regulatory structure suitable for today's shipping
    industry, it also allows us the flexibility necessary to grow and
    change as the industry continues to evolve.
        Lastly, the Commission recognizes that its oversight of ocean
    common carriers, ocean transportation intermediaries, including ocean
    freight forwarders and non-vessel-operating common carriers, 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 Shipping Act. In addition, we submitted a
    report to Congress in November of 2004 detailing our cooperation with
    other agencies involved in maritime transportation, including the
    Department of Homeland Security, Department of Transportation and
    intelligence agencies, regarding information-sharing and other possible
    FMC contributions to the efforts to ensure a safe and efficient
    maritime transportation system.
        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
    2006.
                           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 2006 budget request.
        The subcommittee requested that public witnesses provide
    written testimony because, given the Senate schedule and the
    number of subcommittee hearings with Department witnesses,
    there was not enough time to schedule hearings for
    nondepartmental witnesses.]

                Prepared Statement of The University of Oklahoma

                     LOCAL AREA AUGMENTATION SYSTEM (LAAS)

        Thank you for the opportunity to submit this testimony for The
    University of Oklahoma (OU) Navigation Solutions Institute (NSI), in
    support of the appropriations request for the Local Area Augmentation
    System (LAAS). This testimony will identify the motivating national
    interest and describe the NSI approach to serve those needs. We
    respectfully request $2.5 million in the pending fiscal year 2006
    appropriations legislation for NSI to provide the engineering and
    technical expertise required to advance the certification effort of the
    LAAS, including anti-jamming mitigation. The proposed work will be
    performed by OU-Norman NSI, in collaboration with the OU-Tulsa electro-
    magnetic compatibility (EMC) facility and OU-Norman Department of
    Aviation flight operations.

                         STATEMENT OF NATIONAL INTEREST

        Travelers are opting to fly rather than drive once again and
    National Air Space (NAS) capacity issues are imminent. The growth of
    air traffic has returned to pre-9/11 levels and the competition among
    airlines for limited network capacity, at a time of rapidly rising fuel
    prices, potentially jeopardizes the quality, safety, security, industry
    economic health, and international competitiveness of U.S. commercial
    and general aviation service. Coordination of local flight (take-off
    and landing) operations with ground (taxi and terminal) operations is a
    critical constraint on local area terminal capacity. The existing
    Instrument Landing System (ILS) is not capable of dealing with these
    capacity issues. Solutions cannot wait decades into the future, but are
    needed immediately; and Local Area Augmentation System (LAAS)
    technology can become available in the near term with the requested
    appropriation to perform the rigorous certification required by FAA
    standards. Issues to be addressed include hardware reliability and
    fault tolerance, software traceability, anti-spoof mitigation, and
    position solution integrity. This critical navigational aid is highly
    sought after by commercial and general aviation.
        According to an Airports International Council report in 2000, the
    United States has over 5,300 airports open to public use. There are
    1,364 Instrument Landing Systems (ILS) in place. The report also cites
    the expected increases in commercial and general aviation traffic,
    which will have a positive economic impact in the United States. The
    Joint Planning and Development Office (JPDO) forecasts three-fold
    increases in passenger and freight traffic by 2025 as a reference point
    for planning of the Next Generation Air Transportation System (NGATS).
    Concomitant with this growth, maintenance, modernization, and air
    traffic congestion are becoming issues of national priority to ensure
    safe, efficient, and effective air travel. A significant maintenance
    and modernization cost is related to precision landing systems for
    airports. Furthermore, accurately guided approaches and departures
    allow for a more efficient use of crowded airspace. GPS-based
    navigation systems in non-critical areas have proven to be cost-
    effective. However, augmentation systems are needed in order to ensure
    the quality of service (in terms of accuracy, continuity, and
    integrity) required by the aviation community. LAAS has the potential
    to provide a paradigm shift in air traffic management in the United
    States. Furthermore, there is significant interest in the international
    community where cost-effective solutions are of paramount importance.
    Finally, LAAS is capable of being deployed on a portable basis without
    significant infrastructure requirements, thus providing precision
    landing services in disaster recovery efforts or military theaters of
    operations, in a timely manner.
        The Wide Area Augmentation System (WAAS), is not able to provide
    the continuity and integrity needed for CAT I precision landing
    services at increasingly heavy traffic levels. LAAS has been shown to
    provide the accuracy needed for precision CAT I, II, and III landings,
    but needs additional development to achieve the required continuity and
    integrity. The LAAS system will provide the needed international
    connectivity between our applications and growing international needs,
    which the airline community wants to provide to strengthen their
    operations status. The certification phase will require the requested
    funds and continued close association among the OU-Norman Navigation
    Solutions Institute, OU-Tulsa EMC Facility, OU-Norman School of
    Aviation, the FAA, and partner air carriers.

                            NSI MISSION AND APPROACH

        The OU Navigation Solutions Institute has already developed a LAAS
    prototype. LAAS is a ground-based augmentation system for GPS and
    provides mitigation for both precision landing and airspace use. The
    cost of implementing a LAAS system is expected to be similar to the
    cost of implementing an ILS. LAAS provides a precision landing
    capability to large and small airports. For example, the deployment of
    a LAAS system at Chicago O'Hare airport would alleviate many weather
    traffic delays in the NAS. An ILS is only capable of providing a
    precision approach for one runway end, while a single LAAS installation
    can provide precision approaches for any runway end in the service
    area. Furthermore, NSI has shown that LAAS can provide guided, curved
    departures, guided missed approaches, and curved-path approaches for
    any runway end in the service area. On-going work at NSI has focused on
    hardware redundancy, reliability, and integrity flight testing. The
    requested funds will be used to move the current LAAS design through
    certification by the FAA. This requires hardware re-design of the
    system to meet fault-tolerance objectives; updated software development
    to meet DO-178B requirements for reliability and traceability; the
    design of far-field monitor stations to provide anti-spoofing
    capabilities and to monitor the integrity of the LAAS position
    solution; and assessment of the robustness of wireless communication
    between the LAAS station elements as a means of minimizing the impact
    on airport infrastructure.
        NSI also has developed a long-term relationship with FAA AFS-440
    and has conducted several studies related to air traffic management and
    navigation. The following projects illustrate the engineering expertise
    that NSI provides:
        Collision Risk Model.--NSI has developed a stereoscopic optical
    tracking system for the passive detection of the position of an
    airplane during the final approach segment (FAS) of an ILS landing
    procedure in IFR conditions. This system was developed in support of
    the initiative to extend the Airport Operations Area Collision Risk
    Model (CRM) beyond the decision height (DH). Currently, no flight track
    data exists to support the CRM from DH to touchdown. A low-cost,
    efficient system was developed quickly for deployment to eight major
    high-traffic ILS approaches around the country. The system has been
    deployed at Will Rogers World Airport in Oklahoma City as a test bed
    site and the first active CRM visual tracking system has been deployed
    at Atlanta Hartsfield International Airport.
        RNAV Performance Data for DME-DME and C129 GPS.--The FAA has
    contracted NSI to develop a test methodology and test set to evaluate
    the performance of DME-DME navigation which relies on older technology,
    ground-based navigational aids. NSI has developed a DME test set
    capable of monitoring a DME-DME position solution, while also
    monitoring a GPS-truth position solution. GPS truth is accomplished by
    differential GPS from a known geodetic location. This study will
    ultimately deliver statistical analyses providing information needed by
    the FAA for developing area boundaries for DME-based navigation.
        TERPS Standards Testing.--NSI worked under the direction of the
    FAA's Procedures and Flight Standards group to analyze the performance
    capabilities of LAAS related to Terminal Area operations. During this
    study, NSI developed its prototype LAAS installation and demonstrated
    the ability to provide highly accurate, complex approaches and
    departures that exceed the performance metric specified for ILS
    approaches.
        LAAS Certifiable System Development.--The current appropriations
    request would provide NSI with the means to develop the prototype LAAS
    system to the rigorous certification level required by today's FAA
    standards. Issues to be addressed include hardware reliability and
    fault tolerance, software traceability, anti-spoof mitigation, and
    position solution integrity. This critical navigational aid is highly
    sought by both commercial and general aviation.
        NSI has a close working relationship with FAA branches from the
    Mike Monroney Aeronautics Center to provide unique aviation-oriented
    engineering design and analysis services. NSI attracts high-quality
    graduate students who are identified as undergraduates and actively
    recruited into the program. Particular emphasis is given to students
    who have an aviation background and are able to gain a broader
    understanding of the implications of design decisions.
                                     ______

          Prepared Statement of the National Treasury Employees Union

        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 2006.
        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
    efforts.

                                     BUDGET

        The President's fiscal year 2006 IRS budget proposal is woefully
    inadequate to provide the resources necessary to meet its enforcement
    goals to reduce the outstanding U.S. tax gap. I commend the
    administration for acknowledging in its Budget in Brief that the ``IRS
    yields more than four dollars in direct revenue from its enforcement
    efforts for every dollar invested in its total budget.'' But I must
    criticize the administration for failing to request a budget that would
    enable the IRS to meet the enforcement challenges it faces with its
    $350 billion annual tax gap.
        The IRS brought in $5.5 billion more in fiscal year 2004 than it
    did in fiscal year 2003 through enforcement efforts. This represents a
    15 percent increase. It makes good business sense to fund the Agency at
    an amount where it can continue to see a similar return on investment.
    Unfortunately, the President's budget does not make good business
    sense.
        The IRS needs a budget that anticipates required expenses such as
    congressionally imposed pay raises and rent increases. Part of the
    President's IRS budget request for enforcement will be used to cover
    inflationary costs. Of the $446 million proposed for new enforcement
    investments, $182 million will be needed just to keep enforcement at
    its current levels.
        Furthermore, the way in which the administration proposes to
    enhance the enforcement budget will mean cuts to other parts of the IRS
    budget--such as taxpayer assistance. The President's budget calls for a
    cut of 1,385 service personnel--87 percent of whom directly assist
    taxpayers and tax professionals. The IRS has taken great strides to
    improve taxpayer service over the past few years and has been quite
    successful in making significant progress. The Service must not let the
    pendulum swing in the other direction and neglect service so that it
    can focus on enforcement. Service and enforcement must go hand in hand
    toward increasing taxpayer compliance and shrinking the tax gap.
        NTEU strongly supports the IRS Oversight Board's proposed budget
    recommendation of $11.6 billion for fiscal year 2006--a 9 percent
    increase over the President's budget recommendation and a 13 percent
    increase over the fiscal year 2005 appropriation. I urge the
    subcommittee to also support the Board's recommendation.

                             PRIVATE TAX COLLECTION

        NTEU strongly opposes the administration's plan to privatize IRS
    debt collection, as authorized by Congress last year in H.R. 4520,
    American Jobs Creation Act of 2004. Under the statute, the IRS would be
    permitted to hire private sector debt collectors and pay them a bounty
    of up to 25 percent of the money they collect. Let me be clear: NTEU
    opposes this short-sighted proposal, anticipates its complete failure
    as witnessed in a similar 1996 pilot program and will work towards its
    repeal.
         This proposal would risk the loss of confidentiality of millions
    of taxpayers' private information, would subject taxpayers to the
    abusive tactics of private debt collectors, and would cost U.S.
    citizens much more money than if IRS employees did the job.
        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, it increases the IRS's enforcement
    capabilities 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 private
    collection agencies (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 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.
        According to GAO's May 2003 testimony before the House Treasury
    Appropriations Subcommittee (GAO-03-732T), one major concern the IRS
    must address prior to implementing tax collection outsourcing is the
    ability to identify ``delinquent debts with the highest probability of
    resolution through PCA contacts. Earlier pilot efforts to study the use
    of PCAs in 1996 and 1997 were hindered, in part, because the IRS was
    unable to do this . . . While IRS proposes using the `case selection
    analytics' to identify appropriate cases, the analytical model has not
    been developed.''
        It appears as though the IRS has not yet addressed case selection.
    According to the IRS's February 15, 2005 ``Filing and Payment
    Compliance Modernization Briefing: The Use of Private Collection
    Agencies,'' there are five major issue areas that still need to be
    addressed before handing work over to the PCAs. One of the issue areas
    is selecting the workload for PCAs (called Filing and Payment
    Compliance), which will be part of the Business Systems Modernization
    Program. Since case selection was a major obstacle for the IRS in its
    1996 pilot program, the IRS should ensure that the technology is in
    place prior to handing over any work to the PCAs.
        Furthermore, the IRS does not have the technology in place to
    ensure that taxpayer information is kept secure and confidential when
    it is handed over to the PCAs. The IRS expects to hand over taxpayer
    information, including Social Security number, to the private
    collection companies.
        Recent security breaches at three data brokerage firms here in the
    United States should alarm every member of Congress and put into
    question the IRS's plans for moving forward with this privatization
    plan. ChoicePoint compromised the personal information of 145,000
    Americans. At LexisNexis, thieves were able to access 32,000 records
    including Social Security numbers and driver's licenses. And Bank of
    America recently reported it has lost personal data--including Social
    Security numbers and account information--on 1.2 million Federal
    employees, including some members of the Senate. These are companies
    that are in the business of trading--and securing--personal
    information. If they aren't able to secure confidential consumer
    information, I have little faith that a private debt collection company
    will be able to guarantee U.S. taxpayers that their information will
    remain secure.
        I would urge the subcommittee to work with your colleagues to
    repeal this ill-fated proposal. Additionally, I would urge the
    subcommittee to require the IRS to perform cost comparisons and closely
    track the contractors' costs. This is the only way that taxpayers can
    be certain their tax dollars are being spent wisely.

                             CUSTOMER SERVICE CUTS

        The President's budget proposes to cut $134,103,000 and 1,205
    positions from customer service, with Taxpayer Assistance Centers
    (TACs) targeted for drastic reductions. IRS Taxpayer Assistance Centers
    are taxpayers' source for personal, face-to-face tax help. Taxpayers
    who have complex issues, need to resolve a tax problem, or are more
    comfortable talking with someone in person can visit a local Taxpayer
    Assistance Center. IRS representatives in these offices can help with
    inquiries or adjustments to tax accounts, payment plans for those who
    owe tax and cannot pay the full amount, questions about IRS letters and
    notices, and levies on wages or bank accounts.
        These cuts will mean that minorities and low-income taxpayers, who
    rely on the Centers to help with language barriers, the earned-income
    tax credit and general tax preparation, will see the tax services they
    rely on cut. As Janet Spragens, law professor and director of American
    University College of Law's Federal Tax Clinic, notes in her testimony
    before the IRS Oversight Board (February 1, 2005):

        `` . . . these taxpayers, many of whom have limited or no
    proficiency in English, are generally not part of the information age.
    They are not Internet connected . . . They tend to be helped better
    through local walk-in offices and opportunities for face-to-face
    meetings than with an organizational structure based on specialization
    of function, remote offices, mailed documents, telephone trees with
    automated selections and electronic transfers.''

        Even the IRS Oversight Board raises concerns of the IRS's plan to
    eliminate additional customer service personnel. In its fiscal year
    2006 IRS Budget Special Report (March 2005), the Board states its
    concerns:

        ``Increasing enforcement resources at the expense of service
    resources is a trend that can lead to a system that fails to meet the
    needs of all honest taxpayers.''

        The IRS claims that taxpayers will continue to have access to tax
    forms and information through on-line access, telephone assistance and
    volunteer tax preparation. Unfortunately, many taxpayers who use the
    walk-in centers have little or no proficiency in English and are not
    part of the electronic information age. Tax forms on the Internet and
    phone trees do them little to no good. They rely on face-to-face
    contact with their local Taxpayer Assistance Centers to help them
    comply with various complexities of the tax code.
        While the agency has not yet provided specific information either
    to NTEU or to affected employees, it is my understanding that the
    agency is reviewing options that include closing either 105 TACs,
    affecting 528 employees, or 67 TACs, affecting 516 employees. Either
    way, the plan is a significant step backward in the ability of the IRS
    to do its job effectively.
        The IRS has suggested that private tax assistance programs using
    volunteers can fill the void that will be created by the cutbacks.
    While volunteer taxpayer assistance organizations play an extremely
    helpful role in assisting taxpayers to meet their tax obligations, it
    is foolhardy for the agency to rely on volunteers to do work that
    should be performed by trained and accountable Federal employees.
    Volunteers claim there's already a shortage of computers and other
    resources to help every taxpayer who seeks assistance, and that
    situation will only worsen if the IRS follows through with its proposed
    cuts to customer service.
        Furthermore, as the IRS is cutting back walk-in customer service
    operations, it is also planning to close six of its call sites in
    Boston, Houston, Chicago Des Moines, Wichita, and Omaha. Especially
    hard hit will be the Boston, Houston and Chicago facilities where
    nearly 200 employees could be affected. These are facilities where the
    employees receive taxpayers' inquiries and respond to their tax
    questions.
        Congress must commit to funding the IRS at adequate levels so the
    IRS is not made to choose between bolstering enforcement and providing
    the superior service our taxpayers expect and deserve.

                                   PAY PARITY

        While the President proposed a 3.1 percent pay raise for members of
    the uniformed military in 2006, he has only recommended a 2.3 percent
    pay raise for the Federal workforce. NTEU supports the higher pay raise
    for all Federal employees. This budget fails to recognize the important
    role Federal workers play in protecting our homeland and providing
    services to America. In recognition of the fact that these two groups
    of public employees more often than not work side by side in support of
    our country, Congress has approved equal pay adjustments for military
    and civilian employees in 17 of the last 19 years. NTEU urges Congress
    to approve equal pay adjustments again for 2006.
        Pay parity has broad bipartisan support in the House and Senate and
    Senator Susan Collins (R-ME) and Representative Tom Davis (R-VA), the
    Chairmen of the Senate Homeland Security and Governmental Affairs and
    House Government Reform Committees, respectively, strongly support
    continuing pay parity in 2006. Last year the House voted in favor of
    pay parity by a 299-126 vote. In addition, both Senate Chairman Collins
    and House Chairman Davis have added their names as cosponsors of
    resolutions supporting pay parity. I commend those members of Congress
    who voted for the pay parity resolution and urge the appropriators to
    fund civilian pay on par with military pay at a 3.1 percent increase
    for fiscal year 2006.

                                CONTRACTING OUT

        Despite provisions in last year's House and Senate fiscal year 2005
    Treasury-Transportation Appropriations bills that would have prohibited
    OMB from using its revised May 29, 2003 A-76 Circular as the guideline
    for competitive sourcing, the administration insisted that this
    provision be stripped from the final bill. The administration is more
    determined than ever to proceed with public-private competitions using
    the revised OMB Circular which gives a clear advantage to the private
    sector.
        Before contracting out any more government work to the private
    sector, the playing field for public-private competitions must be
    leveled. There are several areas where Congress should require OMB to
    make changes to the A-76 Circular in order to establish a fair
    outsourcing process.
        First, the A-76 Circular must allow Federal employees to offer
    their best bid with a most efficient organization (MEO). Under the
    revised A-76 process, a ``streamlined'' competition allows the agency
    to avoid organizing an MEO and just take a ``snapshot'' of the current
    work being performed and the costs associated with it.
        Second, a minimum cost savings of 10 percent or $10 million must be
    required of the contractor in order for the work to be contracted out.
    There is no requirement under current statute or under the revised A-76
    Circular which requires the contractor to provide a savings at least
    equal to the amount it costs to run a competition. Congress ought to
    require the contractor to save the agency at least enough so that the
    competition is paid for and taxpayers aren't cheated.
        Third, 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.
        Fourth, Congress must also make sure that Federal employees are
    treated fairly throughout the competition process by sharing 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.

                                   CONCLUSION

        On behalf of the dedicated Federal employees NTEU represents, I am
    proud to submit these views for the hearing record. I encourage the
    committee to make a strong investment in the Federal workforce by
    appropriating the 9 percent increase as requested by the IRS Oversight
    Board; repealing the IRS's authority to privatize tax collection;
    prohibiting the IRS from closing up to one-quarter of its Taxpayer
    Assistance Centers; providing pay parity for Federal workers; and
    giving the Federal workers a level playing field when competing for
    their jobs with private contractors.
        Without a doubt, the frontline employees are committed to working
    with management and Congress to increase efficiency and customer
    satisfaction. NTEU is committed to striking a balance between taxpayer
    satisfaction, business results and employee satisfaction. I encourage
    Congress to join us in this commitment.
                                     ______

    Prepared Statement of the 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 2006 funding requests from the Federal Transit Authority
    for Capital Metro--the transportation provider for Central Texas. I
    hope you will agree that the appropriation 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.
        Capital Metro requests funding for four critical projects that we
    hope the subcommittee will include in its fiscal year 2006
    appropriation bill: (1) $15 million for an Urban Commuter Rail Line;
    (2) $4.5 million for a Rapid Bus Project; (3) $1.5 million for a North
    Operating Facility; and (4) $4.2 million for improvements in and
    expansions of our bus service and facilities.
        Before describing each project in some detail, let me first 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 13 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. Capital Metro is seeking
    $15 million for this project.
        The All Systems Go Long-Range Transit Plan also 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 $4.5 million for the Rapid Bus
    Project.
        Additionally, Capital Metro will complete work this year on the
    North Operating Facility. This facility will serve as a maintenance and
    housing facility for the vehicles serving Capital Metro's many Northern
    routes and the University of Texas shuttle services. Capital Metro's
    Special Transit Services operations will also be located at this
    facility. Work began in Spring 2004 on the North Operating Facility.
    This project is in the final stages of construction and will be
    complete in Fall 2005. Capital Metro is seeking $1.5 million for this
    project.
        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. New planned facilities
    include the North IH-35 Park and Ride, the South Central Transit
    Center, the Leander Park and Ride, and a new administrative facility in
    East Austin. Also, in response to increasing air quality concerns,
    Capital Metro will be engine-retrofitting its fleet to help improve air
    quality in Central Texas (a grant from the Texas Emission Reduction
    Plan will provide 20 percent of the local funds for this project).
    Capital Metro seeks $4.2 million for these improvements and expansions
    of our bus service and facilities.
        On behalf of Capital Metro, I am grateful for your consideration of
    our requests for funding in the fiscal year 2006 cycle. I look forward
    to working with each of you in order to demonstrate the necessity of
    these projects.
                                     ______

              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 2006.
        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:

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

    ------------------------------------------------------------------------
    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 2006. 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 2006 cycle, and
    respectfully requests your support.
                                     ______

         Prepared Statement of the Coalition of Northeastern Governors

        As the subcommittee begins the fiscal year 2006 transportation
    appropriations process, the Coalition of Northeastern Governors (CONEG)
    is pleased to share with the subcommittee testimony on the fiscal year
    2006 Transportation, Treasury, the Judiciary, and Housing and Urban
    Development Appropriations bill. The CONEG Governors commend the
    subcommittee for its past support of funding for the Nation's highway,
    transit, and rail systems. Although we recognize the extensive demands
    being made upon Federal resources in the coming year, we urge the
    subcommittee to continue the important Federal partnership role that is
    vital to strengthening the 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.
        The Governors urge the subcommittee to fund the combined highway,
    public transit and safety programs at levels that will continue the
    progress in recent years to improve the condition and safety of the
    Nation's highways, bridges and transit systems. Continued and
    substantial investment in these infrastructure improvements--in both
    urban and rural areas--is necessary if the Nation's surface
    transportation system is to safely and efficiently move people and the
    substantial growth in freight movement that is projected in the coming
    decade. Providing robust funding of the Nation's transportation
    programs will allow States to continue investment that will improve the
    conditions and performance of the Nation's highways, bridges and public
    transit systems.
        Within the public transit program, the Governors strongly urge the
    subcommittee to provide funding levels that at least maintain the basic
    program structure and address the solvency of the mass transit account.
    Further, the Governors urge the subcommittee to maintain the authorized
    80/20 Federal-State match for the New Start Program. Transit programs
    like New Starts and the Bus and Bus Facilities Discretionary Grant
    Program have been instrumental in ensuring that needed funds are
    invested to improve and extend vital services in both our urban and
    rural communities.
        The CONEG Governors request that the fiscal year 2006
    Appropriations allow for at least $1.8 billion in funding for intercity
    passenger rail to ensure stability of the current system as critical
    decisions are made in the coming months on the future of the intercity
    passenger rail system and service. We understand that Amtrak has
    implemented management reforms, modified service, reduced personnel,
    and sought to increase non-Federal revenues. A capital investment
    program to bring essential infrastructure closer to a state of good
    repair will essentially exhaust the cash reserves that made it possible
    for Amtrak to continue operations the last few years. Yet bringing
    about necessary system reforms will require time for an orderly
    transition that does not jeopardize service and safety. As discussions
    on appropriate reforms in the Nation's intercity passenger rail system
    intensify, an appropriation of $1.8 billion for Amtrak, plus additional
    resources for a State-controlled corridor development, will enable
    continued operation and basic maintenance of a national system, and
    phased investment in infrastructure critical to safe and efficient
    operations.
        The safety and security of the Nation's highways, transit and rail
    systems remains a priority of the Governors. The safety and security of
    the aging rail tunnels along the Northeast Corridor is a particular
    concern, and we urge the subcommittee to fund life safety improvements
    for the Amtrak-owned Baltimore and New York tunnels. The Governors also
    support maximum funding for the Section 130 Highway-Rail Crossing
    Program. As part of the Federal-State partnership to correct hazardous
    conditions on the Nation's highways, investments in highway-rail
    crossings can reduce injuries and death from accidents even as they
    allow higher train speeds and increased reliability.
        The Governors urge the subcommittee to provide sufficient funding
    for border crossing and gateway infrastructure programs. 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 Governors support continued Federal investment in
    transportation research and development programs, particularly the
    Federal Railroad Administration's Next Generation High Speed Rail
    program. This program enhances safety and helps stimulate the
    development of new technologies which will benefit improved intercity
    rail service across the Nation. The President's fiscal year 2006 budget
    would zero out the Next Generation High Speed Rail Program that has
    funded a range of rail improvement programs such as train control
    systems, non-electric locomotives, grade crossings, track and structure
    improvements, corridor planning and maglev.
        The Governors urge the subcommittee to continue funding for
    investments in Intelligent Transportation Systems (ITS) that can
    maintain and enhance the capabilities and security of the Nation's
    transportation system. ITS helps States and communities along the
    densely populated Atlantic Coast region improve the safe and reliable
    operations of highway and transit systems on a daily basis. The
    Northeast's rural areas and communities also benefit significantly from
    ITS investments. The region's ITS systems, including those provided by
    TRANSCOM and the I-95 Corridor Coalition, have demonstrated their
    critical role, both in the emergency management and recovery phases,
    when security demands put added pressure on the region's transportation
    networks.
        The Governors also support the President's funding request of $23
    million for the Surface Transportation Board. The Board is essential
    for oversight and effective implementation of decisions in the ongoing
    process of railroad consolidations and restructuring that affect local
    and regional economies across the Nation.
        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 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 2006 funding request of $600,000
    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 financial support of 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. This request would fund the extension 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 was anticipated
    when CCOS was originally designed and involve new technical challenges.
    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 extended CCOS
    study will involve the conduct of corroborative analyses with the
    extensive data provided by past studies, advance the state-of-science
    in air quality modeling, and improve our understanding of multi-
    pollutant, multi-year air pollution. In addition, it will facilitate
    continuous data collection, using an expanded monitoring network, over
    a 3-year period. Access to data over a multi-year timeframe will enable
    us to perform seasonal and annual modeling of all pollutants. It will
    also allow us to consider year-to-year variations in air quality. The
    study will incorporate further refinements to emission inventories,
    develop observation-based analyses with sound theoretical bases, and
    include the following five general components:
      --Conducting weight-of-evidence data analyses, 2006-2008;
      --Developing an enhanced monitoring network, 2006-2007;
      --Making emission inventory improvements, 2006-2010;
      --Collecting enhanced monitoring data, 2007-2009;
      --Performing seasonal and annual modeling, 2008-2011.
        As with CCOS and CRPAQS, Policy and Technical Committees consisting
    of representatives from Federal, State and local governments, as well
    as private industry, would direct the new study elements. Under CCOS
    and CRPAQS, these committees set landmark examples of collaborative
    environmental management. The proven methods and established teamwork
    provide a solid foundation for this study.
        For fiscal year 2006, our Coalition is seeking funding of $600,000
    from 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.
    To support the region's new SIPs and to address the new NAS
    recommendations, a heavy-duty truck model is needed. The continued
    growth of heavy-duty truck travel, including increases in interstate
    and international goods movement, makes this element of the SIP
    transportation emission estimate critical. We propose funding of this
    activity at a level of $600,000 for 3 years.
        The funding for this year's request will go into the first phase of
    the heavy-duty travel activity data collection. The goal will be to
    collect data that can be used to more accurately characterize heavy-
    duty truck emissions, including those resulting from NAFTA. A heavy-
    duty truck model is needed because on-road emissions for air quality
    modeling purposes are currently based on the available light-duty
    vehicle activity data collected by local transportation agencies. This
    is due to the lack of data specific to heavy-duty vehicles. This is a
    problem because 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 NOX emissions).
        Thank you very much for your consideration of our request.
                                     ______

           Prepared Statement of the International Loran Association

                        FEDERAL AVIATION ADMINISTRATION

        On behalf of the International Loran Association (ILA), I am
    submitting this outside witness testimony and respectfully request that
    it be added to the subcommittee hearing record in conjunction with
    subcommittee work on the fiscal year 2006 appropriations bill.
        Specifically, the ILA is asking for your support for $25 million in
    funding from the Federal Aviation Administration (FAA) Facilities and
    Equipment (F&E) budget--the same level as we requested last year--to
    continue modernization of the Loran-C system. Because Loran is the only
    multimodal system we have that can support the global positioning
    satellite (GPS) system in all modes of transportation as well as timing
    applications affecting the majority of our population, we believe
    completing Loran modernization has critical national importance.
        Last year, the Appropriations Committee provided $22.5 million for
    this recapitalization initiative and since 1997, Congress has provided
    approximately $140 million to modernize the Loran infrastructure in
    order to provide a reliable, multimodal backup to the GPS in numerous
    transportation applications and to help ensure the safety and security
    of our critical national infrastructure. This modernization has
    proceeded under an interagency memorandum of agreement (MOA) between
    the Federal Aviation Administration (FAA) and the U.S. Coast Guard
    (USCG), with recapitalization resources provided through the FAA budget
    and the $27 million annual operations and maintenance (O&M) costs
    funded through the USCG budget.
        In recent years, we have gained greater recognition about GPS
    vulnerabilities that could affect the safety of tens of millions of
    Americans and the security of our critical national infrastructure. In
    combination with a modernized Loran system, GPS and Loran can together
    form the basis of a national infrastructure that is extremely robust
    and secure, now and well into our future.
        Immediately before September 11, 2001, DOT's Volpe Center released
    a widely read and accepted report entitled ``Vulnerability Assessment
    of the Transportation Infrastructure Relying on the Global Positioning
    System.'' That study clarified the dependence of our critical
    infrastructure on GPS and the national vulnerabilities associated with
    that dependence.
        The Volpe report was followed by a July 2002 FAA report that
    identified Loran as the best ``theoretical'' backup to GPS, because
    Loran-C:
      --``provides an independent source of navigation with the potential
            to meet required navigation performance (RNP) 0.3 area
            navigation (RNAV) requirements;
      --``is not subject to the vulnerabilities of GPS;
      --``provides redundant and in some cases primary capability as a
            source for precise timing; and
      --``can provide a backup and potentially redundant ground based
            communication channel for the WAAS broadcast.''
        As a consequence of these events and our new awareness, Loran
    became the subject of intense scrutiny. A highly regarded team of
    experts conducted the most extensive technical evaluation of Loran ever
    performed, and ``Loran's Capability to Mitigate the Impact of a GPS
    Outage on GPS Position, Navigation, and Time Applications'' was
    released in December 2004. This study unequivocally demonstrated that
    Loran could serve to backup GPS and protect our national infrastructure
    in numerous critical applications, and a Loran benefit/cost study
    performed at the same time also contained favorable findings. In fact,
    Secretary Mineta confirmed the positive results of both the Loran
    technical evaluation and the accompanying cost-benefit analysis in
    letters to various members of Congress in August 2004.
        Significantly, the President just authorized a new GPS policy in
    December 2004, and it specifically calls for the improvement and
    maintenance of GPS backups, and as indicated above, Loran is the only
    system available to support GPS in multiple critical infrastructure
    applications. The new ``U.S. Space-Based Positioning, Navigation, and
    Timing Policy'' affirms that GPS ``is a key component of multiple
    sectors of U.S. critical infrastructure.'' Furthermore, the policy goes
    on to state: ``The continuing growth of services based on the Global
    Positioning System presents opportunities, risks, and threats to U.S.
    national, homeland, and economic security . . . The United States must
    continue to improve and maintain the Global Positioning System,
    augmentations, and backup capabilities to meet growing national,
    homeland, and economic security requirements.''

                                 GPS AND LORAN

        GPS and Loran are radionavigation systems that operate in virtually
    identical ways but have extremely different properties--properties that
    make them uniquely synergistic systems. GPS is a satellite-based, high
    frequency, and very low signal level system, while Loran is a ground-
    based, low frequency, and a very high signal level system. Given their
    distinctly different properties, GPS and Loran do not share
    vulnerabilities, e.g. interference that may affect one system will not
    affect the other. Both GPS and Loran are multimodal (i.e. they can be
    used for aviation, marine, terrestrial and timing applications), and
    they are the only multimodal systems we have. Given its multimodal and
    performance capabilities, Loran is the second most widely used
    navigation and timing system in the world. Additionally, both GPS and
    Loran are RNAV systems, which would make future air navigation and
    landing procedures consistent between GPS and Loran. This is a key
    capability in the aviation community's gradual transition from the
    current, highly structured air traffic control system to the future
    ``Free Flight'' system envisioned by the FAA.
        It costs about $27 million annually to operate and maintain the
    entire nationwide Loran infrastructure, making Loran the least
    expensive navigation system available to operate and serve multiple
    transportation user requirements; it is also important to note that
    when the modernization program is complete, Loran's annual operation
    and maintenance expenses are projected to be less than $15 million.

      NATIONAL TRANSPORTATION SAFETY AND CRITICAL INFRASTRUCTURE SECURITY

        Congress and the Nation have become extremely focused on protecting
    the national infrastructure and safety of life, and on seeking
    practical, cost effective solutions to very real concerns. Through a
    full range of studies and reports, including those cited in this
    submission and several others, overwhelming evidence has accumulated
    about the need for systems that complement and backup GPS, and Loran is
    the best system for that role.
        Since virtually every aspect of our national infrastructure (e.g.
    transportation, telecommunications, and power) relies on GPS, and
    because GPS is an inherently fragile system, GPS dependence is a core
    national vulnerability. Basically, GPS is vulnerable to intentional and
    unintentional interference, and neither can be completely controlled
    today or in the future, regardless of system augmentations/
    modifications or resources expended on those efforts. For example,
    intentional jamming was used in Iraq, as reported by The Washington
    Post, Reuters, and other news sources, and while such acts are
    recognized tactics in modern war situations, recent history tells us
    that such tactics could be applied in the United States.
        There have also been numerous examples of unintentional jamming and
    interference, and these incidents exemplify how easily GPS reception
    can be disrupted. Our personal experiences with cell phones, AM/FM
    radios, wireless networks, TV reception etc. illustrate that wireless
    communications are not perfect, and will not become so in our lifetime.
    We believe it is also reasonable to assume, particularly given the huge
    popular migration to wireless communication technologies, that the
    wireless spectrum will only become even more congested in the future.
        The reality is that our national transportation and related
    infrastructures are increasingly reliant on GPS and our infrastructure
    is vulnerable. The reality is also that GPS can never be made to be
    invulnerable, and we cannot completely control our radio frequency
    environment today or in the future. Loran is a very inexpensive, yet
    extremely capable system that can mitigate this vulnerability and
    provide the Nation with an infinite backup to GPS.

                                ECONOMIC ISSUES

        It is clear that the Nation's transportation infrastructure is
    increasingly reliant on GPS and that satellite technology is
    vulnerable. It is also clear that the Nation must seek cost-effective
    means to protect our national transportation and other infrastructure.
    In this regard, Congress has shown exceptional leadership, supporting
    numerous steps to take advantage of Loran's utility as a national asset
    that can complement GPS in a multimodal and cost-efficient manner.
        With regard to Loran's ability to complement GPS in aviation, it is
    important to note that the current VOR/DME system costs approximately
    three times more than Loran to operate annually. In contrast, Loran can
    not only provide navigation benefits to aviation today and in the
    future, but its multimodal capabilities mean those benefits can also be
    provided to millions of other Americans. Furthermore, Loran's costs
    will drop substantially after the modernization is completed.
        To address another important economic issue, it should be noted as
    in previous years, that two U.S. firms, Rockwell Collins and FreeFlight
    Systems, are currently developing combined GPS/Loran systems for
    aviation and terrestrial users. These ongoing programs not only
    represent increasing commercial interest in such systems, but also
    promise lower consumer costs, new jobs and related economic benefits.
        In addition to these direct benefits to aviation and terrestrial
    applications, other major transportation user groups wish to enjoy
    these same benefits, and they have solidly endorsed the Loran
    modernization program. In the marine community for example, the
    National Boating Federation (NBF) and United States Power Squadrons
    (USPS) represent millions of recreational boaters, and these
    organizations have strongly supported Loran modernization for years.
        It should also be noted that the telecommunications and timing
    community also has an intense interest in the Loran modernization
    program, and their applications affect the majority of American
    citizens. For example, the T1X1 standards committee of the Alliance for
    Telecommunication Industry Solutions (ATIS) has endorsed the Loran
    modernization program in a letter to the National Institute of
    Standards and Technology (NIST).

                              LORAN MODERNIZATION

        As indicated above, the Loran recapitalization effort has already
    yielded cost-savings and national infrastructure enhancements at sites
    in 17 States (AK, CA, FL, IN, LA, ME, MA, MN, NV, MT, NM, NY, NC, OK,
    TX, WA, WY) across the country with the potential to benefit various
    transportation modalities. For example, major progress has been made in
    replacing old tube transmitters with modern, high efficiency solid-
    state technology and associated electronic systems. This modernization
    program has already enabled personnel reductions, increased
    reliability, and enhanced performance.
        As noted previously, these improvements will ultimately reduce
    Loran's annual O&M costs from $27 million to under $15 million, and do
    so while improving Loran's ability to complement GPS. Once the
    recapitalization effort is completed, Loran can act as a multimodal
    backup for satellite technology, greatly benefiting our national
    transportation infrastructure for a minimal annual investment.

                                   CONCLUSION

        It is a certainty that modern Loran can help protect our critical
    infrastructure and assist in meeting our national transportation safety
    and security objectives. The Loran modernization program is indeed a
    prudent and necessary investment in America's future.
        The committee should continue its support for Loran modernization,
    and we respectfully ask that no less than $25 million in fiscal year
    2006 resources from the FAA Facilities and Equipment (F&E) budget be
    provided for undertaking additional modernization projects through the
    collaborative efforts of the FAA and the Coast Guard.
                                     ______

                       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 and
    reauthorized the project in 1997 as part of TEA21. The strong interest
    and support of all members of Congress has been greatly appreciated by
    Easter Seals as it has pursued project ACTION's goals and objectives.
        Since the project's inception, Easter Seals has administered the
    project through a cooperative agreement with the Federal Transit
    Administration. Through steadfast appropriations support, Easter Seals
    Project ACTION has become the Nation's leading resource on accessible
    public transportation for people with disabilities. The current project
    authorization level is $3 million, and Easter Seals is pleased to
    request the appropriation of that sum for fiscal 2006.
        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 FTA Administrator
    Dorn and their teams. Secretary Mineta, who worked on the original
    authorization of Project ACTION, has worked closely with us since
    taking over DOT.
        Easter Seals Project ACTION was also heavily featured in the
    President's New Freedom Initiative Progress Report released in 2004.
    This demonstrates how closely the administration is working with
    Project ACTION to reach our shared goal of a safe, accessible,
    reliable, efficient and affordable transportation for and by citizens
    with disabilities at the local, State, regional and national levels
    throughout the United States.

                    SUPPORT FOR EASTER SEALS PROJECT ACTION

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

           EASTER SEALS PROJECT ACTION WORKING AT THE COMMUNITY LEVEL

        Among the programs pursued by the project in the recent period have
    been efforts aimed at increasing community capacity to meet the
    transportation needs of people with disabilities. For instance, in
    2001, Easter Seals Project ACTION initiated the first Mobility Planning
    Services (MPS) Institute. The latest Institute took place in March of
    this year and approximately 25 communities took part in the 2-day
    event. This was the third group of communities to go through the MPS
    training. The first two 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 is 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:
      --Pocket guides for Taxi drivers and transit operators to help them
            better serve customers with disabilities;
      --A collection of ``success stories'' that share, in the own words of
            people with disabilities, stories about their successful use of
            transportation and the positive difference it made in their
            lives;
      --New resources and guidance on good practices for conducting
            physical functional assessments for determining paratransit
            eligibility;
      --A collection of innovative practices in operating paratransit;
      --A redesigned resource called ``You Can Ride,'' a reference guide on
            how to use public transportation for people who can't read;
            and,
      --A model for solving rural transportation issues.
        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 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 2006 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 2006 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 University Corporation for Atmospheric
                                Research (UCAR)

        On behalf of the University Corporation for Atmospheric Research
    (UCAR) and the university community involved in weather and climate
    research and related education, training and support activities, I
    submit this written testimony for the record of the Senate Committee on
    Appropriations, Subcommittee on Transportation, Treasury, the
    Judiciary, and Housing and Urban Development.
        UCAR is a consortium of 68 universities that manages and operates
    the National Center for Atmospheric Research (NCAR) and additional
    research, education, training, and research applications programs in
    the atmospheric and related sciences. The UCAR mission is to support,
    enhance, and extend the research and education capabilities of the
    university community, nationally and internationally; to understand the
    behavior of the atmosphere and related systems and the global
    environment; and to foster the transfer of knowledge and technology for
    the betterment of life on earth. In addition to its member
    universities, UCAR has formal relationships with approximately 100
    additional undergraduate and graduate schools including several
    historically black and minority-serving institutions, and 40
    international universities and laboratories. UCAR is supported by the
    National Science Foundation (NSF) and other Federal agencies including
    the Federal Highway Administration (FHWA), the Federal Railroad
    Administration (FRA), and the Federal Aviation Administration. I would
    like to comment on the fiscal year 2006 budgets for the FHWA and the
    FAA.

                       THE FEDERAL HIGHWAY ADMINISTRATION

        The fiscal year 2006 budget request for the FHWA should support the
    administration's and the country's commitment to a safe, efficient, and
    modern surface transportation system. Weather research and intelligent
    transportation system (ITS) technology significantly contributes to
    this commitment. According to the National Academy of Sciences, weather
    reduces roadway safety, capacity and efficiency and is often the
    catalyst for triggering congestion. In the United States each year,
    approximately 7,000 highway deaths and 450,000 injuries are associated
    with poor weather-related driving conditions. The economic toll of
    these deaths and injuries is estimated at $42 billion per year. Weather
    plays a role in about 28 percent of the total crashes and 19 percent of
    the total fatalities. The societal and economic impacts of adverse
    weather on the highway system are enormous.

    Road Weather Research Program
        To mitigate the effects of weather, the FHWA's Road Weather
    Management Program conducts applied research in partnership with a
    broad spectrum of the weather research and transportation stakeholders
    with a goal of transitioning advanced weather detection and forecasting
    technologies into operational use to support traffic, incident, and
    emergency management, maintenance operations, and traveler information
    systems. Leveraging the work of the research community, the FHWA has
    made tremendous strides in just a few years in understanding and
    developing decision support systems to address the impact of poor
    weather on the surface transportation system. Enhanced research on
    pavement condition prediction, snow and ice control, fog, road
    friction, flooding, thunderstorm forecasting, icing, sensor
    development, and other areas will result in even more savings, in lives
    and dollars. Advanced surface transportation weather technologies are
    critical components of ITS solutions.
        Regarding the fiscal year 2006 request for the FHWA, I would like
    to comment on accounts related to surface transportation weather
    research that fund the collaborative work of surface transportation
    weather researchers and stakeholders. These accounts are relatively
    small in dollar amounts, but the work is potentially life saving for
    the users of the national surface transportation system. It should be
    noted that according to the 2004 National Research Council's report
    titled Where the Weather Meets the Road: A Research Agenda for
    Improving Road Weather Services, the investment required to satisfy the
    unmet needs for road weather information is $25 million per year for 15
    years. An investment at this level would be focused on developing
    decision support systems for traveler information systems, winter road
    maintenance, traffic, incident and emergency management, in-vehicle
    information systems, and ITS.
        Only recently has the FHWA begun investing in road weather research
    and this investment level has been very low ($2 million to $4 million
    per year) considering its impact on the transportation system. The
    funding has come partly from ITS Research and Development and from FHWA
    Operations. An investment at a much higher level is required.
        An adequately funded road weather research program will improve the
    safety, capacity, efficiency and mobility (reduce congestion), of the
    national roadway system. It will benefit the general public, commercial
    trucking industry, State DOT traffic, incident and emergency managers,
    operators and maintenance personnel. The road weather program will
    focus on the development of decision support systems for winter
    maintenance to improve snow and ice control operations by reducing
    staff costs and optimizing chemical use, which will result in
    environmental benefits. It will also focus on detecting, predicting,
    and communicating road weather hazards such as black ice, fog, hail,
    flooding, strong winds, and snow. Decision support systems for traffic,
    incident, and emergency management will also be developed and
    implemented taking advantage of new and emerging ITS technologies, such
    as vehicle infrastructure integration, and road weather information
    sensor systems. In-vehicle information systems capable of alerting
    drivers to dangerous weather and road conditions will also be developed
    as part of this research program.
        The Transportation Reauthorization Bill, H.R. 3 (TEA-LU), Section
    5607 contains language that establishes a merit based Road Weather
    Research and Development Program within the FHWA ITS Research and
    Development Program with annual funding at $4 million (significantly
    less than the NRC recommendation of $25 million). The establishment of
    a Road Weather Program is well supported by numerous organizations
    including the American Association of State Highway and Transportation
    Officials (AASHTO), the International Transportation Safety Association
    (ITSA), the Transportation Research Board (TRB), the National Research
    Council (NRC), and State Departments of Transportation (DOTs). Please
    support this important roadway safety and efficiency improvement
    program; I urge the committee to fund a Road Weather Research and
    Development Program of, at a minimum, $4 million in fiscal year 2006.

                     FEDERAL AVIATION ADMINISTRATION (FAA)

        ``Hazardous weather is a leading cause of aviation accidents--with
    more than 100 general aviation fatalities per year due to weather--and
    providing weather information directly to the cockpit is seen as a key
    factor in helping reduce weather-related accidents.''--FAA's ARA News
    Bulletin.

        Safety is of paramount importance to the flying public; weather is
    a primary factor in more than 40 percent of commercial aviation fatal
    accidents. A goal of the FAA is to reduce weather-related fatal
    accidents for commercial and general aviation by 80 percent by 2006.
    While substantial progress has been made through the FAA's Aviation
    Weather Research Program (AWRP), continuation of ongoing efforts is
    essential to reach its goal.
        To mitigate the effects of weather, the FAA's AWRP conducts applied
    research in partnership with a broad spectrum of the weather research
    and user communities with a goal of transitioning advanced weather
    detection and forecasting technologies into operational use. Leveraging
    the work of the research community, the FAA has made tremendous strides
    in understanding and mitigating severe weather on aviation. Enhanced
    research on turbulence, thunderstorm forecasting, oceanic weather,
    icing, and other areas will result in even more savings, in lives and
    dollars. I ask you to support the fiscal year 2006 request of $20.6
    million for the Aviation Weather Research Program, which is within the
    FAA's Research, Engineering and Development (RE&D) appropriations.
        I also ask you to support the request for the following accounts
    that fund the collaborative work of researchers in universities and
    Federal laboratories. These accounts are relatively small in dollar
    amounts, but the work is potentially life saving for our Nation's
    pilots and passengers.

    Joint Planning and Development Office (JPDO)
        The President has requested $18.1 million in its RE&D appropriation
    for the JPDO in fiscal year 2006 to support planning and development
    for the Next Generation Air Transportation System (NGATS). Working in
    close collaboration with the Departments of Commerce, Defense, and
    Homeland Security, the FAA, NASA, the White House Office of Science and
    Technology Policy, and other experts from the public and private
    sectors, the JPDO is developing a business plan for the aviation system
    of the future. Its goals and objectives focus on eight specific areas,
    one of which is aviation weather forecasting. The research community
    has years of expertise and knowledge to contribute to this area. The
    request of $18.1 million is a significant increase from the fiscal year
    2005 level of $5 million, and is supported by the Secretaries of
    Transportation, Commerce and the Air Force, and the NASA administrator.
    I urge you to support the requested amount of $18.1 million for the
    Joint Planning and Development Office.

    Wind Profiling and Weather Research--Juneau
        Turbulence costs U.S. airlines an estimated $100 million each year
    in injuries and operational disruptions such as delays and rerouting.
    High wind information can help airlines adjust their routes and
    schedules to optimize usage of the airport. Within the FAA's Facilities
    and Equipment is the program, Wind Profiling and Weather Research-
    Juneau, which supports the Juneau Airport Wind System (JAWS), an
    operational system in development, designed to detect and warn of wind
    hazards. For fiscal year 2006, the FAA is requesting $3.16 million to
    continue this work; while it is less than last year's level approved by
    Congress, I am pleased that this is the first year the FAA has
    requested funds for this effort. I ask that you support the
    administration's request of $3.16 million for Wind Profiling and
    Weather Research-Juneau.

    Wake Turbulence
        Improving the detection and forecasting of wake turbulence is a key
    element to the FAA's goal of tripling air travel capacity by the year
    2025. The Joint Planning and Development Office Integrated Product Team
    is committed to better understanding wake vortex behavior, and improved
    forecasting of this invisible threat. Within the FAA's F&E account, $2
    million is requested for wake turbulence research. Another $2.3 million
    is requested in its RE&D account. Given the importance of this
    relatively small research program to the FAA's capacity goal, I urge
    you to support these requests for wake vortex capacity enhancement.
        On behalf of UCAR, as well as all U.S. citizens who use the surface
    and air transportation systems, I want to thank the committee for the
    important work you do that supports the country's scientific research,
    training, and technology transfer. We understand and appreciate that
    the Nation is undergoing significant budget pressures at this time, but
    a strong nation in the future depends on the investments we make in
    research and development today. We appreciate your attention to the
    recommendations of our community concerning the fiscal year 2006 FHWA
    and FAA budgets and we appreciate your concern for safety within the
    Nation's transportation systems.
                                     ______

      Prepared Statement of the Fond du Lac Band of Lake Superior Chippewa

        Mr. Chairman, members of the committee, I am Peter J. Defoe,
    Chairman of the Fond du Lac Band of Lake Superior Chippewa. On behalf
    of the Band, we would like to thank you for this opportunity to submit
    testimony on fiscal year 2006 appropriations relating to the Department
    of Housing and Urban Development. We submit this testimony to urge
    Congress to increase the Federal funding levels for Indian housing
    programs that are provided through the Department of Housing and Urban
    Development.
        Specifically, we ask that Congress increase, or at least restore to
    fiscal year 2005 levels, funds for the Native American Housing Block
    Grant Program (NAHASDA), and to increase all other HUD programs serving
    Native Americans. Although the NAHASDA program is the principal source
    of Federal financial assistance for housing on Indian Reservations, the
    President's proposed fiscal year 2006 budget would cut that program by
    7 percent from fiscal year 2005 levels. Because of the severe and
    persistent deficiencies in housing in Indian country, such cuts should
    not be made. Congress should increase, in light of inflation, the
    funding for these vitally important programs.
        Native Americans suffer the most substandard housing--at a rate of
    six times that of the population at large. The Fond du Lac Band, like
    tribes nationwide, has longstanding and severe housing needs. Our
    Reservation, located in northeastern Minnesota, is part of our
    aboriginal territory. The Reservation was established for us by Treaty
    with the United States on September 30, 1854 as our permanent home. We
    have 3,900 enrolled tribal members, and provide a wide range of
    services not only to our members, but also to approximately 6,500
    Indian people who live and work on and near our Reservation.
        The Fond du Lac Reservation did not receive public housing until
    1965, 30 years after public housing was established for all other
    Americans. The implementation of the housing program for Fond du Lac
    followed many years of failed Federal policy, which served to break up
    families by placing children in boarding schools and foster homes, and
    which relocated many of the residents of the Fond du Lac Reservation
    from the Reservation to urban areas. In recent years, many Band members
    have come back to the Reservation in the interest of obtaining jobs
    that the Band can now provide as a result of the Band's recent strides
    in economic development.
        Although our Reservation encompasses 100,000 acres of land, the
    Federal allotment policy, which was applied to the Fond du Lac
    Reservation in 1889, left us with the poorest lands; our most valuable
    lands went to timber companies and homesteaders. In addition, our
    Reservation is located in a geographical area that contains mostly
    marginal lands that require costly drainage projects for the land to be
    useable. Our lands are considered a difficult environment for
    affordable housing because they require high development costs
    associated with substandard soils and expensive sewage systems and a
    lack of decent infrastructure. In an effort to meet our members'
    housing needs, the Band has found it necessary to invest significant
    funds to remediate the Band's current lands, purchase other lands, and
    construct the infrastructure (septic systems, water and sewer lines,
    roads, and utility services) that is essential to serve those lands.
        The Band cannot do this alone. The Band has long depended on the
    funds made available to Indian tribes through HUD to assist us in
    meeting the housing needs of our members. But the deficits in housing
    for Indian people are so entrenched and so severe that they will not be
    remedied without continued Federal financial assistance.
        We currently have 146 units of homeownership housing, and 230 units
    of low rent housing. Of these housing units, 75 percent are over 15
    years old, and as a result, are constantly in need of maintenance and
    repairs. Over 20 percent of these homes are in need of major
    renovation--which will cost between $10,000 and $20,000 per unit. Other
    units require routine repairs and maintenance, the average cost of
    which is $5,000 per year.
        The Fond du Lac Housing Division currently has a waiting list of
    224 applicants seeking housing. This is just the waiting list for low
    income housing. We have many other Tribal members who are also in need
    of housing, but who have moderate incomes and therefore are not even
    shown on our waiting list. To meet the needs of our low income members
    we need to build at least 200 new housing units. We also need to build
    new and upgrade existing septic systems to serve that housing, the cost
    of which is estimated to be approximately $5 million.
        The disparity between housing conditions among our members and that
    of the general population is shown by the 2000 Census. In Minnesota,
    0.5 percent of the population lives in homes lacking complete plumbing.
    In contrast, among Fond du Lac members that figure is 10 times higher--
    5.1 percent. In Minnesota, 0.48 percent of the population lives in
    homes that lack complete kitchens. In contrast, among Fond du Lac
    members, 4.2 percent live in homes without complete kitchens. In
    addition the poverty rate in Minnesota is 7.9 percent, while the
    poverty rate among Fond du Lac members is 14 percent.
        Because of the severity of our housing shortage, approximately 40
    percent of our people live in overcrowded homes. It is not uncommon on
    our Reservation and among our people to find 10 or more individuals
    living together in a two-bedroom home. Overcrowding, in turn, taxes the
    house itself. Overcrowded homes accelerate the wear and tear on those
    homes. For example, the Band has been required to rebuild septic
    systems because the existing system was not built to serve the number
    of individuals that were actually living in the home. Over the past 5
    years, our Housing Division has spent approximately $1.2 million on
    septic repair and replacement and additional work still needs to be
    done. These costs, although necessary, restrict the resources that
    would otherwise be available for new construction of housing units. The
    needs are great but the resources keep getting smaller.
        Overcrowding and dilapidated housing creates other risks. As
    discussed by the U.S. Commission on Civil Rights, in its report, A
    Quiet Crisis: Federal Funding and Unmet Needs In Indian Country, at 62-
    63 (July 2003), the high rate of overcrowded housing among Native
    Americans increases the risk of fire and accidents, and creates
    unsanitary conditions, with increased spreading of communicable but
    normally preventable illnesses. Overcrowded housing is especially
    harmful to children, who, as the Commission found, are likely to
    ``suffer sleep deprivation and inability to concentrate in school.'' In
    addition, overcrowding ``often results in stress, which can magnify
    family dysfunction and eventually lead to alcohol and child abuse.'' A
    Quiet Crisis at 63. We see these problems at Fond du Lac.
        In addition to the problem of overcrowding, we are also faced with
    a burgeoning homeless problem that needs to be addressed immediately.
    In 1994, the Minnesota Housing Finance Agency reported that while the
    homeless rate for all Minnesota residents was 0.92 percent, the
    homeless rate among Fond du Lac members was 6.54 percent. Minnesota
    Housing Finance Agency, Comprehensive Housing Affordability Strategy
    1996-2000 at 28, 43, 49 (December 29, 1995). The problem of
    homelessness still exists and is severe. The Band regularly receives
    requests from Band members who are homeless and in need of housing. The
    Band currently has no facilities to provide temporary shelters to house
    our members when emergencies arise. The Band is presently assisting 20
    homeless families by providing shelter and rental assistance in several
    local hotels and motels--a situation that certainly does not foster a
    sense of belonging and ownership, not to mention the financial burden
    that this places on the Band's limited resources. The Band needs
    affordable low-income transitional housing in order to assist families
    in the interim that want to come home to the Reservation or who face
    housing emergencies.
        We also need to address the housing needs of our elderly population
    by providing assisted living accommodations for them if they so choose.
    Our elders are our teachers and mentors and we need to honor and
    respect them by giving them comfort and security, and allow them to
    live in a secure, healthy and worry-free environment.
        The Band relies on its annual grant from the Department under the
    NAHASDA program to meet some of these housing needs. The Band has also
    relied on Indian Community Development Block Grants, which the Band has
    been able to use for infrastructure. However, the funding for these
    programs has not materially increased over the years. At the same time,
    the costs of the supplies, materials and labor necessary to remodel and
    modernize our aging housing stock have increased every year with
    inflation. Each year we are forced to do more with less. Current
    funding levels simply do not meet the housing needs. Further cuts in
    the NAHASDA program and in the other HUD programs that are intended to
    serve Indians will only make this housing crisis worse. The Federal
    Government's trust responsibility demands that this Indian housing
    crisis be addressed.
        The inadequacy of Federal funding for Indian housing programs was
    documented by the U.S. Commission on Civil Rights 2 years ago. As the
    Commission found, and as we have seen, Federal funding for the Indian
    programs provided by HUD has not even kept pace with inflation. When
    adjusted for inflation, it is clear that HUD funding for Native
    American programs has actually decreased 1.3 percent from 1998 to 2004.
    A Quiet Crisis at 67. In contrast, during the same period, HUD's
    overall budget, even when adjusted for inflation, actually increased by
    46.5 percent. In fiscal year 2005, the HUD budget for Native American
    programs was reduced from fiscal year 2004 levels. Although Congress
    has consistently found that housing conditions among Native Americans
    are far worse than housing conditions among any other group, funds have
    yet to be provided to effectively address those needs.
        Housing represents the single largest expenditure for most Indian
    families. The development of housing has a major impact on the national
    economy and the economic growth and health of regions and communities.
    Housing is inextricably linked to access to jobs and healthy
    communities and the social behavior of the families who occupy it. The
    failure to achieve adequate housing leads to significant societal
    costs.
        For most families, the investment in housing is the only tool for
    wealth building. On most reservations the opportunity to use equity in
    home building has not been available. There are recent initiatives,
    such as the Section 184 Housing Program, under which guaranteed loans
    are made available to Indian people to build or purchase housing on
    trust lands. Our community is on the verge of implementing that program
    to assist our members. However, with the proposed cuts to the Federal
    budget for housing programs, there will be a comparable reduction in
    the availability and use of these wealth-building tools.
        Decent, affordable, and accessible housing fosters self-
    sufficiency, brings stability to families and new vitality to
    distressed communities, and supports overall economic growth. Very
    particularly, it improves life outcomes for children. In the process,
    it reduces a host of costly social and economic problems that place
    enormous strains on the education, public health, social service, law
    enforcement, criminal justice, and welfare systems. For these reasons
    the Fond du Lac Band strongly urges Congress to increase funding for
    our housing needs, rather than impose cuts which will adversely affect
    the core of our communities.
        Miigwech. Thank you.
                                     ______

               Prepared Statement of the Shoshone-Bannock Tribes

        On behalf of the Shoshone-Bannock Tribes of the Fort Hall
    Reservation, I submit this testimony on fiscal year 2006 appropriations
    for Native American Programs provided through the Department of Housing
    and Urban Development. We are Idaho's largest tribe, with a reservation
    population of nearly 8,000 residents, Indian and non-Indian, spread out
    over a 753 square mile reservation. Like many tribes, we have vast
    unmet needs in housing. We oppose the administration's effort to
    further reduce funding for Native American housing programs that are
    funded through the Department of Housing and Urban Development. The
    administration's proposed reductions to these programs impact Indian
    tribes more severely than other program cuts because Indian programs
    are already significantly under-funded.
        A housing crisis exists in Indian country, and it exists on the
    Shoshone-Bannock Reservation. The 2000 Census shows this. In stark
    contrast to all other Americans, 16 percent of all Indian homes had no
    electricity, 21 percent had no piped water, over half had no central
    heating and nearly 12 percent lacked complete plumbing. In addition,
    Native Americans suffer from disproportionately high rates of
    homelessness, or live in severely overcrowded conditions. The problems
    in Indian housing were also documented by the U.S. Commission on Civil
    Rights, which in a report issued 2 years ago, found that overcrowding
    on Indian trust lands ``is six times the national rate.'' U.S.
    Commission on Civil Rights, A Quiet Crisis: Federal Funding and Unmet
    Needs In Indian Country, at 62-63 (July 2003).
        The Commission on Civil Rights, in its 2003 report, found that
    Federal funds for Indian housing programs have never kept pace with
    increased housing costs and tribes are in fact losing purchasing power.
    During the 7-year period from 1998 to 2004, while overall funding for
    HUD, when adjusted for inflation, increased by 46.5 percent, HUD
    funding for Native American programs decreased by 1.3 percent. A Quiet
    Crisis at 56.
        The Fort Hall Reservation encompasses four Idaho counties: Bingham,
    Bannock, Power and Caribou and is one of the largest land based Indian
    tribes in Idaho. According to the 2000 U.S. Census, more than 25
    percent of Native American families residing on the Reservation live at
    or below the poverty level. Hundreds of Indian families are kept on our
    Housing Authority's waiting lists for low-income and Mutual Help homes
    because our resources are inadequate to finance new construction or
    renovate existing homes. We need to build hundreds of new homes on our
    reservation. Statistics mask the true need for safe and affordable
    housing for many eligible families simply stop petitioning for housing
    when year after year they are told that tribes do not have the
    resources. Even when the Tribes' Housing Authority is able to provide a
    home for an eligible family, some aspect of the project is incomplete
    (e.g., exterior stairs) due to lack of funds, and the family is
    reminded that the needs of Native Americans remain a distant concern of
    the Federal Government.
        Despite the substantial and well-documented unmet needs in Indian
    housing, the administration proposes deep reductions to Federal funds
    for Indian housing programs in fiscal year 2006. The President's
    proposed budget would significantly cut funding for Indian Housing
    Block Grants (IHBG) that are made available to Tribes under the Native
    American Housing Assistant and Self-Determination Act of 1996
    (NAHASDA), which funds are essential for maintaining existing housing
    units and building new homes. The President also proposes to reduce the
    funding for Indian Community Development Block Grants (ICDBG), which
    program serves as an important resource for constructing the
    infrastructure necessary for Indian housing. The net effect of the cuts
    in these two programs would be an overall reduction of more than $107
    million, a 15 percent reduction from last year's enacted levels at a
    time when tribal populations are increasing along with the demand for
    safe and affordable housing. These reductions are unwise and will
    further compromise Tribal efforts to provide safe and affordable
    housing to eligible members.
        Indian country simply cannot afford such substantial reductions in
    housing funds. We urge Congress not to allow such cuts to be made. We
    ask Congress to increase HUD funding for Indian housing programs above
    fiscal year 2005 levels to account for increases housing costs and
    inflation. Congress should appropriate $700 million for the NAHASDA
    block grant program and maintain, as a separate program, the $68
    million for the Indian Community Development Block Grant. This will
    afford the Shoshone-Bannock Tribes, and other Indian tribes, some of
    the resources we require to address chronic housing inequities and
    other problems relating to inadequate infrastructure which persist in
    Indian country.
        The Tribes would also like to see Congress restore the Rural
    Housing and Economic Development program which the President eliminated
    from the fiscal year 2006 budget. This program provides capacity
    assistance to rural, local and State organizations and Indian tribes.
    Grants awarded under the RHED program finance a variety of programs
    like enterprise development, affordable housing construction, staff
    development and computer software. We urge Congress to support
    continued funding of the RHED program at $25 million.
        When Congress passed NAHASDA, it recognized that ``through
    treaties, statutes, and the general course of dealing with Indian
    tribes, [Congress] has assumed a trust responsibility for the
    protection of Indian tribes and for working with tribes and their
    members to improve their housing conditions and socioeconomic status so
    that they are able to take greater responsibility for their own
    economic condition.'' We ask that the United States live up to these
    fine words.
        If the United States truly wishes to improve the housing conditions
    and socioeconomic status of Indian communities, it must provide
    sustained funding so that tribes may recruit and retain qualified
    staff, so that we may prioritize housing needs, and finance and
    complete construction of new homes, renovate existing homes, provide
    other forms of housing assistance, as well as provide related
    infrastructure--water, sewers, roads, and utilities--which our
    communities so desperately need. No home in America should be without
    safe drinking water, a working kitchen, plumbing, and heat. Yet
    throughout the Fort Hall Indian Reservation, too many homes do not have
    these ``luxuries.''
        The administration's fiscal year 2006 budget for Indian housing
    programs, like its budget for other Federal programs which benefit
    Indian tribes, indicates a lack of appreciation for the challenges
    Indian communities face each day to provide basic governmental services
    to their members. Infrastructure in Indian country is inadequate and
    contributes to the difficulties Tribal governments have to improve the
    economic and social wellbeing of our members. Congress must restore the
    President's proposed cuts and increase funding to meaningful levels so
    that Tribal governments can make tangible progress to improve the
    housing conditions of our members.
        Housing is basic to all people. Safe and affordable housing also
    promotes the family. So much good can come from providing Indian
    families with this essential need.
        Congress and the administration must recognize that we, like other
    local governments, are partners with the Federal Government, in
    providing for the needs of our members. Indian tribes deserve their
    equitable share of Federal funds to build reservation infrastructure,
    including housing, so that over time, we may provide for all the needs
    of our members. Strengthening tribal governments is a good investment
    of taxpayer dollars. Like the Indian Self-Determination Act, NAHASDA,
    the ICDBG, and the RHED programs are successful programs and Congress
    and the administration should increase, not decrease, funding for them.
        Thank you for affording the Shoshone-Bannock Tribes the opportunity
    to make known our comments regarding the President's budget proposal
    and our needs for fiscal year 2006.
                                     ______

                  Prepared Statement of Huron Potawatomi, Inc.

                                  INTRODUCTION

        The Nottawaseppi Huron Band of Potawatomi Indians appreciates the
    opportunity to present testimony on the President's fiscal year 2006
    budget for the Department of Housing and Urban Development. The Tribe
    is disappointed that the administration has failed to acknowledge the
    chronic housing needs facing Indian tribes and has proposed harmful and
    dramatic cuts to tribal housing programs that Indian tribes rely upon
    to fund their housing operations.
        In fiscal year 2005, Congress appropriated $622 million for the
    NAHASDA Indian Housing Block Grant (IHBG) Program and $68 million for
    the Indian Community Development Block Grant (ICDBG) Program. The
    combined total for these programs in fiscal year 2005 was $690 million.
    For fiscal year 2006, the President proposes to cut these two programs
    by $107 million and fold a reduced ICDBG program into the NAHASDA
    program. The fiscal year 2006 funding for these programs would total
    $583 million, a 15.5 percent reduction from the fiscal year 2005
    enacted level. The President's budget eliminates support for the
    National American Indian Housing Council which assists Indian tribes
    with technical assistance and capacity-building. Under NAHASDA, we are
    limited in the amount of funds they we may use for administration and
    technical assistance from HUD is limited by funding and staffing
    constraints.
        We have stated in the past that basic infrastructure--housing, law
    enforcement, roads, sewers, and health facilities--is required in
    Indian country if tribes are to attract business and provide for their
    members. Safe, affordable housing is a critical element to improve the
    quality of living for our members. It provides family stability. It
    promotes health. It is a basic human need. Homeownership is part of the
    American dream. The President's proposed cuts to Indian housing
    programs are ill-advised. In the long run these cuts will have a
    devastating impact on Indian communities. Our numbers grow. Inflation
    reduces what little we have. Congress must act.
        We ask that Congress reverse these proposed cuts to Indian housing
    programs. We request that the committee restore and increase funding
    for NAHASDA's IHBG program to $650 million and retain separate funding
    for the ICDBG program at $70 million so that we may address the acute
    housing needs of our members.
        In February, HUD's Assistant Secretary for Public and Indian
    Housing testified before Congress. He noted that in fiscal year 2004,
    Indian tribes and their housing authorities built 2,115 new housing
    units. Yet, despite these successes, the Assistant Secretary
    acknowledged that HUD expects to see overcrowding in Indian country
    reduced by ``at least one percent in the coming year, which means that
    467 additional families will be housed.'' At that rate, it will take
    100 years to resolve overcrowding in Indian country. This Nation can do
    better than that. It must.

                                 HOUSING NEEDS

        Our Tribe has over 600 enrolled members, with a total of over 390
    member households. Many of our members have incomes at or below the
    poverty level. More than half of Huron Band families live in
    substandard and overcrowded housing. Less than 20 percent of our
    members own their own home. More than 30 percent of member households
    receive housing assistance. Housing assistance consists of rental,
    utility, rehabilitation, advocacy, training and/or apprenticeship, and
    construction.
        Our housing program offers rehabilitation assistance to repair
    member homes--ranging from roofing, sewer and water, plumbing,
    electricity, HVAC, window replacement, insulation, and lead and
    asbestos mitigation. In some instances, we cannot assist members in
    need because our policies permit assistance to members once per year
    and three times in a lifetime.
        In many instances, ``affordable'' rental housing for our members
    means living with substandard electrical, plumbing, and heating, often
    in unsafe neighborhoods.
        Many of our members currently living off-Reservation have expressed
    a desire to relocate to the Reservation if adequate housing were
    available to them. Despite record-low mortgage interest rates and
    increased activity in the real estate market, the price of available
    housing within the local market is generally prohibitive to lower
    income families. Within our service area, the current job market is
    centered away from the Pine Creek Reservation, toward the larger cities
    and surrounding areas, particularly Kalamazoo and Grand Rapids. Rental
    properties within the immediate vicinity (25 to 50 miles) of the
    reservation present a variety of issues that include affordability and
    safety. Structurally, many affordable units are inferior and unsafe.

    Lack of Housing
        As noted above, few members own their own homes. Of those families
    living in rental units, many pay more than 50 percent of their monthly
    income in rent, leaving very little money for other household expenses.
    In the winter months, when temperatures routinely fall below freezing,
    lack of money for utilities is especially dangerous. With rising heat
    and electricity costs, many tribal families are forced to choose
    between paying rent or using the rent money to keep the utilities on,
    eventually facing eviction for nonpayment of rent.
        We are also seeing an increase in homelessness among our members,
    especially among families with young children. The Tribe currently does
    not have enough funding to provide transitional housing, so we must
    refer these families to shelters in larger cities. Once there, they may
    be turned away if the shelter is full that day. The Tribe would like to
    address the growing homelessness problem by finding ways to provide
    temporary or transitional housing on the Reservation.
        Our housing goals are modest. We seek to construct seven low-income
    elder rental units, six low-income rental units, provide 15 eligible
    tribal members with financial assistance through the Down Payment
    Assistance Program, rehabilitate and renovate eligible homes, provide
    Emergency Rental/Utility Assistance and home counseling services to
    eligible members.

    Housing Conditions
        Many of our members live in substandard housing. For example,
    recent cases addressed by our Housing Department included an elder who
    lived for several years in a home with no indoor plumbing and no
    running water, and a family with children with no heat that placed
    blankets over the windows for insulation. Other homes are in such poor
    condition that housing inspectors order them condemned before
    rehabilitation can even occur. They express disbelief that people
    actually live in such conditions. The Department has also intervened in
    cases of major insect infestation, toxic mold and mildew, indoor air
    quality problems and lead contamination. These deplorable housing
    conditions can be changed, but it takes money and adequate staff to run
    the program, determine eligible recipients, and monitor the work
    performed.

                           HUD FUNDING AND ACTIVITIES

        We have witnessed a steady decline in our IHBG funding from a high
    of $419,000 in fiscal year 2002 to the current funding of $273,000 in
    fiscal year 2005 (more than a 33 percent reduction). This year is the
    first year the Tribe has been awarded funding under the ICDBG and we
    plan to construct a community center. Roughly 40 percent of our recent
    housing budget went toward new construction, another 32 percent for
    housing services, 6 percent for rehabilitation, 2.5 percent for housing
    management services, and slightly less than 20 percent for planning and
    administration. How will we make up for the President's proposed cuts?
        The Housing Department works with the Indian Health Service and
    South-Central Michigan Construction Code Inspection, Inc., a local non-
    profit municipal agency, to provide inspection code enforcement
    services. The Housing Department ensures that renovation and
    rehabilitation projects are performed pursuant to IHS, BIA and NAHASDA
    standards, and are examined by a qualified, contracted inspector. The
    Tribe has adopted the National Building and Maintenance Codes and
    Construction Standards which will be enforced through an association
    with the South Central Michigan Construction Code Inspection, Inc. How
    can we be viewed as a reliable partner with other local governments if
    we cannot assure that essential tribal programs will have the resources
    required to properly staff and operate them?
        The Housing Department is continually working to address Tribal
    member's home health and safety needs. We provide members with smoke
    and carbon monoxide detectors, radon testing, fire extinguishers, home
    repair manuals, and child-proof cabinet and drawer latches.
        The Tribe was only recognized in 1996, and we do not have any
    formula-eligible housing stock. This summer, the Tribe will begin
    construction of elder housing.

                                   CONCLUSION

        Through housing programs such as NAHASDA, the Indian CDBG, and the
    BIA's Housing Improvement (HIP) Program, Congress has entrusted Indian
    tribes with resources to address our member's most basic need--safe and
    affordable shelter. Congress must know, however, that these resources
    are insufficient to the task. Census statistics and reports reveal that
    Native Americans are three times more likely than other Americans to
    live in overcrowded homes, many without central heating or complete
    plumbing.
        Congress must reverse the President's proposed budget cuts.
    Appropriations for Indian housing have stagnated and are at their
    lowest level in 5 years. Housing construction costs have risen. Budget
    cuts hurt our ability to tackle housing needs. As the demand for safe
    and affordable housing increases, our needs increase. Construction
    costs increase and we must still recruit and retain qualified staff.
    With reduced funds under NAHASDA, as proposed by the President, we are
    limited in our ability to remedy unsafe and unsanitary housing
    conditions.
        When it passed NAHASDA, Congress recognized that ``through
    treaties, statutes, and the general course of dealing with Indian
    tribes, [Congress] has assumed a trust responsibility for the
    protection of Indian tribes and for working with tribes and their
    members to improve their housing conditions and socioeconomic status so
    that they are able to take greater responsibility for their own
    economic condition.''
        If the ``government-to-government'' relationship is to remain
    meaningful, the current administration, future administrations, and the
    Congress must consult with Indian tribes, learn more about our needs
    and how best to address them, and provide tribes the flexibility we
    need to address a myriad of housing problems. Most importantly, the
    Federal Government must not undermine the successes Indian tribes have
    achieved to redress chronic housing problems by cutting the Federal
    programs we rely upon.
        Native Americans have answered the call for national sacrifice in
    the War on Terrorism. Those brave men and women serving in the Armed
    Forces of the United States deserve to know that their mothers and
    fathers, spouses and children, and extended families are safe at home.
        The Huron Band will do its part to improve the living conditions of
    our members. We only ask Congress to give us, and other Indian tribes,
    the resources necessary for the job. We long to be self-sufficient, but
    until that day comes, the United States must live up to its word. The
    President can propose cuts, but it is the Congress which appropriates
    the Nation's resources. Please continue to allocate them where there is
    documented need.
        Thank you for permitting us the opportunity to submit comments on
    the President's fiscal year 2006 budget for the Department of Housing
    and Urban Development.
                                     ______

        Prepared Statement of the Fort Peck Assiniboine and Sioux Tribes

        Mr. Chairman and members of the committee, I am Ray K. Eder,
    Chairman of the Assiniboine and Sioux Tribes of the Fort Peck Indian
    Reservation, in Montana. I am pleased to present this testimony
    regarding the fiscal year 2006 budget for the Department of Housing and
    Urban Development.
        Indian communities across America continue to be plagued by severe
    housing shortages. The tragedy of homelessness and substandard housing
    is only too familiar to Indian tribes within this country. A 2003
    report by the U.S. Commission on Civil Rights found that approximately
    90,000 Indian families were homeless or under-housed. Native Americans
    are three times more likely than other Americans to live in overcrowded
    homes; on reservations, 14.7 percent of homes are overcrowded, compared
    to 5.7 percent of homes elsewhere. We are also more likely to lack
    sewage and water systems. The last census documented that 16 percent of
    all Indian homes had no electricity, 21 percent had no piped water,
    over half had no central heating and nearly 12 percent lacked complete
    plumbing.
        About 6,000 tribal members live on the Fort Peck Reservation. Of
    these, it is estimated that 271 families live in substandard housing,
    all of whom have incomes below 80 percent of median income. It is also
    estimated that there are 389 low-income families living in over-crowded
    conditions.
        The Department of Housing and Urban Development estimates that
    there is a need for about 220,000 new housing units for Indian
    families, but that NAHASDA funding can only meet 5 percent of this
    need. The housing shortage will only get worse: according to a Bureau
    of Indian Affairs Labor Force Report, nearly 44 percent of the
    population living on the reservation is under the age of 18, further
    increasing the need for future housing development. The Federal
    Government's trust responsibility demands that this Indian housing
    crisis be addressed.
        In the face of these inequities, the President proposes to further
    cut funding for the Native American Housing Block Grant (NAHBG) program
    from $622 million to $583 million and to cut funding for the Indian
    Community Development Block Grant (ICDBG) program from $68 million to
    $57.9 million. Furthermore, the proposed fiscal year 2006 budget for
    HUD would roll the ICDBG program into the NAHBG program. The result of
    these changes would be a 15 percent ($10 million) reduction in funding
    for the competitive ICDBG program and a 15.5 percent ($97 million)
    reduction in formula funding. This is a total proposed reduction of
    $107 million in funding for Indian housing.
        These cuts must be restored. Furthermore, appropriations for Indian
    housing, which have not increased significantly since 1998 and are at
    the lowest level in 5 years, should be increased to a level that is
    responsive to tribal housing needs. We support the recommendation of
    the National Congress of American Indians and the National Indian
    Housing Council that funding for Indian housing be increased to $723
    million.
        The Fort Peck Housing Authority manages over 955 units through HUD
    Low Rent and Mutual Help housing programs. With inadequate funding
    levels and an allocation formula based in part on existing housing
    stock, most tribal housing entities struggle to maintain their existing
    housing, leaving no money for new housing. The Tribes' annual formula
    grant from the Department is $4.85 million. However, because of
    operation and maintenance obligations to existing housing stock, the
    Tribes are only able to build 20 new units every 3 years. Consequently,
    there is a waiting list of over 400 families.
        The Tribal Housing Authority continues to find ways to maximize
    this admittedly insufficient funding. For example, the Tribes have
    received $2.1 million in ICDBG funding over the past 5 years and have
    used this funding as seed money, leveraging it for an additional $1.6
    million to support tribal housing needs. Projects include a water
    supply and distribution system for the towns of Frazer and Brockton, a
    multi-purpose building, and housing rehabilitation.
        We want the subcommittee to know that our housing needs are
    significant and that the President's proposed funding decreases will
    further cripple the Tribes' efforts to provide adequate housing for our
    members. We urge you to restore all proposed cuts and to increase
    funding for Indian housing to meet these needs.
        I would like to thank the subcommittee for the opportunity to
    present this testimony.
                                     ______

        Prepared Statement of the Lac du Flambeau Band of Lake Superior
                                Chippewa Indians

        ``Ahneen. Gum mah quay indiznecos. Makwa Dodame. Waswagoning in
    doon ja ba.'' What I said in my native language ``Ojibwemowin'' was
    ``Hello. My name is Head Woman. I'm of the Bear Clan and I'm from Lac
    du Flambeau, Wisconsin.''
        My English name is Victoria Doud, President of the Lac du Flambeau
    Band of Lake Superior Chippewa Indians. The Lac du Flambeau Reservation
    is in the North Woods area of Wisconsin and our homeland is called
    Waswagoning. The Federal Government is obligated by Treaty and
    Executive Order to provide critically needed social, educational,
    health and governmental services to the Band and its members in
    exchange for the land, water, natural resources and peace our
    forefathers provided. As Congress and the President work on the fiscal
    year 2006 budget, the obligations and commitments to provide these
    services must not be forgotten and should be given the highest
    priority. The Band submits the following issues and concerns to the
    subcommittee concerning the budget for the Department of Housing and
    Urban Development.
        We request that Congress increase funding for Native American
    Housing programs to $723 million. Since implementation of the Native
    American Housing Assistance and Self-Determination Act (NAHASDA) in
    1998, HUD has provided assistance to Native Americans through four
    programs: the Native American Housing Block Grant program (formula
    funds), the Indian Community Development Block Grant (competitive
    grants), the Section 184 Indian Housing Loan Guarantee Program and the
    Title VI loan guarantee program. This year, the President proposes
    substantial cuts to Indian housing programs. At a minimum, these cuts
    must be restored. Furthermore, because the budget for Indian housing
    programs has not increased significantly in recent years and the need
    continues to outstrip available funding, we join other Native American
    organizations in requesting that Congress increase funding for these
    programs.

                           CHIPPEWA HOUSING AUTHORITY

        The Lac du Flambeau Band has approximately 3,600 enrolled members,
    of which 1,900 live on or near the Reservation. We provide housing for
    our Members through our Tribally-designated housing entity, the
    Chippewa Housing Authority (CHA). The mission of the CHA is to develop,
    operate and maintain affordable housing programs in order to provide
    Tribal membership with decent, safe, sanitary housing and supportive
    services that promote self-sufficiency and economic and community
    development on the Reservation. The CHA's first 20 Low Rent properties
    were available to the community in 1966. Today, CHA housing stock
    includes 196 Low Rent units, 40 Mutual Help homes, 48 Tax Credit units
    and 64 USDA-RDS 515 units.
        Homelessness, overcrowding and sub-standard housing are serious
    problems in Indian Country, and Lac du Flambeau is no exception. Ninety
    families remain on the waiting list for CHA housing, while 135 families
    are in pending/review status. Furthermore, although CHA has identified
    67 families as ineligible for HUD housing, we still believe that there
    is a housing need for those families. Because of this housing shortage,
    92 of our members are homeless and many others are forced to live in
    overcrowded conditions. CHA has identified at least 50 overcrowded
    households. Housing on the Reservation, both public and private, is
    also in poor condition: 7 units have been identified as dilapidated,
    132 units are in need of serious repairs and 175 are in need of minor
    to moderate repairs.

                      NATIVE AMERICAN HOUSING BLOCK GRANT

        We ask that you increase funding for the Native American Housing
    Block Grant Program (NAHBG). President Bush's proposed budget for this
    program in fiscal year 2006 is $583 million. This amount is a $39
    million decrease from fiscal year 2005 enacted levels. Moreover,
    because of proposed changes in the administration of the Indian
    Community Development Block Grant Program, NAHBG funding will suffer a
    de facto $97 million cut under the President's proposed budget.
        According to data from the National Association of Home Builders,
    the median cost of a new home has more than doubled in the last 2
    decades of the Twentieth Century. In order for the subcommittee to
    understand the funding shortfall, it is estimated that the CHA would
    require $2.5 million dollars per year for maintenance and
    rehabilitation for existing NAHASDA units, $1.2 million dollars
    annually for new housing development and $1.5 million for
    administrative costs. The Band urges Congress to increase NAHASDA
    appropriations to a level that is responsive to the growing housing
    needs on the reservation.
        We also request that Congress revise the formula for allocation of
    funding under the NAHBG program. The CHA received approximately $1.5
    million in NAHASDA Block Grant funding this year. This amount has
    decreased steadily in recent years, and is down from $1.6 million in
    fiscal year 2004. This allocation is based on an outdated funding
    formula that fails to address tribes' need for funds to maintain or
    improve existing housing and build new housing. Because of the
    shortfalls in funding, the CHA faces both housing shortages and
    inadequate funds to renovate existing units. It becomes a balancing act
    to determine if our limited funding should be used for housing
    development, rehabilitation of older units or toxic mold remediation.
    Currently, CHA uses NAHASDA funding for maintenance, renovation and
    administration, supplementing it with other small grants and rental
    income. Congress needs to once again revisit the formula issue, since
    the current formula does not take into consideration the simultaneous
    need for housing development, remediation, maintenance and
    modernization.

                   INDIAN COMMUNITY DEVELOPMENT BLOCK GRANTS

        We request that Congress restore or increase funding for Indian
    Community Development Block Grants. The proposed fiscal year 2006
    funding level for the ICDBG program is $57.9 million. This is nearly a
    20 percent decrease from the $71.6 million requested in fiscal year
    2005. Unlike NAHBGs, Indian Community Development Block grants are
    awarded to tribes on a competitive basis. These funds are used by
    tribes to improve housing stock and infrastructure, build community
    facilities and expand development corporations. The Lac du Flambeau
    Band has received approximately $500,000 in grant funding annually for
    community development projects. Each annual grant has been used to
    support a specific project, including a Planning and Information
    Facility, a Domestic Abuse Shelter, a Family Resource Center for
    alcohol, drug and mental health programs, a Wellness Center and a
    Business Incubator.
        Finally, we ask Congress to ensure that, regardless of any
    administrative changes, both the NAHBG and the ICDBG programs are fully
    funded. The Band is concerned with the administration's proposal to
    move the ICDBG program, now a separately-funded competitive grant
    program, into the NAHBG program. Under this proposed move, $57.8
    million of the budget for NAHBG would go to support ICDBG activities.
    This means that NAHBG formula funding will actually be reduced by $97
    million. While we support the administration's effort to ensure that
    the program remain under the jurisdiction of the Department of Housing
    and Urban Development, we adamantly oppose any reduction in NAHBG
    funding. Tribes should not have to suffer a de facto funding cut in
    these already under-funded programs.
        In light of the severe need for housing described above, we urge
    the subcommittee to increase the budget for Indian housing programs or,
    at minimum, to ensure that these programs to not suffer funding cuts.
        Miigwetch. Thank you.
                                     ______

     Prepared Statement of the American Association of Service Coordinators

        On behalf of low-income frail and vulnerable elderly, persons with
    disabilities, and others with special needs residing in federally
    assisted and public housing, the American Association of Service
    Coordinators (AASC) urges the committee's full support for the staffing
    of well-trained service coordinators during mark-up of the
    Transportation, Treasury, Judiciary, HUD and other agencies fiscal year
    2006 appropriations bill.
        AASC, a nonprofit organization based in Columbus, Ohio, represents
    over 1,600 service coordinators and other housing professionals
    nationwide who serve more than 200,000 elderly and others with special
    needs residing in federally assisted and public housing. AASC members
    are dedicated to a mission of serving low-income frail elderly, persons
    with disabilities and others with special needs who live in and around
    federally subsidized housing, including the Section 202 program and
    public housing.
        Our members are grateful for the leadership of this committee for
    the establishment and funding of service coordinators. We understand
    that the committee faces difficult choices during this time of tight
    funding constraints; therefore, we urge your continued support for a
    sound investment in the service coordinator program.
        Service coordinators are increasingly recognized nationwide as the
    vital ``lynchpin'' in linking older persons with essential community
    supportive services. The fragmentation, lack of awareness, and
    complexities of some essential services available in the community,
    have hindered timely access by frail elderly and others, and has
    contributed to many being forced to move to more costly settings.
    Service coordinators have helped thousands of low-income elderly and
    persons with disabilities with their health and supportive service
    needs, enabling them to age in place and avoid premature
    institutionalization.
        In addition to individual preferences and increased quality of life
    issues, comparative costs of enabling frail elderly or persons with
    disabilities to remain longer in their home and community is clearly
    cost effective for limited Federal funds. The congressionally
    established Seniors Commission and others have documented the cost-
    effectiveness of service coordinators who assist frail elderly and
    others in postponing, if not avoid, costly nursing home placements. In
    addition, service coordinators allow States and local governments to
    respond to the administration's New Freedoms Initiative and
    requirements of the Supreme Court Olmstead Decision by providing
    options for community-based living arrangements for frail elderly and
    persons with disabilities.
        The current policy debate over the solvency of the Social Security
    Fund is raising public awareness of the dramatic escalating elderly
    population, a demographic tsunami, that is challenging our Nation.
    Service coordinators can have a key role in re-positioning federally
    assisted senior housing as part of community-based long-term care
    strategies to prepare for increases in the elderly population,
    particularly those age 85 and older whose numbers are expected to
    quadruple from 3.5 million to over 14 million by 2030. While
    eligibility for federally assisted senior housing is age 62 and older,
    the average age in many senior housing facilities is well over 80 and
    generally need increased supportive services as they age.
        HUD provides funding of service coordinators in federally assisted
    housing through three approaches: (1) national competition grants for
    eligible federally assisted senior housing (Section 202, Section 8,
    Section 221(d)(3) below-market interest rate, and Section 236); (2) use
    of the housing project's residual receipts; or (3) a budget-based rent
    increase or special rent adjustments to accommodate the position as
    part of the project's operating budget. For public housing, service
    coordinators have been one of the eligible uses of competitive funds
    through the Resident Opportunities and Self Sufficiency Program (ROSS).
        Yet, despite the critical need and cost-effective role of service
    coordinators in assisting the elderly and others who seek to remain in
    their homes, funding to staff and train service coordinators in
    federally assisted and public housing facilities remains limited. While
    the administration's fiscal year 2006 budget essentially maintains the
    current funding levels for service coordinators in Section 202 and
    other federally assisted senior housing, it significantly cuts funds
    for coordinators assisting elderly and families residing in public
    housing.
        AASC would urge support for the following:
      --$100 million in fiscal year 2006 for service coordinators in
            federally assisted housing, particularly to ensure adequate
            funds for expiring contracts of existing service coordinators;
      --full funding for Section 8, PRAC, and project operating funds to
            permit the staffing of a service coordinator as part of the
            project's routine operating budget, including an exemption, as
            needed, from rent caps to enable the staffing of service
            coordinators;
      --an add-on of $75 million in Public Housing Operating Funds for
            service coordinators, and $75 million for Resident
            Opportunities for Self-Sufficient (ROSS); and
      --improved collaboration between HUD and HHS with senior housing and
            housing for persons with disabilities, including the
            establishment of Interagency Council on Senior Housing and
            Services.

                    FEDERALLY ASSISTED HOUSING--$100 MILLION

        The administration's fiscal year 2006 budget requests $53 million
    for service coordinators, a slight increase over the $50 million that
    has been provided over the past few years. However, this year there is
    a potential of losing existing service coordinator positions if the
    proposed $53 million is not increased. While the initial grants for
    service coordinators has been for 3 years, extensions of contracts is
    only provided for 1 year. In fiscal year 2006, there are over 1,075
    existing grants for service coordinators due for renewal with an
    estimated funding need of $54 million to $58 million.
        In addition to the jobs lost for existing service coordinators that
    would affect thousands of vulnerable, low-income older residents, for
    the first time since Congress established the program in 1990, there
    would be no additional funds available to staff new service
    coordinators. This situation is compounded by the fact that many
    federally assisted and public housing facilities currently do not have
    the resources to staff service coordinators; are ineligible for funds,
    such as Section 515 rural housing or Low-Income Housing Tax Credits; or
    due to limited funding, may need to share service coordinators between
    several facilities, often miles apart, thus stretching their capacity
    and effectiveness to assist frail elderly and others.
        AASC would recommend funding the service coordinators program at
    $100 million in order to ensure sufficient funds for renewals of
    existing contracts, as well as to fund new service coordinators for the
    hundreds of elderly properties that currently do not have them.

                PROJECT OPERATING FUNDS FOR SERVICE COORDINATORS

        There is a need for a two-tier strategy for the staffing of service
    coordinators, to continue the funding of the Service Coordinator grant
    program; and at the same time to complement this program with parallel
    actions to permit and promote the staffing of service coordinators as a
    part of a federally assisted and public housing facility's routine
    operating budget. The Service Coordinator grant program could be
    developed as a transition program to initiate the staffing of service
    coordinators with clear instructions to HUD, accompanied with the
    necessary funding, to enable sponsors of federally assisted senior
    housing (as well as housing for persons with disabilities) to
    incorporate the staffing of service coordinators as part of the housing
    project's routine operating budget.
        Many federally assisted senior housing projects do have service
    coordinators funded through their operating budgets, but not all
    housing projects are able to transition from the service coordinator
    grant program to the project's operating budget because of limited
    Section 8 or operating funds, or their inability to secure a rent
    increase due to regulatory impediments that cap rent increases. While
    there exists authority to allow HUD to take these actions, many senior
    housing facilities have not been able to secure the necessary rent
    adjustment from their local HUD office to accommodate the staffing of
    service coordinators. AASC would recommend that sufficient Section 8,
    PRACs, or other operating funds be made available, as well as to direct
    HUD and their field offices, to provide necessary regulatory relief to
    remove any barriers to enable the staffing of a service coordinator as
    part of the project-operating budget.
        Finally, it is important that financing options continue to allow
    sponsors to fund service coordinators through either Service
    Coordinators grants or to include them within the project's operating
    budget, and the flexibility to phase-in or proportionally fund service
    coordinators through both funding sources.

         PUBLIC HOUSING--$150 MILLION THROUGH ROSS AND OPERATING FUNDS

        Over a third of residents in public housing are elderly who reside
    in age-specific senior housing, family housing, or in mixed-population
    housing with younger persons with physical and mental disabilities.
    Funding for service coordinators in public housing stems from a number
    of pilot programs, including the Congregate Housing Services Program
    (CHSP) that assist frail elderly and persons with disabilities residing
    in public or Section 202 housing. In the early 1990's, service
    coordinators were funded to assist residents living in public housing
    serving a mixed population, particularly frail elderly living with
    younger persons with mental and physical disabilities.
        A number of local housing authorities have also funded service
    coordinators though various grant programs under the Resident
    Opportunity and Self-Sufficiency (ROSS) and Family Self Sufficiency
    (FSS) programs, including efforts to promote transition from subsidized
    renters to homeownership and financial independence. Of the $55 million
    that has been appropriated over the past few years for ROSS, only $20
    million has been provided for service coordinators.
        Initially part of the Community Development Block Grant (CDBG), in
    fiscal year 2004, the administration shifted the Elderly/Disabled
    Service Coordinator program (EDSC) from ROSS to the Public Housing
    Operating Fund. For fiscal year 2006, public housing elderly service
    coordinators must be included in the PHA plan; therefore, it is
    necessary to ensure that there are adequate funds available in the
    fiscal year 2006 Public Housing Operating funds to accommodate elderly
    service coordinators. However, HUD indicated that no new service
    coordinators were to be funded; and existing coordinators are subject
    to proportional cuts with recent year decreases in Public Housing
    Operating Funds. Because of limited funds, a number of public housing
    authorities have been forced in recent years to cut their service
    coordinator program.
        The administration's fiscal year 2006 budget cuts in half the ROSS
    program from the $53 million appropriated in fiscal year 2005 to $24
    million; and cuts Public Housing Operating Funds from $3.6 million to
    $2.6 million. Conversely, the FSS program that encourages financial
    independence, including homeownership opportunities, was shifted from
    the Public Housing Operating Funds to ROSS with an increase from $46
    million in fiscal year 2005 to $55 million for fiscal year 2006 with
    emphasis to help low-income families in public housing transition from
    welfare to work and to become homeowners. AASC supports the
    administration's requests for the FSS program.
        In addition, we support the administration's goals to make the
    staffing of service coordinators a part of the public housing operating
    expense; however, we are concerned about the smooth transition of
    funding service coordinators from the ROSS program to Public Housing
    Operating Funds. AASC would urge that a separate add-on of $75 million
    in the Public Housing Operating Fund be provided for the staffing of
    well-trained elderly service coordinators. In addition, we would urge
    that $75 million be provided for the ROSS program to be targeted to
    specific activities or to develop innovative programs to assist
    elderly, persons with disabilities and others with special housing
    needs.

               COLLABORATION BETWEEN HUD, HHS AND OTHER AGENCIES

        Given the strong relationship between suitable and affordable
    housing with timely access to a range of supportive services and health
    care needed by older residents and others with special needs residing
    in federally assisted and public housing, it is vital that there be
    effective collaboration between HUD, HHS, and other Federal agencies
    serving these vulnerable populations. Because of this critical need,
    AASC would urge that the committee give directives to HUD, HHS and
    other Federal agencies to develop means to promote collaboration with
    their respective programs and policies involving services to assist the
    elderly and persons with disabilities residing in public and federally
    assisted senior housing.
        In addition, we urge the committee to support efforts to establish
    and fund a Federal Interagency Council on Senior Housing and Services
    to promote and facilitate collaboration between key Federal agencies to
    better assist frail elderly and others with special housing needs.
    Collaborative efforts could include: streamlined administrative systems
    with flexibility to accommodate effective cooperation; collaborative
    training of service coordinators; exchanging relevant information and
    data bases; development and/or identification of models that promote
    partnership, such as the co-location of community/senior centers with
    federally assisted and senior and public housing.
        Thank you for your consideration of these recommendations.
                                     ______

      Prepared Statement of the Confederated Tribes of the Siletz Indians

        On behalf of the Confederated Tribes of the Siletz Indians, I would
    like to thank the committee for the opportunity to present testimony on
    the fiscal year 2006 budget for the Department of Housing and Urban
    Development. Our territory, while located on the beautiful Oregon
    Coast, is rural and isolated. The Tribes' service area spans 11
    counties, serving an Indian population of 25,665. Given our large
    service area, our housing market encompasses metropolitan, suburban and
    rural areas. This presents unique challenges for the Tribes' housing
    program in that we have to respond to a wide variety of our tribal
    members' housing needs ranging from rental housing, home repair,
    homelessness, and home financing in these various areas and markets.
        As you well know, severe housing deficiencies continue to plague
    Indian communities. The tragedy of homelessness and substandard housing
    is only too familiar to Indian tribes within this country. The last
    census documented that 16 percent of all Indian homes had no
    electricity, 21 percent had no piped water and over half had no central
    heating and 43 percent of Indian households were below the poverty
    line. The Department of Housing and Urban Development estimates that
    there is a need for about 220,000 new housing units for Indian
    families, but that NAHASDA funding can only meet 5 percent of this
    need. In addition, more than 20,000 homes are in need of replacement
    and more than 60,000 are in need of substantial rehabilitation.
        At Siletz, we have 157 low income families waiting for housing
    assistance--we also have seven families who we classify as the working
    poor and while they do not meet the low income guidelines are still
    struggling to meet their families' needs. This translates into over
    2,561 Indian families now living in substandard or over-crowded
    conditions. We also have handicapped members whose homes need to be
    rehabilitated and members, whose homes are badly in need of health and
    safety repairs. In addition to providing direct housing assistance, one
    of our housing program's key goals to is assist our tribal members in
    fulfilling the American dream of being home buyers and homeowners. Our
    program provides needed housing counseling--including instruction on
    how to take care of their home, paying the mortgage, and predatory
    lending practices. The program also provides down payment assistance
    for those families who can qualify for private financing to purchase
    homes. Thus, utilizing the limited HUD resources that the Tribes
    receive, we are able to meet a broad spectrum of the housing needs
    facing our tribal community.
        Given the significant need in Indian country generally and at
    Siletz in particular, we were discouraged with the administration's
    fiscal year 2006 proposed budget for Native American housing programs.
    At a minimum, we urge Congress to fund for Native American Housing
    programs at $723 million. Furthermore, because the budget for Indian
    housing programs has not increased significantly in recent years and
    the need continues to outstrip available funding, we join other Native
    American organizations in requesting that Congress increase funding for
    these programs.

                      NATIVE AMERICAN HOUSING BLOCK GRANT

        Specifically, we ask that you increase funding for the Native
    American Housing Block Grant Program (NAHBG). President Bush's proposed
    budget for this program in fiscal year 2006 is $583 million. This
    amount is a $39 million decrease from fiscal year 2005 enacted levels.
    If Congress restores the program to $622 million, this level of funding
    will only allow tribal housing programs to maintain. It will not allow
    these programs to address the growing backlog in housing needs.

                   INDIAN COMMUNITY DEVELOPMENT BLOCK GRANTS

        We request that Congress restore or increase funding for Indian
    Community Development Block Grants. The proposed fiscal year 2006
    funding level for the ICDBG program is $57.9 million. This is nearly a
    20 percent decrease from the $71.6 million requested in fiscal year
    2005. Unlike NAHBGs, Indian Community Development Block grants are
    awarded to tribes on a competitive basis. These funds are used by
    tribes to improve housing stock and infrastructure, build community
    facilities and expand development corporations.
        Like tribes throughout the country, the Siletz Tribes are concerned
    with the administration's proposal to move the ICDBG program, now a
    separately-funded competitive grant program, into the Native American
    Housing Block Grant program. Under this proposed move, $57.8 million of
    the budget for direct housing funding would go to support ICDBG
    activities. This means that NAHBG formula funding will actually be
    reduced by $97 million. While we support the administration's effort to
    ensure that the program remain under the jurisdiction of the Department
    of Housing and Urban Development, we adamantly oppose any reduction in
    NAHBG funding. Tribes should not have to suffer a de facto funding cut
    in these already under-funded programs. We urge Congress to reject the
    administration's proposal.
        Again, we thank the subcommittee for the opportunity to present
    this testimony.
                                     ______

     Prepared Statement of the National Association of Railroad Passengers
                           fiscal 2006 amtrak funding
        The National Association of Railroad Passengers believes that the
    right fiscal year 2006 funding level for intercity passenger rail is
    $2.3 billion, consisting of:
      --$1.8 billion for Amtrak. This is what the Amtrak board approved
            last month, and is consistent with the 5-year plan a slightly
            different Amtrak board--but with the same chairman--approved 1
            year ago, and
      --$500 million for a capital program for States investing in rail
            passenger development. The Federal match would be 80 percent.

                        WHY TRAINS ARE A GOOD INVESTMENT

        Polls have consistently shown that the public wants the rail
    choice, and that is consistent with Amtrak's ridership statistics in
    recent years, including fiscal year 2004.
        Ridership.--As of the end of fiscal year 2004, Amtrak had posted
    ridership increases in 7 of the last 8 years; the only exception was a
    tiny (0.04 percent) decline in fiscal year 2002 when the economy was
    reeling from the 9/11 tragedy. Fiscal year 2004 ridership was 28
    percent above the fiscal 1996 level.
        Amtrak ridership increases have come in spite of fare increases and
    airline fare reductions. 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 2004 yield was 62 percent above that in
    fiscal year 1994.
        For airlines reporting financial data to the Air Transport
    Association (Southwest and JetBlue are among those not reporting),
    yields fell each year starting in calendar 2001, with the 2004 level 12
    percent below the 1994 level, and 20 percent below the peak level in
    2000. Even Southwest's yield fell in calendar years 2001, 2002 and
    2004.
        The success of State-sponsored rail passenger corridors is well
    known; these successes are not confined to the two coasts. Here, for
    example, are the changes in ridership percentage posted in fiscal year
    2004 (compared with fiscal year 2003) on the corridors radiating from
    Chicago:

    ------------------------------------------------------------------------
                                                                  Percent
    ------------------------------------------------------------------------
    Chicago-Grand Rapids....................................           +19.6
    Chicago-Port Huron......................................       \1\ +16.7
    Chicago-Detroit-Pontiac.................................           +12.2
    Chicago-Carbondale......................................           +10.3
    Chicago-Milwaukee.......................................           +10.3
    Chicago-St. Louis.......................................        \2\ +8.1
    Chicago-Quincy..........................................            +4.8
    Chicago-Indianapolis....................................        \3\ -6.7
    ------------------------------------------------------------------------
    \1\ Ridership jumped significantly when Amtrak, responding to a request
      from the State of Michigan, rescheduled this train on April 24, 2004.
      Thus, for example, the ridership growth in July, August, and
      September, was, respectively, 36.8 percent, 22.8 percent and 22.1
      percent.
    \2\ After lengthy negotiations between Amtrak and the city of St. Louis,
      ground is expected to be broken this year for a new intermodal
      terminal that will serve Amtrak, Greyhound and the city's highly
      successful light rail line. When this terminal, originally funded in
      the 1991 ISTEA law, finally opens, Amtrak ridership at St. Louis
      should improve dramatically.
    \3\ The ``Hoosier State'' is a 4-day-a-week train (running on days when
      the ``Cardinal'' does not run) whose primary purpose usually is to
      ferry cars to and from Amtrak's Beech Grove shops.

        However, the long-distance trains also have shown strength. In
    fiscal 2004, the long-distance trains carried an average 364 passengers
    per run, and the average number on board at any one time (passenger-
    miles-per-train-mile) was 171.
        Other Justifications.--Items (1) through (6) are specific to long-
    distance trains; quotations are from Amtrak's new plan.
      --(1) ``Providing an important transportation link for many
            underserved rural communities and regions across the country;''
      --(2) Providing important transportation for people who cannot fly,
            who prefer not to fly, or who have medical equipment and/or
            conditions that make flying difficult;
      --(3) ``Serving as a foundation of a future rail development
            program;''
      --(4) ``Forming the basis for, and connections to, emerging state-
            supported corridors;''
      --(5) On many routes, the best way to see the Nation's natural
            beauty; the only practical way for those who can't take long
            automobile trips.
      --(6) In many States, the only intercity passenger rail service. (If
            all long-distance trains disappeared, the surviving system
            would serve just 21 States, and the network would consist of
            four, isolated mini-networks.)
      --(7) Providing needed transportation capacity with minimum impact on
            the environment. Except in a few key corridors already at
            capacity, rail can increase its capacity through-put with
            relative ease, by increasing train length or running more
            trains on existing infrastructure.
      --(8) The safest mode of transportation in bad weather, and often the
            most reliable.
      --(9) Trains enhance national security both by giving passengers
            another travel option--most dramatically illustrated
            immediately after 9/11--and by reducing the Nation's energy
            dependence.
        Related to (3) and (4) above, development of new commuter rail or
    intercity corridors is more cost-effective where passenger trains
    already operate. Consider, for example, the creation of Virginia
    Railway Express, or Amtrak's extension of some Northeast Corridor
    trains to Richmond (and Newport News). Both efforts benefited because
    Amtrak's New York-Florida and New York-New Orleans services were
    already in place, preserving useable tracks under Capitol Hill south of
    Union Station, and adequate track capacity through Alexandria station.
        Long-distance economics.--It is frustrating to our members to hear
    continual discussion that pits long-distance trains ``against'' short-
    distance trains. Both are important; they complement each other and
    other parts of our transportation network. Certainly, 3.9 million
    people--the fiscal year 2004 passenger-count on long-distance trains--
    is significant. Moreover, 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 2004, the
    farebox recovery (passenger revenues as percent of costs) for short-
    distance trains outside the Northeast Corridor was 46 percent; long-
    distance trains were at 39 percent. The ``fare box loss'' per
    passenger-mile was almost identical for short-distance trains (22.47
    cents) and for long-distance trains (21.82 cents).
        DOT Inspector General Kenneth Mead has noted often that the capital
    needs for corridor development (especially in the Northeast) are much
    larger than the operating grant requirements of the long-distance
    trains.
        It is sometimes said that ``it would be cheaper to buy everyone a
    plane ticket than to run the long-distance trains.'' However, this
    ignores the markets long-distance trains serve which have no affordable
    air service or, in many cases, no airline service at all. It also
    ignores some of the other numbered points above.
        Amtrak has made a number of route and service cuts over the past
    few years. Today's network is so skeletal that elimination of any
    additional route would remove major metropolitan areas from the system
    and raise the question of whether the system is truly nationwide. It is
    critical that Amtrak's proposed ``performance improvement program'' be
    implemented well before consideration of any route cuts, so that any
    weaker routes have the opportunity to get a passing grade on the
    ``selected performance metrics'' which Amtrak plans to create this
    year. Amtrak, for example, anticipates beginning any route termination
    process in fiscal 2008, and also talks of applying the metrics to
    ``prospective new long distance routes.'' Past studies have indicated
    that a larger system would have lower unit costs and recover a higher
    percentage of costs from the farebox.

    On-board Food Service
        The suggestion has been made that Amtrak's food service costs could
    be reduced by $80 million-$100 million. If this is based on the
    assumption that dining cars could be eliminated with no impact on
    revenue from fares that is unrealistic. Greater efficiencies indeed may
    be achievable on all Amtrak food services, including dining cars, but
    eliminating the latter would be counterproductive.
        It would be important to understand the impact of Amtrak's
    outsourcing a few years ago of commissaries. Did this actually improve
    the cost situation? Does this area show promise of further improvement?
        To our observation, food service revenues could be improved if
    Amtrak promoted the service on board consistently. For example, on
    Amtrak-operated Capitol Corridor trains in California, at the
    initiative of local (BART) management, window decals throughout the
    train invite people to the food car if they are hungry, and
    announcements are used to do the same.
        There has been some talk of simply eliminating food service on
    short runs under 3 hours. It is important that Amtrak first attempt
    promotion or other innovations (food trolley going through the train).
    For some people, including those with certain medical conditions, the
    availability of on-board food service even on short runs is vital and
    is a key factor in the decision to take the train.
    federal-state partnership needed in addition to, not in place of amtrak
        While we agree with Secretary of Transportation Norman Y. Mineta
    that the ``Federal-State partnership'' is badly needed (second bullet
    at the beginning of this statement), such a partnership would be
    worthless absent the foundation or platform provided States by Amtrak's
    Federal funding and Amtrak's rights.
        Secretary Mineta depicts Federal funding for Amtrak as money down a
    rat hole. His February 23 New York Times op-ed column said, ``The
    federal government can do little to support [state] projects directly,
    because all of its money goes to Amtrak.''
        In reality, a lot of the money that goes to Amtrak supports and
    makes possible the very State projects that Mineta has praised.
      --Amtrak funds overhead costs for all U.S. intercity passenger
            trains--including those of ``State-supported'' trains.
      --Amtrak has provided major assistance in planning State services.
      --Amtrak funds direct operating losses of several corridor services,
            as follows: (1) Empire Corridor (New York-Buffalo)--100
            percent; (2) Chicago-Detroit-Pontiac--100 percent; (3) Chicago-
            St. Louis--66 percent; (4) Seattle-Portland--33 percent (50
            percent if Coast Starlight is included); (5) Pacific Surfliners
            (southern California)--30 percent.
        With regard to the Pacific Northwest, Mineta's column claimed that
    ``Amtrak's role is reduced to running the trains under contract,''
    clearly implying that Amtrak provides no funding. In fact, as just
    noted, the Federal Government through Amtrak funds direct operating
    losses of two of the three daily Seattle-Portland trains (three of four
    if counting the Seattle-Los Angeles Coast Starlight), plus overhead
    costs for all of the trains.
        Access to Tracks, Parking Lots, Stations.--Amtrak has the right to
    access tracks and stations on an incremental cost and a ``package deal
    basis,'' while others would have to negotiate arms' length deals
    (driving up the price of service). Moreover, with stations, this could
    involve lengthy and costly negotiations on an individual property
    basis. While many stations now are city owned, the private railroads
    generally own the platforms, and in many cases the parking lots. Even
    in California, there are still 13 stations owned by Union Pacific or
    BNSF, and several more owned by local transit authorities.
        Ability to Indemnify Railroads.--The railroads accept
    indemnification only from Amtrak. Several States with rail passenger
    corridors have indicated they would not be able to offer such
    indemnification. If they were, it is not clear that railroads would
    accept it.
        DOT's Plan.--Zero funding is provided for fiscal year 2006, along
    with ever-increasing estimates of funding that would be provided for
    intercity passenger rail in fiscal year 2007 and beyond contingent on
    ``reforming'' Amtrak. However, there would be no Amtrak--and no
    passenger rail--to reform if Federal funding ceases on September 30,
    2005. OMB Director Joshua Bolten reaffirmed the administration's zero
    request at an April 21 Senate appropriations hearing. So it appears
    that the administration essentially has said to the Congress, ``You
    figure it out and take the hit for whatever programs you cut to make
    room for intercity passenger rail in your fiscal year 2006 budget.''

                                 AMTRAK'S PLAN

        The request for $1.8 billion from a board all of whose members are
    appointees of President Bush is significant. Also important is their
    finding--contrary to DOT's--that, due to cost and complexity, the risk
    of removing Amtrak as Northeast Corridor owner ``simply outweighs the
    benefit,'' to quote Amtrak Chairman David Laney. An Amtrak official has
    noted that it would have been impossible to quickly ``backfill'' Acela
    Express schedules with Metroliners if infrastructure and carrier had
    been separately managed.
        Obviously, we also agree with their support for a Federal-State
    partnership on rail corridor development, including ``reliable''
    Federal funding with an 80 percent match.
        As rail passengers, our fundamental interest is in the quality and
    quantity of rail passenger service. However, we are concerned about the
    passion which the board shows for development of competing carriers,
    since the freight railroads whose tracks Amtrak generally uses outside
    the Northeast Corridor are firmly against giving Amtrak's access rights
    to others. Rhetoric about addressing railroads' concerns ``by making
    franchises exclusive over defined routes'' and time-limited is not new
    to the railroads, and--unless Amtrak knows something we do not--the
    railroads are not impressed. Also, the effective capacity of today's
    limited fleet of rolling stock--and the ability to respond to a crisis
    like the Acela Express withdrawal--would be reduced if the rolling
    stock ownership was divided among a number of different carriers.
        We agree that a more competitive supply industry would benefit the
    entire railroad industry, but that likely would flow from an adequately
    funded rail program (including Amtrak and corridor development) and
    does not require specific legislative changes.
        It is important that progress be made on specific contract issues
    whose relevance to productivity is generally acknowledged, including
    those mentioned in the Amtrak report (pages 17, 20, 27). Such progress
    must not be ``derailed'' either by Amtrak's discussion of changes in
    Railroad Retirement and the Railway Labor Act, which has already
    produced angry releases from the unions, or by the discussion of
    competing carriers which both the freight railroads (as just noted) and
    rail labor oppose.
        Thank you for considering our views.
                                     ______

      Prepared Statement of the American Public Transportation Association

                                  INTRODUCTION

        Mr. Chairman and members of the subcommittee, on behalf of the
    American Public Transportation Association (APTA), I thank you for the
    opportunity to testify on the need for and benefits of investment in
    Federal Transit Administration (FTA) programs under the Transportation,
    Treasury, the Judiciary, Housing and Urban Development, and Related
    Agencies Appropriations bill for fiscal year 2006.

                                   ABOUT APTA

        APTA's 1,500 public and private member organizations serve the
    public by providing safe, efficient, and economical public
    transportation service, and by working to ensure that those services
    and products support national economic, energy conservation,
    environmental, and community development goals.
        APTA member organizations include public transit systems and
    commuter railroads; design, construction and finance firms; product and
    service providers; academic institutions; and State associations and
    departments of transportation. More than 90 percent of the people who
    use public transportation in the United States and Canada are served by
    APTA member public transportation systems.

                                    OVERVIEW

        Mr. Chairman, the fiscal year 2006 Transportation appropriations
    bill is an opportunity to advance national goals through increased
    Federal investment in the Nation's surface transportation
    infrastructure, including public transportation. U.S. citizens support
    Federal policies that create good, high-paying jobs, especially jobs
    that cannot be exported abroad. Not only does public transportation
    create jobs, it also helps improve the economy by reducing congestion,
    promoting energy conservation, and providing transportation options to
    workers and others.
        In 2004, public transportation ridership grew at a rate about the
    same as vehicle miles traveled on the Nation's roads. Ridership on
    light rail grew by more than 8 percent, on heavy rail by more than 3
    percent, and on bus systems by more than 2 percent. Light rail's strong
    growth should be of no surprise, considering the establishment of new
    service in communities around the country including Houston, Charlotte,
    Little Rock and Minneapolis. As gas prices continue to climb to record
    highs, public transit agencies in Chicago, Columbus, Denver,
    Jacksonville, Miami and New York, all have reported increases in
    ridership.
        To augment Federal investment, communities across the Nation are
    voting for local funding to support new and expanded transit service
    every year. Voters in 44 areas, including Denver, Phoenix and San Diego
    approved new or extended existing taxes in November 2004 to finance
    such new service. Demand for these options is partly a product of
    frustration with constantly growing congestion that negatively affects
    our quality of life by wasting time and money, and a desire for cleaner
    air. Indeed, polls show that voters support public transportation
    regardless of whether they live in urban, suburban, or rural
    communities, and that they will vote for candidates who support such
    investment. However, transit service is only useful if is convenient
    and available, and today less than 55 percent of all families have
    access to any public transportation, based on the 2003 American
    Household Survey for the United States, and an even smaller number of
    households have access to adequate public transportation service.
        Similarly, with the population aging, many older Americans would
    benefit from increased investment in public transportation. As driving
    becomes a less viable option for many elderly citizens, they and
    persons with disabilities want good public transportation options so
    that they can continue to participate fully in society. Ridership on
    demand-response systems grew by more than 4 percent in 2004. Because of
    funding constraints at all levels of government, many older Americans
    and people with disabilities have limited access to public
    transportation services, despite the fact that good transit service can
    make the difference between living independently and moving into
    assisted living facilities.
        Clearly, we need to maintain, improve, and expand the public
    transportation systems that have served this country so well, but the
    needs are great. The American Association of State Highway and
    Transportation Officials (AASHTO) and Cambridge Systematics, Inc.
    estimate that an annual capital investment of more than $44 billion is
    needed to adequately maintain and improve existing transit systems. The
    Senate took an important step towards meeting these needs when it
    overwhelmingly passed a Transportation Equity Act for the 21st Century
    (TEA21) reauthorization bill that provides nearly $295 billion in
    investment for Federal transportation programs, including $53.8 billion
    for public transportation, through fiscal year 2009.

                             FISCAL YEAR 2006 GOALS

        APTA recognizes the need to wisely invest limited Federal resources
    and an investment in public transportation is a wise use of limited
    funds. It is important to maintain and expand the Nation's basic
    transportation infrastructure, including transit, to meet the public's
    growing demand for service. In addition to being an important part of
    our overall surface transportation network, transit investment produces
    excellent returns and serves national goals by producing jobs and
    providing more mobility options to all Americans. It improves the
    environment, reduces dependence on foreign oil, and provides a solid
    return on the investment by fostering economic growth. According to a
    Cambridge Systematics Inc. study, for every $10 spent on transit
    capital projects, $30 in business sales is generated. Every $10
    invested in transit operations results in $32 in business sales.
        APTA's funding request for FTA programs in fiscal year 2006 is
    based on APTA's recommendations for reauthorization of TEA21, which
    were developed over a 2-year period and adopted by APTA's Board of
    Directors in 2002. Those recommendations proposed funding transit at
    $10.1 billion in fiscal year 2006. We recognize the constraints that
    the subcommittee faces, however, and we urge that it fund the transit
    program at no less than $8.9 billion, which is the level included for
    the Federal transit program for fiscal year 2006 in the reauthorization
    bill which the Senate approved this week by a vote of 89-11.

      PUBLIC TRANSPORTATION INVESTMENT CREATES JOBS AND KEEPS THE ECONOMY
                                     MOVING

        Policy makers know that increased investment in our Nation's
    transportation infrastructure, and especially in public transportation,
    will help the economy and produce good-paying jobs. Secretary of
    Transportation Norman Mineta points out that for every $1 billion in
    Federal highway and transit spending, 47,500 jobs are created or
    sustained. Investment in public transportation creates jobs that are
    high-paying, stable, and cannot be exported. These jobs are not just
    those needed to operate new and expanded transit service, which are
    significant, but also in the private sector, which has an impact
    nationwide. For instance, buses are built by Chance Coach in Wichita,
    KS; Neoplan USA in Lamar, CO; New Flyer in St. Cloud, MN; GILLIG in
    Hayward, CA; North American Bus Industries in Anniston, AL; Champion
    Bus in Imlay City, MI; MCI in Pembina, ND; Orion Buses in Oriskany, NY;
    and the list goes on. Transmissions for many of those buses are built
    by Allison Transmission of Indianapolis, a General Motors subsidiary.
    Indeed, the APTA Business Member Board of Governors presented GM
    Chairman and CEO Rick Wagoner with its Outstanding Business Executive
    of the Year Award in 2004. In accepting the Award, Mr. Wagoner spoke in
    support of public transportation, saying, ``We have supported a federal
    transit program because we know that personal vehicles are only part of
    the solution . . . that a balanced transportation system is the best
    approach.'' Engineering services may be provided by Parsons Brinkerhoff
    Quade and Douglas, and DMJM + Harris or a score of other private sector
    firms with offices around the country. Opportunities for businesses
    across America expand when investment in public transportation is
    increased.
        While investment in public transportation is good for the economy,
    it serves another important economic purpose: alleviating highway
    congestion. It was reported last year that the cost of congestion
    exceeds $67 billion annually--including more than 3.6 billion hours of
    delay and 5.7 billion gallons of excess fuel consumed. The average
    driver loses more than a week and a half of work (62 hours) each year
    sitting in gridlock. The average cost of congestion per peak road
    traveler is $1,160 a year. All of that congestion delays more than 64
    percent of the Nation's freight that moves by truck on highways, which
    represents annual value to the economy of more than $5 trillion. Were
    it not for public transportation, the Nation would have lost another
    1.1 billion hours and $20 billion dollars while stuck in congestion.
        Public transportation does not just improve the economy by taking
    cars off the road--it also provides transportation options to low-
    income workers who cannot afford to drive to their jobs. According to
    the Surface Transportation Policy Project (STPP), the proportion of
    household expenditures devoted to transportation has grown from 14
    percent in 1960 to almost 20 percent today. As transportation costs
    increase, a recently published Bureau of Transportation Statistics
    (BTS) Issue Brief found that Americans who commute by car or truck
    spent about $1,280 per year in 1999, while those who were able to use
    public transportation to get to and from work spent just $765 per year.
    These costs have risen faster with the recent increase in the cost of
    gas. Clearly those who need to work the most to provide for their
    families have much to gain from the savings that public transportation
    can provide.

                       PUBLIC TRANSPORTATION IS IN DEMAND

        Last November voters in cities across the country, from Phoenix,
    Austin, San Antonio, and Northern Virginia to Ludington and Kalamazoo,
    Michigan; and Bend, Oregon voted for new taxes to provide new and
    expanded public transportation services. These were just a few of the
    efforts across the country to increase funding for transportation
    infrastructure, which saw voters approve a strong majority of transit-
    related referenda. According to the Center for Transportation
    Excellence (CFTE), of the 28 measures on ballots that included public
    transportation funding in November 2004, 22 initiatives (worth an
    estimated total of over $40 billion) were approved. Eighteen were
    approved earlier in the year for a total of 40 approved initiatives in
    2004. In total, the public voted to support 80 percent of these recent
    ballot initiatives. This approval rate is being driven in large part by
    citizen demand for more transportation choices.
        That these referenda have been approved by such large margins
    should come as no surprise. As APTA reported in testimony before this
    subcommittee last year, polls have consistently shown that the American
    public supports increased public transportation services and also
    supports providing the resources to pay for it. A Wirthlin Worldwide
    poll taken for APTA in 2004 showed that 80 percent of Americans see
    quality of life benefits from increased investment in public
    transportation, 76 percent of Americans support public funding for the
    expansion and improvement of public transportation, and a strong
    majority of Americans believe transportation investment is preferable
    to tax cuts to stimulate the economy. These findings hold true across
    all geographies--urban, suburban, small town and rural residents.
    Another poll from 2003 by APTA and the American Automobile Association
    (AAA) showed that 95 percent of Americans said traffic congestion,
    including commutes to and from work, has grown worse over the last 3
    years, and that 92 percent said it was either very important (71
    percent) or somewhat important (21 percent) for their community to have
    both good roads and viable alternatives to driving.
        While demand for new and expanded service is increasing, the
    resources required to simply maintain the present level of service are
    immense. The Department of Transportation's own 2002 Conditions &
    Performance Report indicates that an investment level of $75 billion a
    year is needed for highway and transit capital infrastructure in order
    to begin to improve the condition of the Nation's highways, bridges,
    and transit systems.

                PUBLIC TRANSPORTATION PROVIDES MOBILITY OPTIONS

        Public transportation provides mobility options to persons for whom
    driving is not an option due either to cost, disability, or other
    reasons. For many in this population, public transportation may be the
    only option to living a fully independent and productive life. The
    affordability of public transportation for low-income workers has been
    addressed, but for some it is not a problem of affordability but rather
    ability to drive. For many of these people, public transportation can
    be the difference between staying in their own homes and moving into an
    assisted living community.
        According to the AARP's Beyond 50.03: A Report to the Nation on
    Independent Living and Disability, released in August 2003, as people
    move from their 70's into their 80's, the percentage of licensed
    drivers falls to 50 percent from just over 90 percent. With the baby-
    boom generation approaching retirement age, this means the population
    of elderly Americans who do not have a driver's license will soon pose
    a serious challenge.
        Persons with disabilities face similar mobility problems. Many
    cannot drive or afford vehicles that are fitted to their needs. Public
    transportation can provide them the options they need to stay active
    and independent. However, according to AARP's report, 32 percent of
    people with disabilities over 65 report that inadequate transportation
    is a problem. The report goes on to say that while public
    transportation is more economically efficient in areas with high
    population density, many older Americans with disabilities live
    ``outside of central cities in communities where public transportation
    is found least often.''

                          PRESIDENT'S BUDGET PROPOSAL

        In February, the Bush Administration released its fiscal year 2006
    budget proposal, which recommends a funding level of $7.781 billion for
    the Federal transit program. Despite proposing an overall cut in non-
    defense discretionary spending, the administration's public
    transportation funding proposal represents an increase in investment
    over fiscal year 2005. This increase for transit investment was
    accompanied by a recommendation in the budget request for a 6-year
    funding level for TEA21 reauthorization of $283.9 billion, an increase
    of $27.9 billion over the administration's proposal last year. The DOT
    budget release states that this ``figure reflects the emerging
    consensus in Congress that was developed in a conference committee in
    2004.''
        Clearly, the administration understands the value that increased
    investment in our surface transportation infrastructure, including
    public transportation, provides to the American people and the role it
    plays in meeting the important national goals described above. The
    administration's support for public transportation investment is
    matched by Congress. The Senate went further towards meeting our
    transportation needs when it approved, by an 89-11 vote, TEA21
    reauthorization legislation that authorizes nearly $295 billion, $11
    billion more for Federal transportation programs than the
    administration proposed.

                          NEW STARTS APPROVAL PROCESS

        The FTA issued a Dear Colleague letter dated March 9, 2005, in
    which it invited interested parties to comment on a number of issues
    relating to FTA's New Starts Program by April 1, 2005, including its
    proposal to no longer consider projects without at least a ``medium''
    cost-effectiveness rating. In a March 31, 2005, comment to FTA on its
    Dear Colleague letter, APTA opposed changing the cost-effectiveness
    rating level for project funding recommendations, noting that under
    Federal transit law and regulation project determinations are to be
    based on a multiple measure approach in which the merits of candidate
    projects are to be evaluated on a range of criteria, not just on cost
    effectiveness. APTA further noted that transit reauthorization
    legislation now pending in Congress may be enacted soon and would also
    require revisions to the New Starts program, and thus asked FTA not to
    proceed with its proposed changes at this time. Finally, APTA expressed
    support for five other changes proposed by the FTA, some of which the
    industry had proposed for many years, and looks forward to working with
    the FTA on their implementation. On April 29, 2005, the FTA issued a
    Dear Colleague letter on this matter, responding favorably to a number
    of industry comments but not changing its position regarding projects
    needing at least a ``medium'' cost-effectiveness rating for funding
    decisions.

                                   CONCLUSION

        Public transportation can play a key role in meeting the goals of
    the administration and Congress in providing economic development,
    energy independence, transportation options for Americans who cannot
    afford to drive or are not able to, and preserving the environment. To
    do so will, however, require a commitment on the part of the Federal
    Government in the form of increased, predictable investment in our
    Nation's infrastructure.
        Mr. Chairman, we look forward to working with the committee as it
    advances the fiscal year 2006 appropriations bills that deal with
    national transportation infrastructure needs.

           LIST OF WITNESSES, COMMUNICATIONS, AND PREPARED STATEMENTS

                                  ----------
                                                                       Page
    American:
        Association of Service Coordinators, Prepared Statement of
          the........................................................   456
        Public Transportation Association, Prepared Statement of the.   463

    Bennett, Senator Robert F., U.S. Senator from Utah, Statements o13, 299
    Black, Patricia M., Acting Inspector General, Federal Deposit
      Insurance Corporation, Prepared Statement of...................   384
    Blair, Honorable Dan G., Acting Director, Office of Personnel
      Management, Prepared Statement of..............................   359
    Bloch, Honorable Scott J., Special Counsel, U.S. Office of
      Special Counsel, Prepared Statement of.........................   369
    Blust, Honorable Steven R., Chairman, Federal Maritime
      Commission, Prepared Statement of..............................   424
    Bolten, Joshua B., Director, Office of Management and Budget,
      Executive Office of the President..............................   199
        Prepared Statement of........................................   213
        Statement of.................................................   212
    Bond, Senator Christopher S., U.S. Senator from Missouri:
        Opening Statements of.....................1, 59, 145, 199, 243, 291
        Prepared Statements of....................4, 62, 150, 204, 247, 293
        Question Submitted by........................................    41
    Bracy, Terrence L., Chair, Morris K. Udall Foundation, Prepared
      Statement of...................................................   403
    Burns, Senator Conrad, U.S. Senator from Montana:
        Prepared Statement of........................................   299
        Questions Submitted by.......................................   352
        Statements of...............................................13, 299
    Byrd, Senator Robert C., U.S. Senator from West Virginia:
        Questions Submitted by.......................................   288
        Statements of..........................................11, 254, 332

    California Industry and Government Central California Ozone Study
      (CCOS) Coalition, Prepared Statement of the....................   438
    Capital Metropolitan Transportation Authority, Prepared Statement
      of the.........................................................   434
    City of San Marcos, Texas, Prepared Statement of the.............   436
    Coalition of Northeastern Governors, Prepared Statement of the...   437
    Cochran, Senator Thad, U.S. Senator from Mississippi:
        Prepared Statements of.....................................211, 302
        Statement of.................................................    10
    Confederated Tribes of the Siletz Indians, Prepared Statement of
      the............................................................   459

    DeWine, Senator Mike, U.S. Senator from Ohio, Question Submitted
      by.............................................................    41
    Domenici, Senator Pete V., U.S. Senator from New Mexico,
      Questions Submitted by...................................42, 136, 184
    Donohue, Kenneth M., Inspector General, Department of Housing and
      Urban Development..............................................   145
    Dorgan, Senator Byron L., U.S. Senator from North Dakota:
        Questions Submitted by......................................53, 353
        Statements of................................................12, 66
    Durbin, Senator Richard J., U.S. Senator from Illinois:
        Prepared Statement of........................................   158
        Questions Submitted by......................................52, 196
        Statement of.................................................   301

    Easter Seals, Prepared Statement of..............................   442
    Everson, Mark W., Commissioner, Internal Revenue Service,
      Department of the Treasury.....................................    59
        Prepared Statement of........................................    72
        Statement of.................................................    67

    Fond du Lac Band of Lake Superior Chippewa, Prepared Statement of
      the............................................................   447
    Fort Peck Assiniboine and Sioux Tribes, Prepared Statement of the   454

    George, J. Russell, Treasury Inspector General for Tax
      Administration, Internal Revenue Service, Department of the
      Treasury.......................................................    59
        Prepared Statement of........................................    85
        Statement of.................................................    83
    Glynn, Marilyn L., Acting Director, U.S. Office of Government
      Ethics, Prepared Statement of..................................   422
    Gunn, David, President, Amtrak (National Railroad Passenger
      Corporation), Department of Transportation.....................   291

    Harkin, Senator Tom, U.S. Senator from Iowa, Questions Submitted
      by.............................................................    54
    Huron Potawatomi, Inc., Prepared Statement of....................   451

    International Loran Association, Prepared Statement of the.......   440

    Jackson, Alphonso, Secretary, Department of Housing and Urban
      Development....................................................   145
        Prepared Statement of........................................   161
        Statement of.................................................   159
    Johnson, Honorable Joann, Chairman, National Credit Union
      Administration, Prepared Statement of..........................   405

    Lac du Flambeau Band of Lake Superior Chippewa Indians, Prepared
      Statement of the...............................................   455
    Laney, David M., Esq., Chairman, Amtrak Board of Directors,
      National Railroad Passenger Corporation, Department of
      Transportation.................................................   291
        Prepared Statement of........................................   304
        Statement of.................................................   302
    Leahy, Senator Patrick J., U.S. Senator from Vermont:
        Prepared Statement of........................................   159
        Statement of.................................................   180

    Mangano, Philip F., Executive Director, United States Interagency
      Council on Homelessness, Prepared Statement of.................   363
    McFarland, Honorable Patrick E., Inspector General, Office of
      Personnel Management, Prepared Statement of....................   362
    Mead, Kenneth A., Inspector General, Department of Transportation   291
        Prepared Statement of........................................   322
        Statement of.................................................   319
    Mineta, Hon. Norman Y., Secretary, Office of the Secretary,
      Department of Transportation...................................     1
        Prepared Statement of........................................    16
        Statement of.................................................    14
    Moore, Thomas H., Commissioner, U.S. Consumer Product Safety
      Commission, Prepared Statement of..............................   417
    Murray, Senator Patty, U.S. Senator from Washington:
        Prepared Statements of....................8, 65, 156, 210, 252, 297
        Questions Submitted by.......................45, 138, 185, 235, 282
        Statements of.............................5, 64, 154, 207, 249, 295

    National:
        Association of Railroad Passengers, Prepared Statement of the   460
        Treasury Employees Union, Prepared Statement of the..........   431
    Nober, Roger, Chairman, Surface Transportation Board, Prepared
      Statement of...................................................   399

    Olson, Nina E., National Taxpayer Advocate, Prepared Statement of   132

    Potter, John E., Postmaster General and CEO, United States Postal
      Service, Prepared Statement of.................................   355
    Powner, David A., Director, Information Technology Management
      Issues, Government Accountability Office, Prepared Statement of   112

    Reid, Senator Harry, U.S. Senator from Nevada, Question Submitted
      by.............................................................   143
    Rosen, Jeffrey A., General Counsel, Office of the Secretary,
      Department of Transportation...................................1, 291
        Prepared Statement of........................................   308
        Statement of.................................................   307
    Rosenker, Mark V., Acting Chairman, National Transportation
      Safety Board, Prepared Statement of............................   393
    Runge, Honorable Jeffrey W., M.D., Administrator, National
      Highway Traffic Safety Administration, Prepared Statement of...   372

    Scheinberg, Phyllis, Acting Assistant Secretary, Budget and
      Programs, and Chief Financial Officer, Office of the Secretary,
      Department of Transportation...................................     1
    Shoshone-Bannock Tribes, Prepared Statement of the...............   449
    Snow, John W., Secretary, Office of the Secretary, Department of
      the Treasury...................................................   243
        Prepared Statement of........................................   256
        Statement of.................................................   255
    Specter, Senator Arlen, U.S. Senator from Pennsylvania, Questions
      Submitted by...................................................   181
    Stevens, Senator Ted, U.S. Senator from Alaska:
        Prepared Statement of........................................   153
        Statement of.................................................   153
    Stratton, Honorable Hal, Chairman, U.S. Consumer Product Safety
      Commission, Prepared Statement of..............................   419

    The University of Oklahoma, Prepared Statement of................   429
    Toner, Michael E., Vice Chairman, Federal Election Commission,
      Prepared Statement of..........................................   381

    University Corporation for Atmospheric Research (UCAR), Prepared
      Statement of the...............................................   445

    Wade, Kenneth D., Chief Executive Officer, Neighborhood
      Reinvestment Corporation, Prepared Statement of................   410
    Weicher, John C., Assistant Secretary for Housing, Department of
      Housing and Urban Development..................................   145
    White, James R., Director, Strategic Issues, Government
      Accountability Office, Prepared Statement of...................   112

                                 SUBJECT INDEX

                                  ----------

                  DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

                                                                       Page
    Additional Committee Questions...................................   181
    Block Grant Section 8 Voucher Assistance and Homeless Funding....   148
    Capital Needs of Public Housing..................................   185
    Community Development Block Grants (CDBG)........................   184
        And Local Community Support..................................   181
        Audit of Program Abuse.......................................   166
        Consolidation................................................   169
        Transfer.....................................................   185
    Consortia........................................................   190
    Elimination of CDBG Program......................................   180
    Error in Distribution of Section 8 Funds.........................   179
    Farm Labor Housing.............................................178, 186
    FHA Mortgage Insurance...........................................   177
    Foster Care Housing..............................................   173
    Home Ownership...................................................   159
    Homelessness...................................................160, 193
    HOPE VI.........................................147, 155, 175, 182, 194
    IHBG Funding in Alaska...........................................   153
    Impact of the Budget-based Section 8 Voucher Program.............   175
    Making Government More Effective.................................   164
    Moving-to-work...................................................   183
        Demonstration Program........................................   191
    Negotiated Rule-making.........................................148, 176
    New:
        CDBG Funds to be Spent on Housing Activities.................   172
        Vouchers for the Tenant Protective Fund......................   174
    Operating Fund...................................................   183
        Negotiated Rule..............................................   195
    Predatory Lending................................................   146
    Promoting Economic Opportunity and Ownership.....................   161
    Proposed:
        Rescissions..................................................   146
        Section 811 Cut..............................................   195
    Public Housing Capital Fund......................................   148
    Rescind Unobligated Cash and Carry-over Funds....................   168
    Rescission of $2.5 Billion for Fiscal Year 2006..................   170
    Reunification of Children With Their Parents.....................   193
    Review of Homeless Assistance Grants.............................   167
    SACI.............................................................   147
    Section 8:
        Reform.......................................................   160
        Vouchers.....................................................   192
    Serving Society's Most Vulnerable................................   163
    Staffing Request.................................................   171
    Transfer CDBG Programs to Commerce...............................   170
    Zero Downpayment:
        Act..........................................................   177
        Home Ownership Plan..........................................   149

                           DEPARTMENT OF THE TREASURY

                            Internal Revenue Service

    Accuracy of Tax Information......................................   141
    Additional:
        Actions Needed to Improve Budgeting for IT Operations and
          Maintenance................................................   125
        Committee Questions..........................................   136
    Assistance.......................................................   106
    Audit Rates......................................................    69
    Budget:
        Resolution...................................................    71
        Restructure..................................................    77
    Business Systems Modernization (BSM)...................79, 95, 104, 138
    CADE.............................................................    81
    Capital Gains Tax Rate for Art and Collectibles..................   137
        And Fuel Tax Fraud...........................................   136
    Challenges Facing the IRS........................................    85
    Compliance.......................................................   102
        Budget.......................................................   104
    Continuing Service and Increasing Enforcement....................    73
    Customer Account Data Engine.....................................    96
    Detailed Budget Summary..........................................    78
    Effect of Service Reductions.....................................   100
    Electronic Tax Law Assistance (ETLA).............................   134
    Enforcement:
        Funding......................................................    67
        Revenue......................................................    71
    Ensuring Tax Law Compliance......................................    87
    Fees for Service.................................................   111
    Filing and Payment Compliance/Private Collection Agencies........    81
    Fuel Tax Fraud...................................................   137
    GAO Highlights...................................................   112
    GAO's Comments on Walk-In Assistance.............................    67
    Health Insurance Tax Credit Administration (HITCA)...............    82
    Integrating Performance and Financial Management.................    93
    Internal Revenue Service--Assessment of the Fiscal Year 2006
      Budget Request.................................................   112
    IRS Strategic Plan and Taxpayer Service..........................    97
    IRS's Budget Request Continues to Shift Priority from Taxpayer
      Service to Enforcement, but the Short- and Long-term Impacts on
      Taxpayers Are Unclear..........................................   114
    IT Security......................................................   105
    Legislative:
        Language.....................................................   100
        Proposals....................................................    83
    Managing Human Capital...........................................    93
    Modernized e-File................................................    81
    Modernizing IRS Systems..........................................    86
    Offshore Voluntary Compliance Initiative.........................   110
    Outreach.........................................................   107
    President's:
        Budget Request...............................................    67
        Fiscal Year 2006 Budget Seeks Increase in Enforcement........    77
    Preventing Erroneous and Improper Payments.......................    89
    Private Collection Agencies......................................   138
    Processing.......................................................   107
        Returns and Implementing Tax Law Changes During the Tax
          Filing Season..............................................    94
    Program Performance..............................................    82
    Progress in BSM Implementation, but the Program Remains High Risk
      and Budget Reductions Have Resulted in Significant Adjustments.   121
    Proposed Cuts to Taxpayer Outreach...............................   142
    Protecting Taxpayers and Taxpayer Rights.........................    91
    Providing Quality Customer Service...............................    90
    Recommendation...................................................   127
    Reducing Tax Law Complexity......................................    89
    Return on Investment.............................................   108
    Securing IRS Employees, Facilities, and Information Systems......    92
    Tax:
        Administration and Operations (TAO)..........................    79
        Complexity...................................................   110
        Gap..........................................................    72
    Taxpayer:
        Assistance Centers (TACs)....................................   135
        Service:
            Centers..................................................    97
            Changes..................................................    98
            Fiscal Year 2006 Budget Reduction Initiatives............   106
            Reengineering............................................   106
        Services.....................................................   140
    TeleFile--Filing Tax Returns by Telephone........................   140
    The Compliance Equation..........................................   133
    VITA Program.....................................................   109
    What GAO:
        Found........................................................   112
        Recommends...................................................   112
    Why GAO Did This Study...........................................   112

                            Office of the Secretary

    Additional Committee Questions...................................   282
    Bonneville Power Administration (BPA)............................   281
    Boosting Tax Law Enforcement.....................................   252
    BSA Direct.......................................................   267
    Budget Proposal to Raise the Cap on Allowable Spending if
      Treasury's Request for Tax Law Enforcement is Fully Funded.....   287
    Business Systems Modernization...................................   273
    CDFI Fund........................................................   272
    Cuba Sanctions.................................................267, 270
    Cutting Services to Taxpayers....................................   252
    Ensure Financial Security........................................   258
    FinCEN Has No Penalty for Regulators That Don't Comply...........   284
    HR Connect.......................................................   274
    Imposing New Fees on Washington's Wine Industry..................   253
    Lack of Security of Information at Treasury......................   285
    Major Procurement Problems.......................................   253
    Manage for Results...............................................   259
    Mismanagement of:
        IRS Employee Tuition Assistance Program......................   282
        Treasury Communications Enterprise Contract..................   283
    New Homestead Act................................................   271
    Office of Intelligence and Analysis..............................   266
    Promote Economic Opportunity.....................................   259
    Social Security..................................................   262
    Strengthen National Security.....................................   257
    Tax:
        And Trade Bureau.............................................   268
        Havens.......................................................   271
    Taxpayer Service.................................................   265
    TBARR Project....................................................   277
    Terrorist Financing..............................................   261
    The President's:
        Management Agenda............................................   260
        Social Security Proposal.....................................   252
    Trade Deficit....................................................   278
    Treasury Department Vacancies....................................   261

                          DEPARTMENT OF TRANSPORTATION

                    National Railroad Passenger Corporation

    Additional Committee Questions...................................   351
    Adequate Federal and State Funding Should Be Provided in Order To
      Restore the Intercity Passenger Rail System and Invest
      Meaningfully in Corridor Development...........................   326
    Administration Budget Request....................................   336
    Amtrak:
        And Competition..............................................   354
        Funding Needs for Fiscal Year 2006...........................   347
    Amtrak's Impact on Rural Communities.............................   353
    Bankruptcy.......................................................   330
        Is No Substitute for Reauthorization.........................   325
    Cannot Survive on Current Funding Level..........................   304
    Current Model Is Broken, Resulting in Severe Financial
      Instability and Declining Service Quality......................   323
    Eliminating Long-Distance Service Will Not Solve the Funding
      Problem........................................................   326
    Fiscal:
        2006 Budget Request..........................................   303
        Year 2006 Grant Request......................................   306
    High-speed Corridors.............................................   344
    Labor Issues.....................................................   331
    Legislative Initiatives..........................................   305
    Operating Initiatives............................................   305
    Pay Off Legacy Debt and Restrict Future Borrowings...............   329
    Questions Submitted to:
        Amtrak.......................................................   353
        The Amtrak Board of Directors................................   352
    Recent History and the Call to Change............................   314
    Reduced Federal Operating Subsidy................................   341
    Reducing the Operating Subsidy...................................   345
    Riding the Rails: AMTRAK's Past and Present......................   309
    Secretary Norman Mineta Comments on the President's Proposal to
      Cut Funding for Amtrak.........................................   338
    Structural Initiatives...........................................   305
    The Administration's Plan for Reform and Preservation of
      Intercity Passenger Rail.......................................   317
    Too Premature to Separate Management of Northeast Corridor
      Infrastructure from Operations.................................   328
    Veterans Advantage...............................................   353
    Where Do We Go From Here? Reauthorization Guidance Is Essential..   326

                            Office of the Secretary

    Additional Committee Questions...................................    41
    Air Traffic Control Workforce....................................    10
    Airport Improvement Program......................................    19
        Funding......................................................    55
    Amtrak........................................................9, 52, 53
    Aviation Fees....................................................    39
    Conditions and Performance Report................................    33
    Corridors and Borders Program....................................27, 42
    Critical Bridge Replacement Needs................................    41
    Cross-Border Trucking............................................    40
    Declining Trust Fund Revenues....................................    47
    Essential Air Service:
        Cost-sharing: Background.....................................    53
        Program......................................................31, 36
    FAA..............................................................     8
        Joint Planning & Development Office..........................    10
        Safety Inspectors............................................    34
    Federal Aviation Programs........................................    15
    Funding for Federal Highway Programs.............................    33
    Gasohol Consumption Impacts......................................    54
    Highway:
        Congestion Relief............................................    38
        Safety.......................................................    24
    Hours of Service Rulemaking......................................    38
    How Will the Research and Technology Innovation Administration
      Harness Transportation Technology Innovation?..................    51
    Indian Reservation Roads.........................................    25
        Program......................................................    44
    Intercity:
        Bus Transportation...........................................    56
        Passenger Rail...............................................    15
            Service..........................................19, 23, 29, 34
              Reform.................................................    24
    Is FTA Changing the Rules of the New Starts Game?................    48
    Maintenance Technician Agreement.................................    46
    Operating Authority Violations...................................    45
    Quiet Zones......................................................    54
    Railroad Safety..................................................    35
    Revenue Aligned Budget Authority.................................    18
    Rural Transportation Needs.......................................    56
    Safety Workforce.................................................    52
    Severe Cuts in the Airport Grant Program.........................    47
    Should the Amtrak Reform Bill Be Part of the Surface
      Transportation Bill?...........................................    45
    Surface Transportation:
        Programs.....................................................    14
        Reauthorization..............................................    17
    Transit Bus and Bus Facilities Funding...........................    55
    Transportation:
        Connectivity.................................................    31
        Infrastructure in Alaska.....................................    21
        Investment Levels............................................    54
    What Progress Has Been Made in Pipeline Safety Research and
      Enforcement?...................................................    48

                       EXECUTIVE OFFICE OF THE PRESIDENT

                        Office of Management and Budget

    A Record Number of Fees?.........................................   237
    Additional Committee Questions...................................   235
    AIP Program......................................................   221
    AK Airport (AIP Program).........................................   221
    Amtrak...........................................................   216
    Bonneville Power Administration (BPA).....................211, 234, 235
    Community Development Block Grant (CDBG).........................   215
        Funding......................................................   224
    Competitive Sourcing.............................................   239
        Disabled and Health Care.....................................   238
    Delivering Results...............................................   214
    EDA..............................................................   227
    Essential Air Service............................................   226
    EXOP/Office of Policy Development................................   234
    Federal IT Program...............................................   231
    Hanford..........................................................   222
        Nuclear Cleanup..............................................   211
        Site.........................................................   222
    HUD Rescission...................................................   220
    Impact of HUD's Unallocated Rescission of $2.5 Billion...........   235
    Manufacturing Extension Partnership (MEP)........................   228
    New Privacy and Civil Liberties Oversight Board..................   236
    OMB's Budget.....................................................   214
    PART Program.....................................................   230
        Assessment Rating Tool.......................................   236
    Rural Community Advanced Program (RCAP)..........................   227
    Strengthening America's Communities..............................   219
        Initiatives..................................................   223
    Winning the War on Terror, Protecting the Homeland and
      Strengthening the Economy......................................   214

                     FEDERAL DEPOSIT INSURANCE CORPORATION

    A Review of the FDIC OIG's Fiscal Year 2004 Accomplishments......   384
    Management and Performance Challenges Facing the FDIC............   387
    The OIG's Fiscal Year 2006 Budget Request........................   391

                          FEDERAL ELECTION COMMISSION

    Compliance Program...............................................   382
    Disclosure Program...............................................   382
    Public Funding Program...........................................   383

                      NATIONAL CREDIT UNION ADMINISTRATION

    National Credit Union Administration:
        Central Liquidity Facility...................................   408
        Community Development Revolving Loan Fund....................   405

                 NATIONAL HIGHWAY TRAFFIC SAFETY ADMINISTRATION

    Alternative Fuel Vehicles--Hydrogen Safety.......................   380
    Crash:
        Avoidance Initiatives........................................   379
        Injury Data Collection.......................................   380
    Emergency Medical Services.......................................   376
    Fuel Economy Program.............................................   380
    Highway Traffic Safety Grants....................................   377
    Impaired Driving.................................................   374
    Motorcycle Safety................................................   376
    New Car Assessment Program.......................................   379
    Safety Belt and Child Restraint Use..............................   373
    Speeding.........................................................   375
    Vehicle:
        Compatibility................................................   378
        Rollover.....................................................   377
        Safety:
            Enforcement..............................................   379
            Priorities...............................................   377

                      NATIONAL TRANSPORTATION SAFETY BOARD

    Accomplishments..................................................   393
    Advocacy Program.................................................   395
    Appropriation Request............................................   399
    Critical Needs...................................................   398
    Major Investigations.............................................   395
    Most Wanted......................................................   394
    Training Academy.................................................   398
    Transportation Disaster Assistance (TDA).........................   399

                     NEIGHBORHOOD REINVESTMENT CORPORATION

    Overview of the Neighborworks System............................   410
    Priorities for Fiscal Year 2006..................................   412
    Projected Outcomes for Fiscal Year 2006..........................   411

                         OFFICE OF PERSONNEL MANAGEMENT

    Fiscal Year 2006:
        Appropriations Request for the Office of the Inspector
          General at the United States Office of Personnel Management   362
        Performance Budget for the Office of Personnel Management....   359

                          SURFACE TRANSPORTATION BOARD

    Amtrak Directed Service Provision................................   402
    Background on the Board..........................................   399
    Fiscal Year 2005 and 2006 Activities of the Board................   402
    Overall Goals of the Board.......................................   400
    Significant Workload that Impacts the Board's Budget Request.....   400
    The Board's Fiscal Year 2006 Budget Request......................   399

               UNITED STATES INTERAGENCY COUNCIL ON HOMELESSNESS

    The Continuing Work of the Council...............................   367

                    U.S. CONSUMER PRODUCT SAFETY COMMISSION

    CPSC's Important Safety Work Must Continue.......................   418
    Future Considerations............................................   419
    Impact of Budget Request.........................................   417

                        U.S. OFFICE OF GOVERNMENT ETHICS

    Fiscal Year 2006.................................................   422

                         U.S. OFFICE OF SPECIAL COUNSEL

    Goals............................................................   369
    Guiding Principles for Achieving These Goals.....................   369
    Relevant Funding Factors.........................................   369
    Units' Success...................................................   370

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