[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


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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\
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    \1\ The filing season refers to the period from January through 
mid-April when most individual income tax returns are filed.
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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.
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    \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).
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    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\
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    \5\ The Internal Revenue Service Has Appropriate Processes to 
Accept Modernization Software From Developers (Reference Number 2005-
20-028, February 2005).
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    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.
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    \6\ The PRIME stands for Prime Systems Integration Services 
Contractor.
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    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.
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    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.
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    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\
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    \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).
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    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).
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    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\
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    \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).
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    The complexity of the code hampers the ability of the IRS to 
administer the Nation's tax system and confuses most taxpayers. The IRS 
has attempted to provide assistance to taxpayers with questions about 
the tax code through toll-free telephone lines, 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).
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    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.
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    As part of its goal to improve service to taxpayers, the IRS 
includes simplifying the tax process as an objective in its 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.
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    \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.
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    \25\ IRS report, Compliance Estimates for Earned Income Tax Credit 
on 1999 Returns (dated February 2002).
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    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.
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    \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.
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    \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.
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    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\
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    \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.
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    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.
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    \32\ Taxpayers Experienced Improved Access to Toll-Free Telephone 
Services During the 2004 Filing Season (Reference Number 2004-30-144, 
dated August 2004).
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    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.
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    \33\ Customer Service at the Taxpayer Assistance Centers Is 
Improving but Is Still Not Meeting Expectations (Reference Number 2005-
40-021, dated December 2004).
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    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).
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  --Restrictions on the Use of Enforcement Statistics to Evaluate 
        Employees.--The IRS is complying with the law. A sample review 
        of employee performance and related supervisory documentation 
        revealed no instances of tax enforcement results, production 
        quotas, or goals being used to evaluate employee 
        performance.\35\
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    \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).
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  --Notice of Lien.--The IRS did not completely comply with the law. 
        For example, the IRS did not always timely mail lien notices. 
        In other cases, the IRS could not provide proof of mailing. In 
        addition, the IRS did not always follow its guidelines for 
        notifying taxpayer representatives and for maintaining 
        certified mail listings.\36\
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    \36\ Fiscal year 2004 Statutory Review of Compliance With Lien Due 
Process Procedures (Reference Number 2004-30-086, dated April 2004).
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  --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\
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    \37\ Legal and Internal Guidelines Were Not Always Followed When 
Conducting Seizures of Taxpayers' Property (Reference Number 2004-30-
149, dated August 2004).
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  --Illegal Tax Protestor Designations.--The IRS is prohibited by law 
        from designating taxpayers as ``illegal tax protestors'' but 
        may refer to taxpayers as ``nonfilers.'' TIGTA has reviewed the 
        Master File 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\
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    \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).
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  --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\
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    \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).
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  --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\
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    \42\ Appeals Complied With the Provisions of the Law for the 
Collection Due Process (Reference Number 2004-40-067, dated March 
2004).
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    Neither TIGTA nor the IRS could evaluate the IRS's compliance with 
three RRA 98 provisions since IRS information systems do not track 
specific cases. These three provisions relate to: restrictions on 
directly contacting taxpayers instead of authorized representatives, 
taxpayer complaints, and separated or divorced joint filer requests.

      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.
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    \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).
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    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\
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    \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).
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    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\
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    \45\ Public Law No. 104-208, 110 Stat. 3009.
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    In audits of the IRS's financial statements, the GAO has concluded 
that the 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.
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    \46\ Financial Audit: IRS's fiscal years 2003 and 2002 Financial 
Statement (GAO-04-126, dated November 2003).
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                         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).
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    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.
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    \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.
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    \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.
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    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.
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    \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.
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    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.
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    \12\ GAO, 21st Century Challenges: Reexamining the Base of the 
Federal Government, GAO-05-325SP (Washington, DC: February 2005).
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    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:
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    \13\ We selected these criteria from a variety of sources based on 
generally accepted government auditing standards.
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  --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.
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    \14\ For our latest high-risk report, please see GAO, High-Risk 
Series: An Update, GAO-05-207 (Washington, DC, January 2005).
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    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).
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    \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.
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    \17\ GAO-02-356.
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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.
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    \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.
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  --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.
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    \21\ GAO, Internal Revenue Service: Improving Adequacy of 
Information Systems Budget Justification, GAO-02-704 (Washington, DC, 
June 28, 2002).
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    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:
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    \22\ Public Law No. 104-13 (1995).
    \23\ Public Law No. 104-106 section 5001 et. seq. (1996).
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  --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.
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                              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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