[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR 2009
_______________________________________________________________________
HEARINGS
BEFORE A
SUBCOMMITTEE OF THE
COMMITTEE ON APPROPRIATIONS
HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
________
SUBCOMMITTEE ON FINANCIAL SERVICES AND GENERAL GOVERNMENT
APPROPRIATIONS
JOSE' E. SERRANO, New York, Chairman
CAROLYN C. KILPATRICK, Michigan RALPH REGULA, Ohio
C.A. ``DUTCH'' RUPPERSBERGER, Maryland MARK STEVEN KIRK, Illinois
DEBBIE WASSERMAN SCHULTZ, Florida RODNEY ALEXANDER, Louisiana
PETER J. VISCLOSKY, Indiana VIRGIL H. GOODE, Jr., Virginia
ROBERT E. ``BUD'' CRAMER, Jr., Alabama JO BONNER, Alabama
MAURICE D. HINCHEY, New York
ADAM SCHIFF, California
NOTE: Under Committee Rules, Mr. Obey, as Chairman of the Full
Committee, and Mr. Lewis, as Ranking Minority Member of the Full
Committee, are authorized to sit as Members of all Subcommittees.
Dale Oak, Bob Bonner, Karyn Kendall, and Francisco Carrillo,
Subcommittee Staff
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PART 7
Page
Department of the Treasury....................................... 1
Office of Management and Budget.................................. 55
Internal Revenue Service......................................... 127
Securities and Exchange Commission............................... 261
________
U.S. GOVERNMENT PRINTING OFFICE
42-831 WASHINGTON : 2008
COMMITTEE ON APPROPRIATIONS
DAVID R. OBEY, Wisconsin, Chairman
JOHN P. MURTHA, Pennsylvania JERRY LEWIS, California
NORMAN D. DICKS, Washington C. W. BILL YOUNG, Florida
ALAN B. MOLLOHAN, West Virginia RALPH REGULA, Ohio
MARCY KAPTUR, Ohio HAROLD ROGERS, Kentucky
PETER J. VISCLOSKY, Indiana FRANK R. WOLF, Virginia
NITA M. LOWEY, New York JAMES T. WALSH, New York0
JOSE'1 E. SERRANO, New York DAVID L. HOBSON, Ohio
ROSA L. DeLAURO, Connecticut JOE KNOLLENBERG, Michigan
JAMES P. MORAN, Virginia JACK KINGSTON, Georgia
JOHN W. OLVER, Massachusetts RODNEY P. FRELINGHUYSEN, New Jersey
ED PASTOR, Arizona TODD TIAHRT, Kansas
DAVID E. PRICE, North Carolina ZACH WAMP, Tennessee
CHET EDWARDS, Texas TOM LATHAM, Iowa
ROBERT E. ``BUD'' CRAMER, Jr., Alabama ROBERT B. ADERHOLT, Alabama
PATRICK J. KENNEDY, Rhode Island JO ANN EMERSON, Missouri
MAURICE D. HINCHEY, New York KAY GRANGER, Texas
LUCILLE ROYBAL-ALLARD, California JOHN E. PETERSON, Pennsylvania
SAM FARR, California VIRGIL H. GOODE, Jr., Virginia
JESSE L. JACKSON, Jr., Illinois RAY LaHOOD, Illinois
CAROLYN C. KILPATRICK, Michigan DAVE WELDON, Florida
ALLEN BOYD, Florida MICHAEL K. SIMPSON, Idaho
CHAKA FATTAH, Pennsylvania JOHN ABNEY CULBERSON, Texas
STEVEN R. ROTHMAN, New Jersey MARK STEVEN KIRK, Illinois
SANFORD D. BISHOP, Jr., Georgia ANDER CRENSHAW, Florida
MARION BERRY, Arkansas DENNIS R. REHBERG, Montana
BARBARA LEE, California JOHN R. CARTER, Texas
TOM UDALL, New Mexico RODNEY ALEXANDER, Louisiana
ADAM SCHIFF, California KEN CALVERT, California
MICHAEL HONDA, California JO BONNER, Alabama
BETTY McCOLLUM, Minnesota
STEVE ISRAEL, New York
TIM RYAN, Ohio
C.A. ``DUTCH'' RUPPERSBERGER, Maryland
BEN CHANDLER, Kentucky
DEBBIE WASSERMAN SCHULTZ, Florida
CIRO RODRIGUEZ, Texas
Rob Nabors, Clerk and Staff Director
(ii)
FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR 2009
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Wednesday, March 5, 2008.
DEPARTMENT OF THE TREASURY
WITNESS
HON. HENRY M. PAULSON, JR., SECRETARY OF THE TREASURY
Chairman Serrano's Opening Statement
Mr. Serrano. Good morning. The subcommittee will now come
to order. Today the subcommittee is pleased to welcome Henry
Paulson, Secretary of the Treasury, for his annual appearance
before our subcommittee. We all know that the Secretary of the
Treasury occupies an important position in the Federal
Government, serving as a policy advisor to the President on a
broad range of domestic and international economic issues.
In addition, the Secretary's responsibilities as Department
head cover a range of important functions: administering the
U.S. public debt, issuing Federal Government payments,
collecting the vast majority of the Federal Government's
revenue, working to prevent money laundering and many other
important responsibilities.
Some examples of the Secretary's recent work include
helping to formulate and administer the economic stimulus
package and working to counter the rise of foreclosures
associated with the subprime mortgages. I look forward to
discussing these issues today.
The issue of subprime mortgages, which this subcommittee
addressed at a hearing last week, is a huge concern not only in
my particular district, but throughout the country. While
subprime loans have in many cases allowed low- to moderate-
income families to experience home ownership for the first
time, it is also apparent that in a great many cases, borrowers
were not fully informed about the terms of the loans.
All consumers are at risk of being victimized by financial
predators. However, it is often our most vulnerable populations
who bear the brunt of these crimes. Each year, countless
working-class parents who are struggling to achieve the
American dream tragically have their hopes of upward mobility
crushed by the practices of dishonest businesses. While their
plight often goes unrecognized, the enduring housing crisis has
opened the eyes of many Americans to their struggles and made
us all aware of the devastating effects such exploitation can
have on the strength of our economy. Hundreds of thousands of
subprime loans have already reset to much higher interest
rates, and approximately 2 million subprime loans will reset
over the next 2 years.
Foreclosures and late payments rose in January to the
highest level on record and the medium price of a single family
home fell in 2007 for the first time in at least 4 decades. The
rise in foreclosures has had an impact not just on families who
have lost their homes. Whole neighborhoods across the country
have seen declines in property values and tax bases as a result
of being near foreclosed homes.
In New York City, my city, as I noted last week, 400,000
homes are experiencing or will experience devaluation as a
result of being located near foreclosed homes. In addition,
minority communities have been and will continue to be the
hardest hit by the foreclosure crisis, since these communities
receive a disproportionate share of subprime loans.
In 2006, 52 percent of the home loans that went to African
American families and 41 percent of the home loans that went to
Latino families were subprime loans. As I expressed also last
week, I am deeply concerned that many borrowers in these
communities were steered specifically towards subprime loans
even though the borrowers in many cases were fully qualified to
receive conventional loans.
The Treasury Department has begun to address the issue of
foreclosures, most notably in the Hope Now Initiative. Under
this voluntary initiative, participating mortgage loan
companies are agreeing to institute a 5-year delay in interest
rate resets for certain families faced with the prospect of
foreclosure.
While I truly appreciate the efforts, Mr. Secretary, that
you and others in the Department have put into this initiative,
I still have significant concerns, as I have pointed out
before. Specifically I am concerned that, one, the proposal is
still a voluntary initiative and, two, a great many borrowers
who are facing foreclosure are not eligible.
While any progress in preventing foreclosures is to be
welcomed, I have concerns about just how many people will be
helped compared to the number of families who will face the
loss of their homes. Indeed, the Secretary himself has stated
recently that we have not yet seen the worst of the foreclosure
crisis. I hope that we can continue to work together to explore
ways to minimize the number of foreclosures.
We thank you, Mr. Secretary, for being here today. We
assure you that this committee stands ready to support you in
all the work that you do and we know that we probably will take
a little more time than usual at this hearing with the issue of
the mortgage issue, but it is the number one situation in this
country which is really concerning and scaring a lot of folks
very seriously.
Mr. Serrano. So we welcome you, and I also welcome my
partner and my friend, Congressman Regula. From Ohio, right?
Mr. Regula. From Ohio. A rather significant State today.
Mr. Serrano. Especially last night, yes.
Mr. Regula. Even more so than Texas, which is not easy.
Mr. Serrano. At least you had just one election. They had
an election and a caucus.
Mr. Regula. Yes. It takes them two times to do as much as
we do in one.
Mr. Serrano. Be nice to the Ranking Member.
Mr. Regula's Opening Statement
Mr. Regula. Well, Mr. Chairman, you have done an excellent
job of outlining the challenges that confront the Secretary and
I want to say, Mr. Secretary, that as a citizen of the United
States, I appreciate the fact that you are willing to come to
this city and accept the challenge of leading the Treasury
Department. It is an extremely important responsibility in
terms of the economic development of the country. I think
sometimes we don't fully understand the role of Treasury.
But when you look back in history, it was Alexander
Hamilton who pushed the development of the Treasury Department.
It is so vital to a nation's success to have a good financial
system. And you are the leader of that and we thank you for
taking on that responsibility. I look forward to your
testimony.
As the Chairman has said, we want to help in any way
possible. You have some requested funding increase because of
the IRS. You have a multiplicity of responsibilities: coinage,
managing the Federal debt, which is a challenge. We appreciate
what you have done by way of leadership in these
responsibilities. So we welcome you here this morning.
Mr. Serrano. Yes. And before we hear your testimony, Mr.
Secretary, once again I want to thank you very much on your
work on the stimulus package. I particularly want to thank you
on your work to include the territories in the stimulus
package, which we thought was something that was great.
And last but not least, we thank you for the fact that you
helped us so much in getting five more quarters, starting with
the District of Columbia, which will be added to the program.
Mr. Secretary, please.
Secretary Paulson's Testimony
Secretary Paulson. Is this on now? Okay.
First of all, thank you for your gracious comments and
thank you for all your leadership on the stimulus, and
particularly as it relates to Puerto Rico and the territories
where you were a real leader, and they should be very grateful.
Now, let me say to you and to Congressman Regula and
members of the committee, I very much appreciate the
opportunity to discuss the Treasury Department's proposed 2009
budget. Our budget request reflects the Department's continued
commitment to promoting a healthy U.S. economy, fiscal
discipline and national security. The Department has broad
responsibility in Federal cash management, tax administration,
and plays an integral role in combating terrorist financing and
advocating the integrity of the U.S. and global financial
systems.
Our spending priorities for the 2009 fiscal year fall into
six main categories. I will briefly describe the priorities and
then will have plenty of time for your questions.
Treasury has an important role to play as steward of the
U.S. economy, and our office provides technical analysis,
economic forecasting and policy guidance on issues ranging from
Federal financing to domestic and global financing systems.
Those functions are especially critical now as the U.S.
economy, through a combination of a significant housing
correction, high energy prices, and capital market turmoil has
slowed appreciably.
Our long-term economic fundamentals are solid and I believe
our economy will continue to grow this year, although not
nearly as rapidly as in recent years.
In response to economic signals early this year, the
administration and Congress worked together to quickly pass on
a bipartisan basis the Economic Stimulus Act of 2008, and I
would like to thank this subcommittee for approving funds for
the IRS and FMS to administer the stimulus check rebate program
under that act, thank you.
As you know, the stimulus payments to households and
incentives to businesses in the act together are estimated to
lead to the creation of half a million jobs by year end. This
will provide timely and effective support for families and the
economy, and it wouldn't be possible without your leadership.
Treasury's Office of Terrorism and Financial Intelligence,
TFI, uses financial intelligence, sanctions and regulatory
authority to track and combat threats to our national security
and safeguard the U.S. Government financial system from abuse
by terrorists, proliferators of weapons of mass destruction,
and other illicit actors.
To continue to build on our efforts to combat these
threats, we are requesting an $11 million increase for TFI,
including $5\1/2\ million for the Financial Crimes Enforcement
Network to ensure effective management of the Bank Secrecy Act.
The budget request emphasizes infrastructure and technology
investments to modernize business processes and improve
efficiency throughout the Treasury Department. We will continue
to make information technology management a priority and have
taken several significant steps to strengthen our systems and
oversight.
Treasury is committed to managing the Nation's finances
effectively, ensuring the most efficient use of taxpayer
dollars in collecting the revenue due to the Federal
Government. The Internal Revenue Service, of course, plays an
integral role in this. The budget requests a 4.3 percent
increase in IRS funding to expand IRS enforcement activities,
improve compliance, enforce the tax gap, and continue
improvements in taxpayer service.
In addition, we are asking your colleagues on the State
Foreign Operations Subcommittee to support funding for the
multilateral development banks, noticeably new replenishment
for the World Bank's International Development Association,
IDA, and African Development Fund and a $400 million request
for the first installment of a $2 billion clean technology fund
that, with additional funding from other donors around the
world, will help to finance clean energy products in the
developing world and make strides towards addressing a global
climate change.
Overall, the budget request reflects a prudent and forward-
leaning approach to fulfilling the Treasury Department's core
responsibilities to support our economy, managing the
government's finances and ensuring the financial system's
security.
I thank you for your past support and consideration of our
work and look forward to working with you during your
deliberations. Thank you and I welcome your questions.
[The information follows:]
Mr. Serrano. Thank you, Mr. Secretary.
STIMULUS CHECKS AND THE TERRITORIES
I want to ask you first a question on the issue of the
territories because as you well said, we worked long hours, the
leadership of both parties and your office and my office, to
make sure that territories were included. As you know, there is
one difference. In the 50 States, checks will go directly to
individuals. In the territories, a dollar amount is going to go
to the central government, the territorial government, in the
case of Puerto Rico the commonwealth government, which then
will distribute dollars based on their tax rolls to the folks
who will qualify, which is all the folks, a lot of the folks in
the territories.
The concern, the fear by some folks as expressed to me and
expressed in the press is that the local government in the
territories, because the money is coming in a lump sum, could
either use the money to sit there for a while and look like
they are balancing their local budgets and/or would take local
tax liabilities.
Let's say Mr. Rodriguez in San Juan owes $300 to the local
tax department. From the $600 that he was supposed to get, he
will only get $300 because $300 will be taken out for that.
Two problems with that. First of all, that is not really
the intent. The intent was to get dollars into people's pockets
so they could spend it and stimulate the economy. And secondly,
unlike if you do it here, where you take from the stimulus
check, from the rebate check to pay for a tax liability, over
there you would be taking Federal dollars to pay for a State
debt, if you will, or a debt to the State that hasn't been
approved by Congress.
So what are the negotiations going like to make sure that
the intent of this committee and this Congress for those
dollars to go directly do take place?
Secretary Paulson. Mr. Chairman, first of all, I appreciate
your strong interest and your familiarity with the details and
your concern here. I had a briefing on this earlier this week
as I am getting continual briefings on the implementation of
the stimulus package. And you are right to indicate that there
is a significant difference, that we are working with the local
authorities and through their tax system. And we are in the
middle of these negotiations right now and there are a lot of
technical issues and difficult issues we are working through. I
am optimistic we are going to work through them.
And I guess what I would say to you, you flagged an
important issue and one we are sensitive to. So we are just
going to keep working on it and we will work with you and your
staff on this, and come out with the best outcome possible.
Mr. Serrano. I appreciate that. And let me just say on the
record that it was our intent when we put this together in a
bipartisan fashion that the dollars go directly to the folks
and not be used for any local options or needs.
Lastly, as you know, just for the record, some folks
commented about dollars going to the territories and said why
would that money be going--some folks said overseas. We remind
everybody that those folks would take that money and go spend
it, and they would spend it in places called Kmart, Wal-Mart,
J.C. Penney, Costco and Sam's and other places. In other words,
it is the same economy, it is the same retailers who operate in
the territories that operate in the 50 States.
Secretary Paulson. Thank you for continually reminding us
of that because, again, the people in the territories owe a
debt of gratitude to you.
Mr. Serrano. Thank you.
SUBPRIME LOANS
Mr. Secretary, one of the organizations that testified
before the subcommittee last week, the Center for Responsible
Lending, has argued that the subprime situation escalated
because Wall Street, as a purchaser of subprime loans on the
secondary market, encouraged subprime lenders to abandon
reasonable, qualifying standards and ignore whether their
customers could actually afford the loan.
In addition, the Federal Reserve Chairman was quoted last
August as saying that the failure of investors to provide
adequate oversight of originations and to ensure that
originators' incentives were properly aligned was a major cause
of the problems that we see today in the subprime mortgage
market.
Mr. Secretary, do you agree with these comments that are
being made and how should this particular problem be addressed?
Secretary Paulson. Yes. Again, thank you for that question
because it is very timely. And as I have thought about this
problem, I see two major focuses. The first was the one you
mentioned in your initial remarks which is, let us figure out
how to get help to the people who need it right now and get
through this problem with as little individual stress and
stress to the overall economy as possible. In other words, so
that is--that is number one.
And then, second, is what is the right policy response to
this? How do we respond to minimize the likelihood that
something like this will happen again? And part of this is law
enforcement and that doesn't fall under my responsibility. But
again, we are seeing aggressive law enforcement activities at
the Federal and the State level to go after people who
committed crimes.
And then there is the question of the right policy
response. And there I am really working on a daily basis on
helping to formulate the policy response for the President's
Working Group on Financial Markets. I chair that group. It has
the chairman of the Fed, the chairman of the SEC, CFTC, and
other regulators. There are efforts going on globally. And
here, when we come up with this response, we are going to be
looking at the mortgage origination process, the writing issues
and issues surrounding the writing agency, the issues you
mentioned on securitization and all of those issues,
disclosure, valuation issues, so there are a good number of
ones.
And then, separately, Treasury has been working now for
almost a year on a regulatory blueprint, because we have a good
regulatory system in the U.S. But it is not perfect and it is a
patchwork quilt that has developed over many years, and it can
be improved upon, and there are some gaping holes in it.
So you are right and both of the issues you have raised are
the right ones: How do we mitigate the harm and then how do we
reduce the likelihood we will have this problem again?
SPECULATORS
Mr. Serrano. Something that I brought up last week and
maybe you would like to comment on it. And very few times do we
have an opportunity to look to both sides of a committee room
and say we are all interested in making sure that this crisis
doesn't get any deeper and that we help Americans keep their
homes. But I suspect that we are talking about two sets of
folks here, the vast majority, people who bought a house and
now find themselves in a very difficult situation. But then
there is the possibility that some were speculating on a very
good market opportunity, and others who bought a second home
perhaps that they knew they couldn't fully afford.
In preparing a response, how do we protect those that we
need to and not necessarily bail out folks we don't need to
bail out?
Secretary Paulson. Again, Mr. Chairman, you and I are
thinking about this very similarly. First of all, let's talk
about the people we really need to help, because you rightfully
singled out subprime mortgages where there is going to be a
reset. There have been resets and there is a wave of them
coming.
And if we look at foreclosures in the third quarter, there
are 55 million mortgages held in the U.S.; 93 percent of those,
51 million, are making their payments every month on time. Then
when you look at that pool, 13 percent are subprime. That was
40 percent of the foreclosures in the third quarter. Then if
you look at the adjustable rate mortgages those where there was
a product problem, you had 6\1/2\ percent of the mortgages and
40 percent of those that entered the foreclosure process. So we
have a huge effort in getting to those people and coming up
with programs to deal with the mortgage reset and to deal with
the issues that they are going to face.
Then as you have said, I have seen these news reports about
Moody's put out numbers, 8.8 million mortgages are under water
that have zero to negative equity. Well, many of those are
people who can afford their mortgage payment. And a good number
of those are ones that put no money down on a home, speculated
on a housing market and the idea that other taxpayers of the
government should pay for their losses. If they can make their
mortgage payments, my view is they should honor their mortgage
payment. If they can not, they are speculators and they
shouldn't be the focus of what we are doing and we should be
concentrating our efforts on those who want to stay in their
house, willing to talk to someone about it, and have a real
problem, either an income problem or a product problem. We try
to get at the income problem with the stimulus program. And the
product problem, we are working on that very hard with the Hope
Now Alliance. And there is always more that can be done.
Mr. Serrano. Well, we thank you for your response and you
are right, we are on the same track. On that, we don't bail
people out who make bad investments. In other areas of the
economy, we have to be careful that we balance that properly.
Secretary Paulson. Yeah.
Mr. Serrano. I will now recognize Mr. Regula. I remind
Members that I will alternate, obviously, between two sides
based on what time you showed up, you came to the hearing. And
once Mr. Regula is finished, this gavel is pretty strict on the
5-minute rule. Mr. Regula.
Mr. Regula. Thank you, Mr. Chairman.
SOVEREIGN WEALTH FUNDS
Mr. Secretary, I would like to discuss the role of
sovereign wealth funds in the United States financial markets.
Do you think that the prevalence of these funds will change
U.S. equity markets in the long term? Some commentators are
saying that governments in the Middle East and Asia are now the
largest net investors in the U.S. equity and bond market. Is
this true and should we be concerned? We go back to the Dubai
thing which got everybody alarmed some years ago. And do you
think that sovereign wealth funds could come to substitute for
central banks?
Secretary Paulson. First of all, Congressman, thank you for
the question because this is very topical now, and let me also
say that we benefit and have for a long time in this country
greatly from foreign investment. The greatest compliment
another government can pay to the U.S. economy is to make a
direct investment. Foreign governments, a wide variety of them
invest in our Treasury securities. And as you have also said,
there are sovereign wealth funds from around the world,
including the Middle East. And they have been around the world
for a long time.
Now, I would say that the absolute size of sovereign wealth
funds has gone up dramatically. But as a percentage of global
wealth, it hasn't really increased that dramatically. The
projections are--and I am always a bit skeptical of projections
because they always assume that a trend is just going to
continue ad infinitum. But again, I think we need to assume
that they are going to be bigger and more important.
And the way we think about these investors at Treasury is,
first of all, it is important that no one would question their
investment if there was a belief and an understanding and some
assurance that their investments were going to be driven by
commercial or economic means by those objectives, as opposed to
strategic objectives, political objectives, whatever. And as
far as we know, the vast majority of these investments, and
maybe all, are driven by economic objectives. But what our role
at Treasury has been is to say we welcome the investment, but
then to have an active dialogue at Treasury, an active dialogue
with a good number of these sovereign wealth funds. And we are
encouraging them to develop a code of best practices as it
relates to governance, as it relates to transparency, to work
with the IMF and others, and to be more clear and more
transparent about what their objectives are, so those countries
that will be the recipients of those investments will be more
comfortable.
Then we are also working with OECD countries, the
developing countries that will be recipients of so many of
these investments, to again come up with some practices so they
won't use sovereign wealth funds as an excuse to be
protectionists and to try to screen out investment.
SANCTIONS AGAINST IRAN
Mr. Regula. As a follow-up to that, is the ability of the
Treasury to freeze funds--and I think in particular I read
somewhere that if we were to freeze economic activity of the
Government of Iran, that this would be some measure of leverage
in getting favorable foreign policy initiatives with them. Is
that ability an important element in our foreign policy as a
Nation?
Secretary Paulson. Yes, Congressman. What you are referring
to is the fact that now the responsibility of the Treasury
Secretary is not just the safety and soundness of the financial
system, it is the safety, soundness and security of the
financial system. And Treasury is on the cutting edge of
looking at financial abuse anywhere in the financial system.
And one of the countries that we are monitoring and taking
action against in the financial system is Iran, because they
use Iranian banks, state-owned banks to engage in their weapons
proliferation and acquisition of missile systems. They are
continuing to enrich nuclear fuel. We see all kinds of
deceptive practices by Iranian banks.
So we have been quite aggressive in terms of singling out
different Iranian banks for sanctions on the part of the U.S.
Government and encouraging organizations like the U.N. The U.N.
just took action where a very recent resolution called upon the
world to carefully scrutinize Iranian banks, be very careful of
their dealings with them, and singled out a couple of banks
specifically. So again this is a very important role of
Treasury.
THE TREASURY ANNEX
Mr. Regula. Last question. The Treasury Annex was
constructed in 1918 and 1919 and I understand it is in need of
some modernization. The fiscal year 2009 budget requests $11.8
million for repair and renovations of the Treasury Annex. I
assume this will be a multiyear project, most things in this
town are, and require additional funds in future years. Would
you tell the Committee why the renovation is needed and do you
have any idea how long this will take?
Secretary Paulson. Well, I would say if you walk through
the building, you would recognize it is more than a renovation;
that these are repairs and they are critical repairs to the
infrastructure and all of the basic infrastructure in the
building. It goes way beyond renovation. And this part of the
building houses 320 people. And by coincidence, you know, you
just asked about the Office of Terrorism and Financial
Intelligence at Treasury. Those people are housed there. So it
is a very critical, and as you said, that our budget request is
$11\1/2\ million and this will go on, obviously, for a number
of years. Thank you.
Mr. Regula. Thank you, Mr. Chairman.
Mr. Serrano. Thank you, Mr. Regula.
Mr. Secretary, when Mr. Hinchey and I were first sworn into
the New York State Assembly in 1975, we were immediately hit
with the possibility of New York City going bankrupt, then New
York State going bankrupt, then the infamous Financial Control
Board, then the running out of the bond market. So we quickly
learned about some of the work you do. Not at your level, but
we were quickly indoctrinated. Mr. Hinchey, what an
introduction.
Mr. Hinchey. Yeah. It is quite an introduction. Thank you
very much, Mr. Chairman, for reminding us of that. That was
quite an event.
RECESSION
Mr. Secretary, thank you very much for joining us and I
very much appreciate your being here. As you mentioned in your
testimony, the Treasury has a very important role to play as a
steward of the United States economy, and I appreciate the work
that you do in that regard. Last week, President Bush said that
the economy was not in recession. But all the indicators are
that we are in recession. I believe fully that we are in
recession. It is only a matter of how deep this recession is
going to be and how long it is going to last. If you look at
all the indicators, you see that I think very, very clearly.
The value of the dollar, for example, is now at a very low rate
compared to the rate of the euro and it is falling with regard
to virtually every other essential currency around the world,
including the yen and others.
The price of oil has now more than doubled, in fact much
more than doubled. But the price at the pump has more than
doubled. The price of food has gone up dramatically. The cost
of living for the American people is now at a higher and more
difficult rate than it has been in a long, long time. Some
people say not since 1929.
The disparity of income, the concentration of wealth in the
hands of the wealthiest 1 percent of Americans, is now at the
highest rate since 1929. In January, we saw an increase of more
than 1 million Americans who are without work for a lengthy
work period, and a whole host of other issues that are facing
the American families across the country.
We have now essentially doubled the nonmortgage debt. It
has gone from $1\1/4\ trillion to up above $2\1/2\ trillion.
The credit card debt in November rose at an annual rate of 8.5
percent--rather in October, at an annual rate of 8.5 percent.
And then one month later it was up to 11.3 percent.
Americans are now paying double the price at the pump that
they paid. U.S. manufacturing has shrunk at its fastest rate in
almost 5 years while construction spending is down below where
it was in 1994. We have lost now over the course of the last 6
years about 1.3 million manufacturing jobs.
You mentioned the proliferation of weapons of mass
destruction in your testimony. I think that these are the
examples of the proliferation of weapons of mass destruction
against the economy.
So although we have passed the stimulus package, and I
think it is a good stimulus package, it is going to be
marginally effective only for a short period of time. There are
so many other things that we should be doing. We should be
reinvesting in our country, reinvesting in the infrastructure,
putting more money into health care, for example, opposing what
the President did in vetoing that health care program for
children. What are we going to do to eliminate the
proliferation of these weapons of mass destruction against our
economy?
For corporations, and even in individuals, the bankruptcy
rate has gone up to record levels. You had another hedge fund
this morning, a big $1 billion hedge fund just go into
bankruptcy. What are we going to do, Mr. Secretary, to deal
with this dire situation that we are confronting? Because if we
don't deal with it effectively, this recession is going to get
worse and last longer.
Secretary Paulson. Congressman, I am very, very focused on
the economy. Let me begin by saying to you that we had an
economy that has grown for 6 years. I have said that I believe
it is going to continue to grow this year. Okay? But whether I
am right or whether you are right about whether it is going to
grow this year, we recognize that the risks are to the
downside. And that is why we moved as quickly as we did, with
the help of Congress, to put a stimulus package in place. And
that is why I get a briefing every day from the IRS or someone
at Treasury in terms of what we are doing to get those checks
out quickly and get them out in early May.
Now, in terms of the employment situation, I would just
remind you that there are some positives here--unemployment,
the last number was 4.9 percent. By any historical standards--I
will just remind you that in 1929 it was 25 percent or
whatever. So we have an economy that has grown for a long time.
The underlying structure is very healthy. The long-term
fundamentals of our economy are healthy.
We are facing the head winds that you cited. We are facing
high oil prices. We have got this housing downturn. And we have
the capital markets turmoil. And I think we are working our way
through that with regard to the capital markets and what is
going on with our major institutions. I believe all of our
major institutions are fundamentally healthy.
But, again, whether it is the GSEs who are going to need to
continue to play their countercyclical role or we need GSE
reform and need them to raise capital, I am urging all
financial institutions that think they are going to need
capital, to raise capital so they can keep lending and playing
an active role in the U.S. economy.
Mr. Hinchey. I appreciate what you are saying and I respect
everything that you just said. But if I may just take another
second, Mr. Chairman.
The things that you mentioned are very vague. It is true
that the economy has grown to some extent over the course of
the last several years, but the number of jobs increase have
been averaging about 95,000 when the normal necessary increase
in jobs is 150,000 a year. Now we have just seen a reduction of
17,000. In other words, we haven't increased jobs, we have lost
17,000 in the last month. So the consequences are very dire for
working people, working families, cost of living going up, the
value of their income--now the average value of the American
family's income has dropped by almost $1,000. They are not able
to deal with the situation. That is why their debt has gone up
so much. Particularly credit card debt. People are borrowing 10
percent more than they are taking in every day.
So I would just ask deeply if you as a Secretary of the
Treasury would consult with this administration more closely
and help us in the Congress get legislation signed by the
President that is going to effectively stimulate this economy
and get people back on the right economic track, because these
are the proliferation of economic weapons of mass destruction
that we are confronting.
Mr. Serrano. Mr. Kirk.
NEGATIVE EQUITY
Mr. Kirk. Thank you, Mr. Chairman. And, Mr. Secretary, when
you came out of Barrington and accepted this job, I thought
maybe the Secretary of Defense seat was the hot seat in the
Cabinet, but I now think you are it as far as big jobs. I just
would note Chairman Bernanke yesterday before the Independent
Banker's Association talked about the negative equity position
of many mortgage holders, and I think the quote was principal
reductions would be a more effective means, he felt of
preventing widespread foreclosures. The back of the envelope
numbers I have is the value of homes in America, 20 trillion,
value of mortgages in America, 10. What we thought was subprime
under stress was 1 trillion, but today's ``Wall Street
Journal'' has that $2.6 trillion number, meaning the problem
would be 2\1/2\ times worse than estimates in December.
In America we have about 650,000 foreclosures a year in a
good year. Now I think at the current rate we are at around 1.2
million per year. And so I don't know if you ever worked with
Alex Pollack, the former president of the Chicago Home Loan
Bank Board before. But at AEI, he is talking about restarting
the Homeowners Loan Corporation, which is a different concept
than Chairman Frank's concept of boosting up the FHA, because
the hulk, by definition, is a 3-year institution only and then
it gets out; whereas a permanent expansion of the bureaucracy I
think might be--so I hope you would be looking--I know your
team is working with Alex and talking to him and----
Secretary Paulson. Well, I would say we--just to be very
straightforward, Congressman, we are looking at a lot of ideas.
I don't think that is a good idea. I think that idea does a lot
more harm than good because, you know, something like that was
done at the time of the Depression. Then foreclosures were 50
percent. Today they are 2 percent. Unemployment was 25 percent.
Today it is at 4.9 percent. We now have the GSEs, Fannie and
Freddie. We have the FHA. We have the Federal Home Loan Banks.
And so we have--and even when you look at these--and I do agree
that foreclosures are very expensive for everyone. And one of
the things that--one of the tools that banks have when looking
to work with homeowners that are facing difficulty making a
mortgage payment is in addition to modifying other terms,
another thing to be, you know, considered is reducing the
principal on the mortgage.
But again, as I look at this, and I very much agree with
what Chairman Serrano said, there are a fair number of people
in this country, I mean even last year 30 percent of those who
bought homes put no money down. And I think investors are going
to be demanding in lenders' different practices in tightening
up their standards. But I really don't think if somebody can
afford to make a mortgage payment on their own and they choose
not to--and I think the vast majority will, because I think the
vast majority will say, ``I may have negative equity in my
home, but I put my roots down here, I am going to continue to
live here.'' But if they say, ``I am just going to walk away
from it and not honor my obligations unless somebody else pays
for my losses,'' I certainly don't think other taxpayers should
pay for their losses.
So, again, we are really focused on this. We have a program
to deal with it--which some people have criticized and said it
is not perfect. And it isn't perfect. But it is a tangible idea
that has been translated into action. There have been a million
people since inception that have received a workout or a
modification. So we are going to keep driving that. We are
going to keep pushing for GSE reform so that the GSEs can get
out there and raise the capital they need to play a
countercyclical role. We need FHA modernization. We need the
tax-exempt financing----
Mr. Kirk. Let me just hope that if it gets worse, you are
still open-minded.
WORLD BANK FUNDING FOR IRAN
I want to raise one other issue which is World Bank funding
for Iran. You have a request for $1.2 billion to the
Appropriations Committee. World Bank funding for Iran is
totaling about 1.3 billion. You said that the IRGC is so deeply
entrenched in Iran's economy in commercial enterprises, that it
is increasingly likely that if you are doing business with
Iran, you are doing business with the Iranian Revolutionary
Guard Corps. And the Treasury did designate the largest foreign
bank of Iran, Bank Melli, as a terrorist financing institution.
Problem: That was the conduit that the World Bank was using to
provide U.S. taxpayer dollars to Iran through the World Bank.
And so they then had to find a new financial intermediary--I am
not exactly sure that the President of the United States knows
that three blocks from the White House an institution is
providing funding directly to the Government of Iran. But if
that policy is maintained, as it appears it has, my office
asked the U.S. executive director, Who is the new financial
intermediary that the World Bank is paying to give money to the
Government of Iran? And they said, We don't know and you don't
have a right to that information. And I would hope that you
would be able to tell us who that financial intermediary is.
Secondly, yesterday, the world--sorry--the U.N. passed a
new sanctions resolution in section 10 calls upon States to
exercise vigilance over the activities of financial
institutions and their territories with all banks domiciled in
Iran. So in conjunction with section 10 of the U.N. resolution
which just passed unanimously in the Security Council, we ought
to know who is the intermediary that U.S. taxpayer dollars are
flowing through to Iran. And I would just ask you if you--it
didn't make a lot of sense to me that the World Bank is funding
the Iranian Government. But if that is the administration's
policy, then who is the intermediary that we are using?
You just I think received a letter from half of the Senate
calling for us to sanction the Central Bank of Iran. And so if
we follow that policy, the question further becomes: What
financial institution is the World Bank using to pay the
Iranian Finance Ministry?
Secretary Paulson. Congressman, let me first of all address
your concerns, and I appreciate them because I think we at the
Treasury have been as aggressive as anyone could be in terms of
going----
Mr. Kirk. And Stuart Levey did an outstanding job.
Secretary Paulson. In terms of the central bank, I have
cited them myself on remarks, and what we are doing is very
contact based. Now, in terms of----
Mr. Serrano. Secretary, is your mike off?
Secretary Paulson. Is it?
Mr. Serrano. Now it is on.
Secretary Paulson. Now in terms----
Mr. Serrano. I can hear you but the camera wanted----
Secretary Paulson. In terms of the World Bank, again these
votes predated my arrival at Treasury. But I understand the
Treasury voted against every one of these--the U.S. Government
voted against every one of these loans and these guarantees.
So we clearly voted against them. There haven't been any
new programs that have been put in place since I have been down
here. I know this is something that Bob Zoellick is very much
focused on and he has got his own governance and his own rules
to deal with.
I do believe actions like those that the U.N. took, in
terms of that sanction, are only helpful to him and others as
we carry this on, and I appreciate you being the strong
advocate you are for being tough there.
Mr. Kirk. I have to support the appropriations request. I
just hope with regard to Iran, we know who we are dealing with.
Thank you.
Mr. Serrano. Thank you. Mr. Schiff.
Mr. Schiff. Thank you, Mr. Chairman.
IRAN'S CENTRAL BANK
I want to follow up on the Iran situation because while we
have taken action to deal with some of these private banks in
Iran, it is now very clear, I think, that the central bank has
become the new conduit for some of these private banks to
funnel money through and evade the sanctions.
The Governor of the Bank Markazi, the central bank,
Tahmaseb Mazaheri, admitted on February 5th that the central
bank, quote, assists Iranian private and state-owned banks to
do their commitments regardless of the pressure on them. And I
think he is referring to the sanctions regime. So here the
central bank pretty much acknowledges that they have stepped in
to help these private banks that we have been trying to shut
down in funneling money to Hezbollah and other terrorist
activities.
As Mr. Kirk mentioned, Mr. Levey is doing a good job,
identified banks like Bank Saderat that facilitated hundreds of
millions of dollars going to Hezbollah. But now the central
bank is accomplishing the same function. And I guess very
similar to the sentiment expressed in the Senate letter, what
are we doing to shut down the central bank's ability to launder
this money?
And a further question is, in light of the U.N. sanctions,
what efforts are we making to deal with banks in countries like
Austria that have picked up some of the slack where other
European banks have stopped doing business with Iran in ways
that facilitate their terrorist financing. It appears Austrian
banks have stepped into the lurch. What kind of communications
have we had with Austria to try to curb that practice?
So those are two questions I would like to ask you vis-a-
vis Iran, and then I have one domestic question.
Secretary Paulson. Okay. In terms of Iran, you are focused
on the right issue, that almost a year ago, I singled out a
number of remarks, Markazi for the work they have been doing
with some of the other state-owned banks. We are focused on the
issue. As we are working, we work to bring others along with
us, because one of the things we have learned that when we have
these conduct-based and we very much are a Treasury, we look
very carefully at the law. We look at conduct. We look at
having very good intelligence and we look at bringing others
along with us, because I think these make the actions we take
much more effective. But I hear you, I appreciate the letter.
This is an issue and an issue we are focused on.
Now, in terms of banks around the world, one of the things
that I did upon arrival at Treasury is work very closely with
Stuart Levey and others to go not just to the governments, but
to go directly to the heads of many banks around the world.
Because I knew that if they saw what was going on, they would
be even more proactive than their governments. They weren't
going to want to be unwittingly abusing the system, helping to
finance terrorists, helping to finance weapons acquisitions and
so on. And we have done that pretty successfully.
So as we have done that, what we found is that the Iranians
have been forced to open up new relationships with new banks in
other parts of the world. And one of the things we do is we
just--Stuart Levey just got back from a trip. So we are
continuing to work and work in every country where there are
banks that have business. But remember, it isn't--all business
with Iran is not illegal under these sanctions. It is business
with the sanctioned entities. So we are pointing out the risks.
But we are all over this.
UNDERLYING STRUCTURE OF THE ECONOMY
Mr. Schiff. I am going to follow-up with you and Mr. Levey
if I could on the central bank issue, as well as on Austria.
But I do want to get to the one domestic question before I run
out of time. And that is, you mentioned in your testimony that
the underlying structure of the economy was still sound in your
view. The question that I get asked most by my constituents in
town halls or telephone conversations, it always comes out in
slightly different fashion, but it raises a question about that
very presumption about the underlying structure of our economy.
And what people in my district say to me is they say, I am
working harder than ever, my spouse is working harder than
ever, and we are finding it more and more difficult every year
to get by, to pay our bills, to pay our mortgage, to pay our
rent, to pay our gas prices, what have you. They look at their
parents' generation where the model was one head-of-household
income earner. They seemed to have an easier standard of life,
less worry about being able to pay for health care, losing
their home because of a catastrophic illness.
What do we tell these families about what the
administration is doing? What do we tell them about the
underlying structure of our economy? Because they look at it
and they wonder whether the underlying structure of the economy
is such that they are going to get squeezed and squeezed every
year until something gives. And what do we tell those folks?
Secretary Paulson. First of all, I get a chance to talk to
a fair number of them, too, and I do understand there are a
number of families that are working hard and struggling, and
you raised a number of important issues.
To begin with, I always begin with telling them that the
most important thing--first of all, we have to keep this
economy growing because whatever their issues and problems are,
they will be more significant if we weren't growing and if we
weren't open to foreign investment and if we weren't active
world traders, and right now exports are driving a lot of our
growth.
And then on health care, I really do agree with you when
you cited that. I think that is--if we weren't going through
this current downturn and mortgage problem, by far the
overwhelming issue in our economy would be health care. And
there I really do believe we are going to need some dramatic
solutions and entitlement reform is going to be a big part of
it. Medicaid and Medicare reform is going to be a very big part
of it, and work to make private insurance more affordable and
more available. And I don't think we have time right here. But
I will talk to you off line. We have made some proposals at
Treasury. And this isn't right in the middle of our lane at
Treasury but we have had some proposals that deal with the Tax
Code that would help--at least help jump-start the creation of
a stronger and broader private health care insurance market.
Mr. Schiff. Thank you, Mr. Chairman.
Mr. Serrano. Thank you.
I thank Mr. Goode for allowing us to break the order here.
It is his turn to allow Ms. Kilpatrick to make a few comments
before she returns to a hearing across the hallway.
Ms. Kilpatrick. Thank you, Mr. Chairman. First let me thank
my gentleman friend from Virginia. Thank you very much. Mr.
Secretary, let me apologize for my absence. And the Chair
understands we have Homeland Security at the same time across
the hall and Admiral Allen is testifying. So I wanted to make
sure first I came to say hello.
Secretary Paulson. Why, thank you very much for coming.
Ms. Kilpatrick. Thank you very much. And for your call
during the stimulus package discussion and I hope we can
continue that as well.
CDFI FUND
I want to just bring up, just briefly, community
development in financial institutions. This committee worked
real hard last year to put some of the money back in to kind of
help our communities who are struggling to get back. In the
President's recommendation, he is recommending that we cut that
appropriation some 70 percent. It is 69.6 to be exact, which
means there will still be another deepening hit for the
communities across America. And I won't begin to ask you in
terms of will you support an increase in that. That is our job
to do that.
How did you arrive at that? Is it something that you can
help us with? I am going to be pushing hard to have it----
Secretary Paulson. First of all, Congresswoman, that is a
very good program, it is an effective program. We have good
leadership. I was in Chicago last year at NeighborWorks which
is a housing counseling, making a CDFI award. We have got good
leadership in the program. We put funding in at the same level
that we had requested last year. You funded it at a higher
level. We have executed the program I think well. There are
just tough trade-offs. And we had some very tough trade-offs to
make in putting together any budget. But I just want to assure
you that we are doing everything we can to execute that program
well and it has got strong leadership and I am committed to the
program.
Ms. Kilpatrick. That will be one of my requests, that we
work together to try do what we can.
Secretary Paulson. We look forward to working with you on
this.
SUMMER JOBS PROGRAM
Ms. Kilpatrick. My only other question was summer job
programs. That is one of the things that we proposed in the
first stimulus package that we did not get.
Secretary Paulson. Right.
Ms. Kilpatrick. We always try do a youth program, but we
are now looking for a summer jobs program for the parents of
the youth who find themselves unemployed or now laid off. We
lost 350,000 jobs in Michigan over the last decade or so. It is
really important to us that we try to put a summer jobs program
in place.
There are mechanisms already set up. We just need the money
to be put in. I am advocating a billion or 2 that would put
tens of thousands of people back to work during this time. It
is not a long, full-term, forever job but something so that the
children can feel more secure in their homes. I hope we can
work and talk to you on that.
Secretary Paulson. Well, I would say thank you, and you
have been a real leader in that area. I know how important
summer jobs are for everyone, and particularly our youth. Thank
you for your comment, and I will look forward to talking with
you and others about that.
Ms. Kilpatrick. Thank you, sir.
Thank you, Mr. Chairman.
Mr. Serrano. Thank you.
The distinguished gentleman from the Bronx, New York, Mr.
Goode. That is not a Bronx accent?
Mr. Goode. It is Bronx just south of Martinsville.
Mr. Serrano. Thank you.
Mr. Goode. Thank you, Mr. Chairman.
HEALTH CARE
I heard a previous question comment on our health care
system and how many changes it has needed and really how bad it
is. I have listened to the debates on the Presidential
candidates and heard the candidates comment on how bad it is. I
have got a letter here from somebody who is in this country
that came either from Pakistan or India, and they want their
sister to come over here, and now they want their niece to come
over because they claim the health care system--and I don't
know whether it is Pakistan or India--can't handle what they
have got. They want to come over to this country.
Secretary Paulson. Yeah.
Mr. Goode. And that is repeated about every week in my
office, of people who want to come here from other countries to
get the health care.
What I am going to do--and maybe you can correct me if I am
wrong. You need to listen to the Presidential debates. I won't
be able to help you because you are in a socialized medicine
country and you ought to stay there. Because, you know,
everybody in this country--not everyone but a lot of the
candidates are saying how bad our system is. So you have gotten
wrong information. You need to stay in the socialized medicine
system. That is how I am going to respond to that.
But, Mr. Secretary, you have to stay where the candidates
say it is the best. Stay in India and Pakistan and don't come
over here. I don't know which country they were from. I can't
tell by the name.
But let us go on to another question I have got here.
TAXING CARRIED INTEREST
Carried interest, I know there have been proposals in bills
to say that that should be taxed at ordinary income rate
instead of capital gain rate. We had that as an offset I
believe in H.R. 2834. Can you explain how that, not for the
hedge fund managers but say for real estate partners, what the
impact would be if that change were made?
Secretary Paulson. Well, it would--I think it would have a
negative impact. Because--let me just tell you how I think
about this. Because in our Tax Code we tax businesses in
different forms. We tax corporations, partnerships, sole
proprietorships and so on. And the way we tax partnerships
with, you know, the carried interest or mechanisms similar to
carried interest, impacts--we have energy partnerships, we have
real estate partnerships, and we have a variety of industries,
not just finance and asset management. And this has been a big
driver of entrepreneurial behavior and activity. So, again, I
think it is difficult to just pick one industry out.
Part of the problem we have in our Tax Code is we have so
much complexity as it is, and we get where we are by sort of
singling out one industry or something for special treatment.
So, again, I think we need to look at it more broadly and look
at it and say, what is going on here? And we have benefited for
a long time for the way in which we have encouraged
entrepreneurial activity and partnerships.
Mr. Goode. So then would it be fair to say then that you
think this would discourage, if you changed it from capital
gains rate to ordinary income rate, real estate investment,
energy investment?
Secretary Paulson. Yeah, I'd be very careful before I did
that. I just think I wouldn't single that out, and that has
been part of a tax code that has worked well for sometime.
Mr. Goode. All right.
U.S. MINT
Last thing, I know the Mint is under your jurisdiction.
Secretary Paulson. What did you say?
Mr. Goode. The U.S. Mint. Are you all melting down the Gold
First Spouse Coins if they don't sell out or have you melted
them down? Because I know the price of gold is right much
higher now than it was when you first started the program.
Secretary Paulson. That is a successful program, and it is
a profitable operation, and we are working hard to sell those
coins.
Mr. Goode. So you--it is 40,000, I believe. It is 20,000
for the proof, 20,000 uncirculated. You are not melting any of
them down? You are going to try to sell them all?
Secretary Paulson. Not that I know of.
Mr. Goode. But you are going to sell--if you had one, say,
from James Madison, Dolly Madison, that you didn't sell, but
the price of gold is up, you are going to sell it at the cost
for James Monroe First Spouse and not--as the price goes up,
you raise the price? Or can you?
Secretary Paulson. I don't believe we do. If I am wrong on
this, I will get back to you.
You know, there are a number of things that we are focused
on where we would like to make a difference in the cost and
save money for the taxpayers. I have been really focused on
legislation we have which would let us change the metal content
of pennies and nickels to make those more cost efficient.
Mr. Goode. Thank you, Mr. Chairman.
Mr. Serrano. So you want to get rid of the penny, hey?
Secretary Paulson. No, I have got no intent to----
Mr. Serrano. Are you familiar with the program in New York
where they collect pennies and they turn it over to charity? It
is amazing.
Secretary Paulson. Yeah, it is a great program, great
program.
Mr. Serrano. Speaking of greatness, Mr. Ruppersberger.
Mr. Ruppersberger. Well, thank you. That was a very nice
introduction.
First thing, thank you for being here.
As we are talking about the U.S. Mint I am going through a
process now to try to direct the Mint to create a commemorative
coin in 2012 to celebrate the Star Spangled Banner. The war of
1812, the 200th anniversary, is in 2 years. I never realized
the process where you have to get 290 co-sponsors. I have been
working the floor for a while. We have 251. We then go to the
next step. There are two commemorative coins produced by the
Mint a year. The good news, it is budget neutral.
So it is not a question, just a statement.
Secretary Paulson. Okay.
OFFICE OF TERRORISM AND FINANCIAL INTELLIGENCE
Mr. Ruppersberger. I am on the House Select Intelligence
Committee, so a lot of what we do is in the area of
intelligence. I just want to talk to you about your role in
helping us with respect to fighting global terrorism.
The Office of Terrorism and Financial Intelligence was
created I believe in 2005. We call it TFI, yes?
Secretary Paulson. TFI.
Mr. Ruppersberger. TFI, okay. So many acronyms in the
field. It basically provides intelligence analysts, combats
money laundering, which is very important, and it enforces U.S.
Government sanctions.
Now you have asked for an $11 million increase for the TFI
in fiscal year '09. This is on top of the 29 percent from
fiscal year '07 and '08. I am asking a question--I am probably
going to be in favor of this, based on my role. It is so
important that we have this component and this resource of
fighting global terrorism. Could you explain why the increase
and why it is needed?
Secretary Paulson. Yeah. Well, I would say, first of all,
you need to understand that we are the only office in the U.S.
Government with TFI solely devoted to using financial means to
track, degrade and disrupt our enemies; and so our budget is
the smallest really of any of the U.S. intelligence agencies;
and it is less than 1 percent of the overall U.S. intelligence
budget. And I guess the way I would describe it to you,
Congressman, is, in today's world, the global financial system
is so prevalent that it is very difficult for terrorists to
operate without using the financial system in some way. And so
that is a weakness, but it is a strength, because it gives us a
way to track what the terrorists are doing, and it gives us a
way to disrupt what they are doing and to--so it helps us from
that perspective.
Then, as has been pointed out, those countries that are
global renegades, as it were, those countries that are pursuing
their weapons of mass destruction, the weapons proliferation,
Iranians, for instance, are--again attempt to use the financial
system to help them pursue their objectives, abuse the system.
And we at Treasury are able to have an impact and--have an
impact and drive behavior. So, again, I would argue that this
is money very well spent and very necessary.
Mr. Ruppersberger. You know, fighting terrorism is a team
effort. That is why the Office of Director of National
Intelligence came together so all agencies can work together to
connect the dots. I do know in my role on the Intelligence
Committee dealing with the CIA and NSA and FBI and all those
groups that they very much feel very strongly about what you
just said.
Now following the money is clearly a big priority as it
relates to terrorists. At some point they have to bring their
heads up into the open to get the money; and we have been very
effective in catching them. Some of our allied countries, some
of our quasi-allied countries, they are still working with us
on the money laundering phase.
I also know that the sanctions--we talked about Iran, but,
as an example, in North Korea, we have been very effective.
That bank was Banco Delta Asia. We have put them out of
business.
Secretary Paulson. Correct.
Mr. Ruppersberger. Sometimes they work; sometimes they
don't. I think that is one of the main reasons why the North
Koreans came back to the table, because we really put them in a
position where they could not really do much as it related to
money. Could you comment on the success there?
Secretary Paulson. Yeah, I would just simply say you are
right, that I think when Treasury and the U.S. Government
sanctions banks, it has a big impact, and I think that it can
change behavior. And I do think the world states that want to,
if they understand they need to change their behavior to become
part of the world financial system, I think that is a big
inducement. And so we----
I think the other thing that makes a big difference is we
base our sanctions on evidence, strong intelligence. It is
conduct based, and we seek to enlist others to work along with
us.
Mr. Ruppersberger. They have just imposed sanctions on
Burma now----
Secretary Paulson. Yes, right. And, again, bad actors in
Burma, right.
Mr. Ruppersberger [continuing]. Appropriations process.
And I do want--Mr. Chairman, this is important. Because
sometimes when you ask for an increase of over 30 percent, our
staff and our people will look at that and say, why the
increase? I would really hope that this committee look very
strongly at the need for what we do on money laundering. It is
a really effective tool.
Do you also have the resources to continue to do what you
are doing in the money laundering phase? Do you have the
expertise and the ability to train the people that are
following the money working with the other intelligence
agencies?
Secretary Paulson. I think we do. I think we have got
really excellent people. And even more important than how many,
it is the quality of the people, as you have pointed out.
Mr. Ruppersberger. And these people have to go all over the
world, too.
Secretary Paulson. We have excellent people. They work
hard. Their leader just got back. Stuart Levey just returned
from a trip to the Middle East, gone for a whole week, got back
on a Saturday. And so we are going wherever we need to go and
doing what we need to do.
INTEREST RATE REDUCTIONS
Mr. Ruppersberger. Switching domestically, just a couple of
issues. I think if you look in the past, until we have had this
crisis now, a lot of what has helped our economy was the lower
interest rates, which allowed people to refinance, use the
equity in their homes to have money that we use for spending.
It seems that some of the moves that we have made now through
the Federal Reserve just haven't really done a lot to bring the
actual residential mortgage rates down. Do you have an opinion
of where you think that--what we need to do to let the banks
understand--I mean, I think the banks want to keep taking the
profit in, but sooner or later we will need to--are you hitting
the--I think you can answer it, but I can't ask any more.
Secretary Paulson. Should I answer it?
Mr. Serrano. Sure, go ahead.
Secretary Paulson. I would say that, as helpful as the
Fed's interest rate reductions have been, and they have been
quite helpful to the overall economy, they alone won't be
sufficient to work through some of the excesses that have taken
place in the credit market and in the housing markets. So we
are making progress, but there is still stress in a number of
these markets; and it is going to take a while for some of them
to perform as normal.
But one thing I will say that has been a help is, when you
look at the adjustable rate subprime market, that those
mortgages were facing resets. If you take an average mortgage
before the recent Fed cuts, the reset would have gone from 8.5
to maybe 10.8 percent. On a $200,000 mortgage, that is more
than $300 a month. After the Feds cut, the reset goes from 8.5
to 9 percent, which is about $70 a month. So there is
definitely help, and it is very tangible help for those people
facing resets. But you are right. In and of itself, it will
take more time and more----
Mr. Ruppersberger. Do you anticipate the rates to go down?
Secretary Paulson. It is not my job to anticipate what the
chairman of the Fed is going to do. Thanks.
Mr. Serrano. Thank you.
IRS PRIVATE DEBT COLLECTION PROGRAM
Mr. Secretary, at this time last year--first of all, you
know of the opposition of many Members of Congress to the IRS,
to private debt collectors. We feel that, as scary as it has
been in the past to see an IRS agent at your door, you would
rather have that than a private company, I believe, getting
paid $0.25 on the dollar to collect. Because, eventually, we
will start hearing more horror stories about tactics used to
collect those debts.
At this time last year, there was talk of expanding the
program to include, at the minimum---- To include ten more
private debt collection companies. Now it seems like you are
going keep the same two. Now does this indicate that the
department is losing confidence in the private debt collection
program or you are just trying to make the chairman of this
committee somewhat happy? Notwithstanding the last----
Secretary Paulson. Mr. Chairman, listen, your views are
well-known; and I would say we are very focused on making this
program work and work whereby protecting taxpayer rights. And
so we have been careful in the implementation. We have, as you
say, two contractors we are working with; and so we are really
focused on enforcing the law and making this program work and
work properly.
Mr. Serrano. So it is basically not that you want to expand
it as you are being careful about how to expand it?
Secretary Paulson. We are maintaining the activities but
being very careful here and implementing it, and these are the
contractors that have measured up, and we are proceeding with
this in I think a responsible, careful way.
RESPONSE OF LENDERS
Mr. Serrano. Thank you.
Going back to the mortgage issue, it would seem to so many
of us that it is in the best interest of the lenders to make
sure that things work out properly. Yet it also appears to us
that the lenders themselves did very little to try to deal with
this problem when it became a problem, that it took you
personally, your agency, your department, government to be
involved. Why did it take them so long to rule? Why did they
not want to move when it was in their best interest? It is not
just the folks who own the home that run the risk of losing it,
but they are losing money, too.
Secretary Paulson. Mr. Chairman, a very good point. I would
say a number of them did and were moving, but what we needed to
do was get the whole industry to come together and let me tell
you why.
Because, if you go back many years ago, a homeowner would
have a mortgage from a bank. If there was a problem, the
homeowner would go to the bank. And if the homeowner was able
to afford to stay in the home, the bank would make some
modification, and they would work something out. Because
foreclosures are very expensive for lenders.
But now, as a result of a securitization process, we have
investors spread all over the world. It is highly complex.
There are various tranches of the same loan with different
interests.
So what it took to get this program up and going was to
have, first of all--to get through a number of technical
issues, technological issues, to get guidance from the SEC on
accounting. So we got that guidance in early January, support
from the investors, legal support. And so what has happened
here, I think that there have been certain lenders, I think,
that would have done something here without the government
getting involved, but the beauty of this is we now have
servicers covering 90 percent of the subprime market. And some
firms have been doing the right things very quickly. Others
have been slower to follow.
But, again, I think there are different levels of
sophistication, different levels of resources. And there were
some huge technical issues, legal issues, accounting issues
that we have worked through; and now I think we are in a
position where we have got this up and going at a time when we
are going to be having the biggest wave of resets coming.
Mr. Serrano. Thank you.
Let me ask you one last question, because we need to finish
up so that you can go resolve all these problems; and we also
have to give up this wonderful room in a little while.
TRAVEL TO CUBA
One of my favorite subjects that we always discuss in
private and public, travel to Cuba. I know that Treasury is
bound by certain White House regulations, orders that are put
in place and law. But within the law and within regulations
there are also decisions made on what travel is allowed and
what travel is not allowed.
And it would seem to many that lately, the last year or so,
travel to Cuba has tightened to the point where even people
like Jose Basulto, a veteran of the Bay of Pigs and founder of
the Brothers to the Rescue and the gentleman who was involved
in the shooting down of the two airplanes by the Cuban
government, even he has done a total turnaround and said the
current type of tightening hurts individual victims more than
it damages the government of Cuba.
Why the feeling by most folks that Treasury has actually
tightened the ability of people to travel to Cuba?
Secretary Paulson. Mr. Chairman, I don't believe at least
the facts I look at bear that out when I look at the huge
number, you know, of over 50,000 licenses that are being
processed for travelers to Cuba. So, again, we clearly are
going to enforce the law until the behavior changes there,
which is odious behavior. But in terms of the way that--there
are licenses being processed all the time for people with
legitimate reasons to go to the country. So, again, I'd be
happy to talk to you about that off-line.
Mr. Serrano. Okay. I would like to do that. Because one
week doesn't pass when our office, either here or in the Bronx,
gets calls from what we would consider legitimate groups--you
know, church groups, people involved with technology,
educators, Little League baseball teams--who are having such a
hard time traveling to Cuba.
Secretary Paulson. There are a lot of church groups going
to Cuba. There have been some groups that have gone and it
looks like they use the church as a bit of a shield to pave the
way for other forms of travel. But you probably don't hear from
all those that are able to get their licenses approved quickly.
But, again, I think the data that I look at looks like we
are not tightening it up, but we are administering an important
program.
Mr. Serrano. Well, that may be true. I am open to that
discussion about not knowing about the other groups. In fact,
Mr. Regula and I off-line, as you would say, were discussing
immigration a moment ago. He says we get a lot of calls about
people who want to bring relatives into the country. We don't
remember a call about somebody who wants to get out of the
country.
Mr. Regula.
FINANCIAL LITERACY PROGRAM
Mr. Regula. How is the financial education program working?
Are you having some degree of success? The fact that so many
people got into financial instruments that they didn't fully
understand the implication of, illustrates the need to improve
financial education for young people.
Secretary Paulson. Oh, you are so right; and we have a
quite active financial literacy program where we outreach to
not just schools but to communities and to workplaces. We
have--our Treasurer, Anna Cabral, who provides great leadership
there. There is much going on, but it is a huge need and will
be a need in this country for a long time, including having
disclosure that is simple and easy to understand, for consumers
to understand, rather than consumer disclosure written by some
lawyer that no one can understand. And so there is--you are
very right to highlight the need for more work there.
BANKRUPTCY COURT REFORM
Mr. Regula. I know that the Senate has kicked around the
proposal that bankruptcy judges could alter the terms of the
contracts. It seems to me it is getting into treacherous ground
when you begin to allow a third party to order what is an
agreed set of conditions on a mortgage or any financial
instrument.
Secretary Paulson. Right. Congressman, I think you are
right.
First of all, a lot of people are focused on this and a lot
of people who are working with the same objective we have,
which is to keep people in their home that have--some of whom
have been abused by being put into financings they don't
understand.
But, as I thought about it, it is a slippery slope. First
of all, property rights are key to our country; and changing a
contract retroactively is something you shouldn't do without an
awful lot of thought. And it can also dry up financing in the
future for those you want to help.
And then, secondly, our focus is on getting to people who
want to stay in their home and we want them to pick up the
phone and call a lender and do a workout, as opposed to slowing
up the process and bogging down the court system. That is how I
have thought about it.
Mr. Serrano. Thank you.
Mr. Hinchey.
THE ECONOMY
Mr. Hinchey. Thank you very much, Mr. Chairman.
I don't mean to press you on this, Mr. Secretary, but your
role as steward of the economy is very important to all of us;
and the situation that we are confronting nationally is getting
worse and worse.
A few moments ago, we talked about the situation of
unemployment; and you rightly said it wasn't nearly as high as
it was in the 1930s.
Secretary Paulson. It is way below--it is 4.9 percent. The
average has been 6 percent. Forget about the '30s. This is
about as good as it gets in terms of unemployment.
Mr. Hinchey. Not really, because what we have seen over the
course of the last few years is a dramatic increase in the
number of people experiencing long-term unemployment, more than
26 weeks. It has gone from a little--just under 1.4 million to
now more than 2.5 million people who are experiencing long-term
unemployment, more than 26 weeks.
As a result of that, they are not included in the
unemployment list. They and other people who are struggling and
looking for jobs, may be working a day or two a week, they are
not included, either. When you bring all of those people in,
the unemployment rate in our country now is about 9 percent.
That is the real unemployment rate, the real number of
unemployed people looking for work.
So I am deeply concerned about this recession that we are
experiencing and what appears to be the way in which important
people who have the responsibility to deal with the economy are
avoiding it.
Let me just read you a couple of in things that showed up
in the newspaper headlines today. One says, productivity growth
slows sharply; and another says, unexpected drop in private
sector jobs reported. We are seeing this kind of thing every
single day. More and more, the experts are telling us that
there is a recession. We had individuals from two major Wall
Street firms, Merrill Lynch and your old company Goldman Sachs,
indicate we are in a recession. Now Warren Buffett echoed that
same statement.
So I just think that we have got to do more. I don't think
it--I think it is very clear. Talk to anybody across the
country. They will say the same thing. They are struggling.
What are we going to do? When are we going to face up to
the fact that the economy is in recession? What are we going to
do it prevent it from getting worse?
Secretary Paulson. Congressman, I don't mean to sound
defensive, but I think this administration and I have been
really focused on the economy, and as soon as we saw it slowing
down in December we began work on a stimulus package.
Whether I turn out to be right when I say I think the
economy is going to grow this year or others that say we are in
a recession are right, we both agree the economy is slowing
down significantly. We agree that's the resurge of the
downside, and we are focused on them.
And, as I said, my focus has been right now sort of a
three-part focus. It is getting the stimulus package out.
Obviously, we don't want to raise taxes, so I would just urge
Members of Congress let us get the AMT patch done early this
year and reduce that uncertainty. But that is one focus.
Another focus is on minimizing the impact of the housing
decline, and we have got a variety of programs, and we really--
I would like to see FHA modernization. You know, the House has
passed it. The Senate has passed it. I would like to get it out
of Congress and get it signed into law.
I would like to see GSE reforms. The GSEs can play their
countercyclical role in housing. I think that is the second
part.
And the third part is I am concerned that the financial
institutions who are so key to keeping our economy going and
needing to lend and make money available to consumers and
businesses that they are able to continue to do that, so I am
pressing them to raise capital.
But those are my big focuses.
Mr. Hinchey. I think they are appropriate focuses, but I
don't think they will do the job that really needs to be done.
You mentioned the idea of no taxes, but the fact of the
matter is that one of the ways in which people have pretended
that the economy is doing well is borrowing and spending,
borrowing more and more and spending more and more. The
national debt now has gotten close to double over the course of
the last 7 years. We are now well above $9 trillion. And so
much money is being spent in ways that border on corruption,
particularly in the situation in Iraq, if you look at the
hundreds of billions of dollars that have been spent there.
IRS PRIVATE DEBT COLLECTION PROGRAM
One of the issues that is much more smaller than that I
would like to ask you as my last question has to do with the
IRS and the way in which the privatization of collection has
been instituted by this administration, in other words,
bringing in private companies to collect money owed to the
Internal Revenue Service in taxes.
The way in which that has been done has been so terribly
ineffective. In fact, the analysis indicates that we have lost
more than $50 million over the course of the last couple of
years by investing in these private companies to go out and
collect taxes. They are spending more than they are taking in.
It just doesn't make any sense. Is there any way that we are
going to deal with this ineffective, inefficient, bordering on
corruption privatization of the responsibilities of our
government?
Secretary Paulson. Well, in terms of the PCA as a private
collection agency--your chairman asked me about that earlier--
that was a program that I inherited. I think as I have looked
at it we have got two contractors, and the money that they are
raising is money we wouldn't get if we didn't have the program,
and so it is more than paying for itself now.
In terms of what happened in the past, as you look at now
that is pretty much a sunk cost; and right now they are
operating efficiently and are raising money that wouldn't be
raised if they weren't there. Thank you.
Mr. Hinchey. Thank you.
Secretary Paulson. Saved by the bell.
Mr. Hinchey. I can hear the tap.
Mr. Serrano. You guys are never through.
Mr. Goode.
Mr. Goode. Just a couple quick questions, Mr. Chairman.
Mr. Hinchey mentioned the debt. How much is the national
debt right now?
Secretary Paulson. It is around $9 trillion.
Mr. Goode. All right. And your deficit in the budget you
submitted is what, $400 billion?
Secretary Paulson. Yeah, it was 162 at the end of last
year, and it will be a bit over $400 billion in the coming year
because--to a large extent because of the stimulus program.
Mr. Goode. The stimulus, is that a--this year, it is 125.
Secretary Paulson. This year, it is 125; next year, 20,
roughly.
Mr. Goode. That will go down, because some of the tax
things will bring money in.
Secretary Paulson. You are correct.
EX POST FACTO LAWS
Mr. Goode. All right. On the issue raised by Mr. Regula,
some States in their constitutions have provisions against ex
post facto laws. Would those provisions--I am not sure whether
this one there is one in the U.S. Constitution or not. Would
those provisions come into play if you empowered the bankruptcy
judge in his example to go in and reform an existing contract?
Secretary Paulson. Congressman, you would have to ask a
very good lawyer or the Justice Department that question. I
just looked at it, and the way I answered the question, I said
I don't like to change contracts retroactively.
Mr. Goode. So you are not going to say yes and you are not
going to say no?
Secretary Paulson. No, I am just going to say----
Mr. Goode. Possibility?
Secretary Paulson. I am not even saying a possibility, I am
just saying someone else is going to answer it. I don't even
need to answer it, because I think it is the wrong policy.
Mr. Goode. Okay, thank you.
That is it, Mr. Chairman.
Mr. Serrano. Wow, I am recommending you for baseball
commissioner.
Secretary Paulson. Thank you. Thank you. But take care of
this steroid scandal before I get there.
Mr. Serrano. Yeah, that is tougher than anything you
inherited here.
Mr. Secretary, we are going to thank you for your
testimony, for spending time with us today, for the work that
you do. We don't always agree on some of the policies, but we
respect the work that you are doing and the fact that you want
the best for our country and economy, and we respect that and
appreciate that.
Secretary Paulson. Well, Mr. Chairman, thank you for all
the support your committee gives Treasury in supporting our
initiatives with the funding. It is very important, and it is
very important to our country.
Mr. Serrano. So, remember, get the Puerto Rico quarter out
as soon as possible, solve the territory's dollars directly,
ease travel to Cuba and make Mr. Hinchey happy. If you do all
of that----
Thank you so much, and the meeting is adjourned.
Secretary Paulson. Thank you.
Thursday, March 6, 2008.
OFFICE OF MANAGEMENT AND BUDGET
WITNESS
HON. JIM NUSSLE, DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET
Chairman Serrano's Opening Statement
Mr. Serrano. The Subcommittee will come to order. Welcome
to this hearing of the Financial Services and General
Government Subcommittee. Today, the Subcommittee will hear from
an old friend and former colleague, director of the Office of
Management and Budget, the Honorable Jim Nussle, my locker
mate. We will explain that later. The locker is still there.
Mr. Nussle. Does this all have to be on the record, Mr.
Chairman?
Mr. Serrano. Well, before the fireworks start, we should
let people know that we actually like each other. Remember, it
is all about the meanness.
Mr. Nussle. It is. It is.
Mr. Serrano. Good morning, Mr. Director. We do welcome you.
This is your first appearance before the Appropriations
Committee as OMB director, and we are pleased to have you.
Today's hearing has a dual purpose. Our Subcommittee has
jurisdiction over OMB's budget, and we will be interested in
your presentation on that budget.
The hearing will also delve into government-wide budget and
management issues at OMB overseas.
With respect to OMB's budget, the Fiscal Year 2009 request
is about $5 million below the enacted Fiscal Year 2008 level,
but that decrease is due to a proposed shift of rent costs from
OMB's budget to the White House Office of Administration. The
actual proposed change from the current year is an increase of
nearly $2 million, or about 2.5 percent. This will allow you to
maintain your current staffing levels. The Subcommittee will
continue to take a close look at your budget proposals, and we
look forward to working with you on that.
I would also like to make a few comments regarding the
bigger budget picture.
The president's Fiscal Year 2009 budget proposes $991.6
billion in nonemergency discretionary spending, according to
the Congressional Budget Office. While this is a substantial
increase over Fiscal Year 2008, the increase is for defense and
other security spending. Nondefense, nonsecurity spending for
the basic operations of government would actually decline by
1.6 percent, even before accounting for inflation, based on CBO
estimates.
This budget continues to squeeze on the programs that
provide essential government services to the people who need
them most. These include programs to protect the environment,
educate our children, provide medical research and health care,
retrain jobless, support law enforcement, revitalize
communities, and offer social services to the most needy. Cuts
to these programs hurt the most disadvantaged of the
population, and they concern me deeply.
The total proposed cut to domestic discretionary programs,
according to nonpartisan Center on Budget and Policy
Priorities, is around $15 billion. As a share of the economy,
nondefense, discretionary programs have declined from 5.2
percent of gross domestic product in 1980 to 3.7 percent today,
and further declines in coming years are anticipated under this
budget.
But talking about these raw numbers does not do justice to
the millions of Americans who are affected by these cuts. Take,
for example, the proposed cuts to the Community Services Block
Grant and the Social Services Block Grant, a combined $1.2
billion cut from the current funding level. This will affect
services for low-income seniors, children, the unemployed, and
disabled. The Social Services Block Grant touches the lives of
nearly 17 million people, most of whom are children.
The Community Services Block Grant supported services to
about 21 percent of people living under poverty in 2005, or
about five million people. There is a significant human cost to
making the kind of cuts to these programs that are envisioned.
It is my hope that, over the next several months, the
Appropriations Committee will play a key part in restoring
balance and fairness to the budget, and while we may not see
eye to eye on all matters, I am hoping to work closely with
Director Nussle on the issues relating to the Subcommittee, and
I want to reiterate what I said before.
We have this wonderful, two-party system, and the times
that you were in the House, we disagreed on many issues. We did
not disagree, however, on being friends, and it is always
exciting to see a former Member come back.
I will say that Mr. Regula will say wonderful things. But
it is always nice to see a former Member and a friend. Mr.
Regula?
Mr. Regula's Opening Statement
Mr. Regula. Well, I think the best thing about the Director
is he comes from a state where they make John Deere tractors,
so that is my likely slight prejudice here.
We are happy to welcome Director Nussle. It must be kind of
a new experience because you chaired the Budget Committee, and
you proposed a budget, which we kind of tended to ignore in the
appropriations process. Now you have got a little more clout as
Director than you did as chairman of the Budget Committee.
I really think that we do not realize the important role
that OMB plays in our governmental structure, because in effect
your budget sets forth the priorities of the administration,
which is a partner with the Congress in ultimately setting
national priorities and the way in which we commit our
resources and priorities as a nation. I have often said that
Appropriations is a great committee because policy follows the
money, and you, as director of OMB, at least, outlined where
the administration wants to go, and we, in turn, have to react
as appropriators on behalf of the people that we represent, and
we have different sets of priorities, depending on the makeup
of our districts.
This is a wonderful system we live in. I said to somebody
the other day, and I was eight years in the state legislature
and 36 years here, and if somebody gave me a clean sheet of
paper and said, ``Design a governmental system,'' I would not
change a whole lot. I think the genius of the Founding Fathers
is remarkable in how they put together the Constitution. Well,
so much for my sermon.
I notice you want to eliminate the deficit by 2012. I have
been here 36 years, and every administration wants to eliminate
the deficit. It is a standard refrain, and Members do the same
thing. We go out and give speeches about how terrible it is
that we do not balance the budget.
I am pleased that you believe that the economy will not
fall into recession. Yesterday, I was with the Secretary of
Treasury, who takes the same position that we are not that bad
off. I notice, out in my area, the traffic is as heavy as it
has ever been, and we are an area tied to heavy industry. So if
we had this huge recession, there would not be a lot of people
on the road, but they are out there, going to the marketplace
or wherever. I do not know if you have the same experience up
your way, but there are a lot of cars on the road.
Mr. Serrano. Up my way, there are always a lot of people on
the road.
Mr. Regula. Well, I think that perhaps things were going a
little too much boom town, and we needed to take a deep breath.
I noticed that you take a little whack at congressional
earmarks, which is a very popular topic at the moment, but it
is less than one percent of the overall budget. My feeling is
that transparency is the way. I have never had an earmark that
I would not be happy to have an interview by the press as to
what happened to it because, in many cases, the local people
call them the ``Good Housekeeping Seal of Approval.'' I have
one university that got a million dollars, raised five, and has
one of the top science classrooms in our area in a small
school.
So there can be positive things, and I noticed that, while
you do not call it ``earmarks,'' you have put in a number of
things like West Wing construction projects, new port-of-entry
facilities, federal courthouse renovations, science labs,
veterans' hospitals, dams, and levees. Now, they are a form of
earmark, maybe not classified as such.
One last comment: You devote about the same amount of space
to earmarks in your testimony as you do to the funding requests
that involve the mandatories. There is a world of difference. I
think the mandatories are going to be an enormous challenge
down the road, when the baby boomers hit. We had testimony from
the Office of Personnel Management the other day that, in 10
years, 60 percent of the federal workforce will retire, and
probably the same thing applies to the private sector. That is
going to put a huge challenge on the mandatories, and I think
perhaps it deserves a little more attention than earmarks, in
terms of your long-term thinking.
So I will have a few questions, but I think OMB, the role
it has in government is not given the visibility it should have
because you set, at OMB, the priorities for the administration,
which is half of this equation, and that is a pretty important
challenge.
Mr. Serrano. Thank you, Mr. Regula.
Let me, before you begin your testimony, Mr. Director, just
make a quick observation. Mr. Regula did bring up the issue of
earmarks, and that is an issue that is not going to go away.
As we have discussed on many occasions, you and I, on a
very friendly basis, I am in a unique situation. I represent
the poorest congressional district in our country, which is
located within the richest city on earth, which is within
walking distance of the wealthiest congressional district in
the United States: the south Bronx to the east side of
Manhattan.
Earmarks, to me, is simply a way to tell a federal agency
that they should pay attention to some of the needs of my
district. Traditionally, it did not happen. The people did not
vote. The people were poorer. Therefore, as part of that
behavior, they did not vote. They were not a political force.
Now, we have even more folks who are not citizens, whereas,
before, it was just folks that did not get involved.
So I am a big believer that the issue is, as Mr. Regula has
said, to make sure that that system is tightened up properly so
that the waste factor does not become the overriding factor.
But the idea that only an agency head knows how to spend money
in any congressional district is really absurd to me.
Lastly, no one ever really complains about an agency head
sending grants to a district that may not be working, but
everybody complains about a Member of Congress sending an
earmark to a district if it runs into any kinds of problems, so
just that point.
My last point to you is there are 10 subcommittee hearings
going on right now on appropriations, so do not look at the
attendance here today as a sign of how we feel about you or
OMB. Everybody is running on to different hearings.
Thank you so much. We are glad to hear your testimony. All
of your testimony, as you know, will go into the record. We
hope you stay within five minutes so that we can ask you 1,375
questions.
Director Nussle's Testimony
Mr. Nussle. I am happy to, Mr. Chairman, and I am probably
the least that you have to explain to when it comes to being
pulled in many directions here on the Hill. I am aware of that,
and I appreciate it.
First of all, thank you. It is nice to be back. It is a
real honor to be before you, as a friend and a former colleague
and still a colleague, as well as my friend, Ralph Regula, who
has been chair, as well as a colleague of mine for many years.
Just while I have the microphone and the opportunity, let me
thank you both for your service, but particularly you, Ralph,
because you made a decision to retire, and that is a tough
decision, but you have served your communities so well, and you
have been a good friend and a great colleague, so thank you for
your service.
I guess, a couple of things. First, you are right. On the
testimony, because you are before this Subcommittee, the
testimony is focused on appropriations, on OMB and on
appropriations, and those things that would be important, I
thought, for the Appropriations Committee to be mindful of, or
that I was hoping you would be mindful of.
But I take it very seriously your admonition, and I have,
in my testimony, in a more macro way to the Budget Committees,
as well as speeches that I have given, as well as my tenure
here in the Congress, to quickly point out that now 62 percent
of the budget is on automatic pilot and has nothing to do with
the appropriations process, and that is where most of the big
bucks and the highest rates of growth and the most
uncontrollable, unsustainable spending occurs.
So all I can say is, ``amen, you are right.'' We,
unfortunately, get wrapped around the axle over, you are right,
one percent, whether it is earmarks. We get wrapped around the
axle of discretionary spending very often. That does not mean
that those dollars are not important, so I am not here to
suggest that we do not care about the nickels and the dimes
because they do add up to dollars, but you are correct, and it
has always been something that I thought I, at least, had some
standing. Even though there is a natural tension between Budget
Committees and Appropriation Committees, I always felt I had,
at least, some standing with your chairs and ranking members
because I did take on the issue of mandatory spending.
To focus first on what I wanted to make sure I touched on,
because this is the reason for the hearing, is to talk a little
bit about the funding request for OMB. Our request this year,
and the Chairman rightfully stated it, is $72.8 million, and if
you compare that, because we now are excluding rent that goes
over to GSA through the Office of Administration, if you
compare that to recent amounts, we are asking for a 2.60
percent increase. That is a requested increase in order to deal
with and fund 489 staff people and FTEs. The 489 for 2009 is a
slight increase to cover GSA rental costs.
The requested funding also includes budget savings,
including reductions and information technology support and
transfer of GSA rent to OA. For the last seven years, we
believe that OMB has submitted a disciplined budget. It is a
small agency. It is an important agency, as you have suggested,
or, at least, I think it is. I think you do, too. We have got
some great people who work there. But over the seven years of
those requests, our request has only grown by 13 percent. We
believe that is a very disciplined approach toward management
of the agency and fiscal management of the agency.
It is a great team, and there is a lot of cross-
pollination, I am told, both from the Appropriations Committee
and OMB, and a few alumni are here in the room today.
It is a great team. They work with professionalism and
dedication. They do not work in a partisan way. They work for
the public good and for the public service, and I am proud of
the job that they do.
Before I began as Director, I had a healthy respect for
them, but I can tell you, having had a chance to get to know
them on that kind of professional basis, it has only grown.
I would like to, if I can, just touch on a couple of things
with regard to the President's Budget overall, and then I am
pleased to take your questions and comments.
First of all, the President asked me to do five things when
he asked me to write the budget. He wanted me to make sure that
we addressed the initial economic concerns that the country was
facing, and we have done that in a bipartisan way, and that is
included in the budget. The fiscal stimulus and growth package
that we have already passed was included in the budget as we
prepared that, at $150 billion, one percent of GDP, but,
nonetheless, we included that in the projections.
Second, we wanted to ensure sustained prosperity, which the
President believes is not only important but is required if, in
fact, we are going to tackle so many challenges that are laid
before us. Economic growth is very important, and he believes
that is best done by keeping taxes low and by making sure that
the tax relief is permanent and that the tax code is
predictable. So tax relief continues in this budget.
He wanted to make sure we kept the country safe. That was
obviously a very high priority because, as the Chairman knows,
if the country is not safe, the rest of this conversation does
not matter. It is so important, both from the standpoint of
national security and homeland security, that that is
accomplished.
He wanted to get the balance, as the Ranking Member said,
by 2012. I view that not as the destination, however, which
brings me to my last point, and that is he also wanted us to
tackle the long-term spending challenges, which are, what I
would suggest, out-of-control, mandatory, fiscal obligations
that we are creating and continue to create, and we begin to
address that in this budget, too.
So, if I may, let me just cover a couple of things and do
so. We believe spending continues to be the challenge, and we
have done a number of things here in order to address that.
Revenue, to our mind, is not the challenge. Even when we cut
taxes, more revenue came into the federal government. It is our
view that getting more revenue to come, except through economic
growth, is really not what we ought to be working on.
We ought to be working on the spending challenge, and we
see it, certainly, as two parts.
The first part is on the discretionary side. We have sent
up another package of programs, totaling about $18 billion,
that we believe either should be eliminated or significantly
reduced, and I commend the Appropriations Committee for looking
through that list very seriously and, over the years, has taken
that list very seriously and has reduced or eliminated programs
from that list.
I can understand how there will be some who say, ``That
list is getting too long,'' or ``something is appearing on the
list that we have not approached in the past. Why is it still
on the list?'' But I will tell you that I think we have worked
together in a good fashion to cull through many of those
programs and try and either improve them or eliminate them
where they are duplicative, or they are not meeting the
objectives.
As far as earmarks, having been a Member of Congress and
understanding that process, I would again agree with you both
that transparency, I think, is probably the biggest issue that
concerns the Administration and the American people. Certainly,
that is why the President wanted them to be reduced in half and
to be put in bill text, as opposed to having report language
earmarks, which are often difficult for the Administration to
define or understand without more follow up from the Committee
or from staff or, for that matter, earmarks that are phoned in
that are done later on in some fashion.
Having more transparency in this process, as the Ranking
Member has suggested, for those that we are proud and for those
that you are proud of, there should not be a problem, and we
are not suggesting that the Article 1 responsibility of
determining that spending is wrong at all. It is exactly the
way it should go, but it should be done in the open, and the
Administration, where it has designated funding, has done so in
the open, and those dollars and requests are put in the budget
a year in advance.
We put the justifications with them. We assume that you are
going the work through them and not take them all, eliminate
some, complain about others. But they are our requests, and
most of them, if not all, are done in a competitive way that,
we believe, is a better way of approaching it than in the past.
Finally, on the mandatory spending, as I said, 62 percent
now is on autopilot, and, in the next 35 years alone, there
will be no money left for discretionary spending, given the
rate of growth in revenues. There just will not be anything for
national defense, homeland security, any of the other
priorities that are within discretionary spending with the
automatic spending trends that we find.
So the President has said, Look, let us try and deal with
this long-term problem in bite-sized pieces, and we look back
at some of the ways this has been done before.
In 1997, in a bipartisan way, the Administration and the
Congress, Clinton and a Republican Congress, in this instance,
worked together on a package that is actually larger than the
package that we are putting up. The package that we are putting
up is a smaller package than the one we were able to agree on
in 1997, where we dipped the growth curve of mandatory spending
for one of the first times, and we propose that again here.
We are saying, instead of, for instance, Medicare growing
at 7.2 percent, let us allow it to grow. It should grow. There
is natural inflation that is in there, but it should grow at
five percent, not at 7.2 percent, and we find savings in that
as a way of accomplishing a bending of the growth curve and
dealing with one-third of the mandatory challenge that is out
there. It does not address all of it. It does not solve the
problem, but, as true in any situation, you have got to take
this in steps.
We know that. Congress, I think, recognizes that as well.
Hopefully, we are not going to come to a situation where it has
to be dealt with all in one big bite. So we are saying, let us
take it in bite-sized pieces. We are proposing that first bite
to be one-third of the problem, and we do put that in there,
and we are asking Congress to consider it.
But, as this Committee, as the Appropriations Committee,
well knows, the fights, unfortunately, will be about the
discretionary package, and it appears thus far, at least from
what we have seen from the Budget Committees, that they will
not consider mandatory savings, and I think that is a missed
opportunity, given the fact that we have this looming challenge
and that if we do not begin to address it in bite-sized pieces,
it will come up to bite us.
So that is what I wanted to come and present to you. I am
pleased to try and answer your questions, and if you stump me
in an area, I have got some good people from OMB behind me who
might have the answer, and if we cannot do it, we will get it
to you in writing. Mr. Chairman, thank you.
[The information follows:]
Mr. Serrano. Thank you so much. I know you have folks from
OMB behind you, and we have folks formerly from OMB all around
us.
Mr. Nussle. I know. So I cannot hide. I realize that.
Mr. Serrano. In fact, I just came from a hearing of the
Homeland Security Subcommittee, and when I said that I was
coming here to spend time with you, half of the staff said,
``We were there also.''
Before I get to my first question, which has to do with
that subject, let me just ask you a question, based on what you
have said.
MEDICARE
So Medicare, for instance, is naturally going to grow to
seven percent, and the Administration would want to see a
growth of five percent. Is that understood to mean that the
natural growth would cover people in need, and the reduced
growth would then leave out some people who are in need? When
we deal with numbers, we are also dealing with people, so how
do we cut in those areas where we know we can cut and not hurt
an individual's need but not cut in the areas where the person
or a group of people will be served?
Mr. Nussle. We have tried to go through and take proposals
from MEDPAC, which provides the proposals and alternatives, for
ways that we can reform these programs, Medicare and Medicaid,
and we have asked them, you know, what is the best way to
approach this? We have tried to take proposals that they have
come up with that go toward efficiencies, improving the system,
and saving money, as opposed to, as you say, cutting into
beneficiaries.
So, yes, we have tried, in those instances, to work on
program changes for efficiencies and not to, as some might say,
go after beneficiaries. In fact, we are trying to improve the
program constantly. That is what Part D was for. That is what
Medicare Advantage was for, was to try and expand the program
in ways that can better serve the beneficiaries and provide
them with access to quality health care.
Mr. Serrano. I think that any time any administration--this
one, the next one, a Democratic or Republican administration--
talks about reductions, if they mean, or they are interpreted
to mean, that they will leave people out, beneficiaries out,
then you are going to run into that trouble. You know that, and
that is what we have to deal with here.
OMB RECRUITMENT AND RETENTION
But you did mention folks from OMB. That is my first
question, which is, last year, Director Portman told this
Committee that OMB had a very aggressive recruitment program,
but we also know that OMB loses a lot of very talented people
to go elsewhere. How do you keep doing the job properly? How
does the agency do what it is supposed to do when you are
losing people, and what is the rate of turnover?
Mr. Nussle. We were just talking about this on the way over
because we are in the middle of a recruiting period right now.
We have been in a number of schools. We are reaching out to
schools, in particular, where we have alumni that are at OMB,
and we actually use them, ask them to go and talk to the people
in their colleges and universities in order to try to
accomplish that. We have already covered 27 schools during
February, as an example, to try and build on that recruitment.
But you are right, and we talked about this in your office
privately as well, that there is this concern, not only about
recruitment but also retention. Once you get some good folks,
you want to make sure you hold onto them because it is tough to
train them. Obviously, we are talking about public service, and
this is not the highest-paid jobs in the world on either side
of Pennsylvania Avenue, but I think some recognition of that is
something that we have tried to build into the budget, as well
as recognizing that there are ways within the agency to improve
the work.
One of the biggest complaints I had when I got in was about
the trade-off. We do surveys within OMB, and they said it was
one of the best places in the federal government to work but
some of the heaviest workload. So we have been trying to work
on workload. It is not just a matter of hiring more people, but
it is also making sure that the work is distributed
appropriately.
So we are working on a number of areas, but, specifically
to recruitment, we have been in 27 schools in February, and we
hope that that, as well as a number of other things, pays off.
Mr. Serrano. You know, speaking on that issue, I have often
said that when a person becomes chairman of a committee in
Congress, you do X amount of what needs to be done by any
chairman. And X amount is what you bring to it, and so part of
my rallying cry is always to remind folks that we have American
territories that are not states. So I hope that the 27 schools
could include some schools in the territories.
In fact, I wish there was a way that OMB could help us in
putting forth a notice throughout the federal government that
when it comes to recruiting from schools, there are territories
that prepare fine English-speaking folks. In fact, NASA started
recruiting--we do not know how--20 years ago or so, at the
University of Puerto Rico at Mayaguez campus, Mayaguez being
the hometown--I will spell that later--my hometown in Puerto
Rico. Now whenever NASA sends up a flight, you would be
surprised at the number of people who graduated from that
university who work at NASA.
So one way to score great points with this chairman is to
either let me know that within the 27, there are some in the
territories, and, if not, they will increase it to 35 or
whatever.
Mr. Nussle. I will confess to you, Mr. Chairman, I cannot
make you happy today, but I already have one volunteer who
wants to go to Puerto Rico and do some recruiting, and I may
go, too.
CUTS TO SERVICES
Mr. Serrano. Good job. Now, let me ask you a question. The
President's Budget request would make deep cuts in inflation-
adjusted, domestic discretionary spending. As I said in my
opening statement, this affects needed services for many
Americans, including low-income seniors, children, the
unemployed, and the disabled.
How can a budget that makes deep cuts to the domestic
discretionary side of the budget provide essential services to
those Americans who are most in need, especially at a time
when, if indeed this economy is where many of us feel it is
already, and where it may head to, some of these folks will be
even hit harder? Is this the time to make cuts there, which
will affect them?
Mr. Nussle. Well, that is always a challenge, and it is
particularly a challenge, given the fact that now 62 percent of
our choices are basically off the table for discussion. We are
only working with a certain pot of money that we can work from.
So you are right. Whenever there is a budget document that
is put together, first and foremost, those choices typically
come from discretionary spending. We have tried to balance
that, but recognizing what Congress might be willing to do,
that balance, most likely, will not occur this year.
Second, we also do a job to try and rate all of the
programs and to do it as objectively as possible so that we can
see whether or not the programs are actually meeting the goals
that you and I and others have intended for the programs to
meet and to address the needs of the people that they were
intended to meet.
Some do an excellent job, some are duplicative, some need
to be improved, and some need to be eliminated. So we have gone
through and tried to rate them in that way and make choices
between some that are doing a good job and some that are not
doing as good a job or need to be reformed. So you will see
those in the budget as well.
Then, finally, and I am not going to pretend I know your
community. I know the communities that I served, and I can tell
you that, at least in my instance, most of those communities
were not waiting for the federal government, or most of the
people there were not waiting for the federal government, in a
program or in an earmark, in order to solve their problems.
Most Americans know that the problems are going to be
solved around their kitchen table, around their neighborhood,
around their community, first and foremost, before anybody from
Washington is actually going to be able to help them, and I
think so much of what we try and do in this is recognize that
and to make sure that they have the resources to accomplish
those solutions.
So that is the direction that we have when try and put
together a budget.
Mr. Serrano. Well, we do not disagree on that comment. I am
glad to say, and I am impressed, that you have not changed your
line of presentation for a long time. We have discussed this in
the past. But there are services that, whether people are
waiting for them or not, do come from Washington: educational
services, services to the hospital, dollars that come to their
local hospital, dollars that come for programs in their
community.
They may not be waiting for them, but it is part of what
happens to them on a daily basis, whether they mention it or
not, called to their attention or not, it is there. When we cut
that, we run into a problem.
VETO THREATS
One last question before I turn to Mr. Regula, as a follow
up. You wrote recently, I think, last week, to the Chairman and
Ranking Member of the House Budget Committee, saying that the
President would veto any appropriations bill that exceeds his
request. That is fine. We understand that statement. We went
through that last year. That is why we had one large bill in
December.
But how could you be offering veto threats if you have not
even seen a plan for what we hope to present to you? Is that
kind of a declaration of some sort of government war before we
even begin? We are still holding hearings here. I have no clue
what this bill will look like, and you are already telling me
that if it exceeds what the President asked for, not knowing
where the amount may be that exceeds what he asked for, and you
are listening to the Chairman, who, last year, started off
under the President's request, did not get me a gold star or a
nickname. I do not want a nickname. How do we offer so early
veto threats?
Mr. Nussle. I think the challenge here, as the Chairman is
well aware, is that we are, unfortunately, not just talking
about the 302[b] allocations to the subcommittees and where you
will be writing your bills; it was a signal that suggests that,
at least from the discretionary top line, the President has set
a number, realizing that Congress will have puts and takes,
will add and subtract, will decide within its committees how to
distribute those resources.
But we wanted to send a signal early on that we thought
that it was a reasonable amount that the President was
requesting and that that should be the number that we all work
from because if we do not work from that number, if we do not
start with that top-line number in mind, then we know from the
beginning, as soon as those allocations are given, that there
is going to be a fight, that there is going to be a problem.
Last year, that signal, in my view, was not given clear
enough maybe as early as it could have been, and so we wanted
to give that signal early this year, and we got a signal back
from the leadership that said, maybe we will wait for the next
administration.
So I think it sets up the discussion early on, and,
hopefully, it gives some guidance, as you are looking through
it, about what the Administration is interested in working
together on.
Mr. Serrano. Well, as I turn to Mr. Regula, it is nice to
see that the President has become a fiscal conservative in the
last year. Mr. Regula.
Mr. Regula. That was a gratuitous comment.
Mr. Serrano. It was off the record. It was just between you
and I.
BUDGET PRIORITIZATION
Mr. Regula. Right. Following up on that, how do you
establish your priorities? Do you sit down and consult with
Josh Bolten or the President? Because, without any question,
the document you present here does clearly establish the
priorities, as they are viewed by the Administration, for the
expenditure of all of the discretionary money, and, as such,
they obviously influence the way in which we have programmatic
direction of the federal government. How do you go about this?
Mr. Nussle. It is an amazing process, I would say to you,
having not been part of it until this year. It starts very
early in the year. Usually, probably in the months coming up
now, the agencies and the departments will begin formulating
their requests, and it starts in that process, and then it goes
through a review process at OMB where we include not only the
President's advisers but also recommendations from those
department heads and agency heads and folks, and we go through
a very rigorous process of trade-offs, of what is working and
what is not, asking, hopefully, some very tough questions about
the programs.
We do not just look at how much money is being spent. We
look at whether the program is working and how effective it is.
Certainly, everyone, including the President's chief of staff
and former OMB director, as well as the President, is consulted
for their views. But it starts with the President. That is why
I outlined the goals that he wanted me to consider as I was
trying to put a budget together for him.
So it starts with him, at the principal level. It flows
through a very complicated process back up to the President for
final recommendation and final approval, and it is a
fascinating process to go through. But there are many trade-
offs within there as you go through it, obviously.
DISTRICT OF COLUMBIA
Mr. Regula. I was pleased to see that you increased the
federal payment to the District of Columbia. I think Mayor
Fenty and Chancellor Rhee are making a real effort to deal with
the challenges of the education program in D.C., and I think
that, by putting the amount you did in the budget on that, it
gives a stamp of approval to their effort, and it certainly is
well overdue for the city to become what President Reagan
called the ``shining city on the hill.'' We need to address the
education challenges.
Mr. Nussle. Well, we see this as a package deal, too, and
one that was worked on--it is very delicate--in order for
improvement, not only in the public schools but education in
general in D.C., so we hope that the Appropriations Committee
will take a look at that.
Mr. Regula. I hope so, too. Also, I had put language in on
HIV/AIDS, which the Subcommittee did, and report language
asking the Administration to help the city address this
epidemic, and it is an epidemic in this city. I have been
disappointed that you have not acted on the report language.
Any reason? What do you propose to do in the future?
Mr. Nussle. As far as that goes, I certainly would take
that into consideration and your concerns in mind at this point
in time, but you are right. There is some controversy
surrounding the proposals. We understand that and the policy,
but I certainly would keep that concern in mind.
Mr. Regula. Well, it is a real challenge in this city----
Mr. Nussle. Yes.
Mr. Regula [continuing]. Because the incidence of cases is
very high, and it has to be part of what you are trying to do
with education and so on to make this a better place for
everybody.
TREASURY DEPARTMENT FUNDING IN STIMULUS BILL
I noticed that you put $250 million to the Treasury
Department in the stimulus bill that was done at kind of the
last minute, and it was a form of administration earmark to
carry out the stimulus bill. It seemed to me that maybe that
should have had some scrutiny before it was made part of the
package.
Mr. Nussle. Did you have an opportunity to ask Secretary of
Treasury Paulson about that? I believe, if I am not mistaken,
that is the amount to actually do the checks----
Mr. Regula. I know.
Mr. Nussle [continuing]. Because it is outside the normal
process for the IRS. I may be mistaken about it, but I think
that is what it was.
Mr. Regula. I think that is right. It was just an arbitrary
figure that went in at the last minute, without any scrutiny on
the part of the Congress.
Mr. Nussle. This may not be enough scrutiny for your
liking, but we did scrutinize it at OMB before we approved it.
Mr. Regula. So you thought it was a legitimate figure.
Mr. Nussle. Yes, we did. In order to accomplish it and get
the checks out as quickly as possible, which, we believe, will
be the first couple of weeks of May. We thought it was
important, you know, to get those out the door, if, in fact,
they were going to have the stimulative effect that was
required.
[Discussion held off the record.]
Mr. Serrano. Before we leave, we have a few minutes we can
take.
Mr. Visclosky. Mr. Chairman, thank you, and I appreciate
your courtesy, Mr. Regula's, and, particularly, Mr. Cramer's
for coming in late. Mr. Nussle, very good to see you.
LAKE COUNTY HIDTA
I have a serious concern and dispute with the Office of
National Drug Control Policy, and, given your testimony today,
you are the closest administration official I can get on the
record, so I appreciate your attendance.
Lake County, Indiana, was declared a HIDTA in 1997, High-
Intensity Drug Trafficking Area.
In 2006, $3,022,000 were appropriated. I would point out
that, in August of last year, ONDCP approached me in my office
and suggested that there are problems with the HIDTA in Lake
County, Indiana, from their perspective.
I would point out for the record that, subsequent to last
August, there was a change in the chairmanship of the executive
board, and you now have an official from the Federal Bureau of
Investigation who chairs that HIDTA. There was a change at the
request by the agency of the fiduciary.
There were multiple changes in the budget process and also
in elimination of what was declared unnecessary spending, all
at the request of the Administration.
The HIDTA is also in the process of physically moving their
operation to another location, again, at the request of the
Administration.
When the Administration came in in August, they suggested
that, given their concerns, they wanted to move the
jurisdiction and the money and the resources to the Chicago
HIDTA. I suggested that we were willing to work with the
administration to make the necessary changes and, again, would
point out for the record that it is now headed by someone from
the Federal Bureau of Investigation.
The Administration's budget this year cut the Lake County
HIDTA by $1,272,000. I find it very interesting that the
Chicago HIDTA was increased by $1,200,000. So, from my
perspective, the administration, in a very cavalier fashion,
did exactly what they threatened to do in August, despite what
I think was significant cooperation in changes and reforms of
the HIDTA.
In reading why there was a decrease, there was an
indication of poor performance. I have acknowledged there that
the changes were apparently necessary and were made subsequent
to last August. There is a decrease due to small geographical
area. I think that is subject to definition. Lake County is the
size it is, and I cannot change that.
But, finally, I am particularly disturbed that the
justification was there is a diminished threat compared to
other areas of the country. The largest city in Lake County,
Indiana, is Gary, Indiana. In 2006, there were 55 homicides in
Gary. In 2007, as of December 18th, there were 71. Homicides in
Gary, Indiana, went up 40 percent last year. It was, on a per
capita basis for communities in excess of 100,000, declared the
murder capital of the United States of America. The county in
which Lake County resides had their homicide rate increase by
32 percent.
So I hate to see what the threats in some other communities
are if that is a diminishment of the problem that we are
facing. I certainly would ask for your intervention and
investigation of this matter because, again, people went to
great pains and much cooperation to make the necessary changes,
and, from my perspective, most importantly, looking ahead to
the people I represent, there is a huge threat, given the fact
that homicides increased by 40 percent in Gary.
With that, Mr. Chairman, I just wanted to pour my heart out
and suggest that I am very unhappy with that decision.
Mr. Nussle. May I get back to you? This is not something I
have----
Mr. Visclosky. No. I understand that.
Mr. Nussle [continuing]. Personal familiarity with, so let
me do some digging and checking and get you a response rather
than trying to do it off the cuff.
Mr. Visclosky. I would appreciate that very much.
Mr. Serrano. We have just a few minutes to vote, so we
shall break right now. When we come back, Mr. Cramer will be
our first speaker.
[Whereupon, at 10:50 a.m., a recess was taken.]
Mr. Serrano. I do not know, Mr. Director, if you saw those
power rankings that came out recently, these things called
``power rankings'' on Members of Congress. Mr. Cramer was way
up there.
Mr. Cramer. I was?
Mr. Serrano. You were certainly ahead of me. You were in
the top 20 or something, yes.
Mr. Cramer. Really?
Mr. Serrano. Right after Pelosi. It is incredible.
Mr. Cramer. Twenty-six.
Mr. Serrano. Twenty-six out of 435 is not bad. Mr. Cramer.
Mr. Cramer. I am sure that makes you tremble there.
Jim Nussle, I said to you before I left, welcome back.
FARM BILL
We know you, and we are glad you are here today, and you
have got a tough job under tough circumstances. I wanted to
talk to you about the Farm Bill, and you live and breathe farm
issues just like we live and breathe farm issues, kind of where
we are and why we are where we are.
With talks ongoing, the Administration recently released
the parameters for a successful Farm Bill. It stated that a
Farm Bill final product must not include any tax increases.
What I wanted to know is what would be acceptable as
offsets to the Administration? I understand we need to get $10
billion above the baseline that we now have. What do you see
happening, or can you look down the road, with a March 15th
expiration date or deadline for the bill?
Mr. Nussle. At this point in time, it is difficult to
project what will happen because we are closing in on a
deadline, and just the physical production of a Farm Bill
during the next basically week before recess is going to be
pretty difficult to do.
As far as what is acceptable, we have been--when I say
``we,'' I say the Administration, the royal ``we''--have been
in many conversations and negotiations and meetings about what
that might entail. We have provided lists to USDA, as far as
different things that might be acceptable. We draw from the
budget, obviously, as a starting point of spending offsets that
we think might be acceptable, that we have floated, if you
will, as part of it.
But I think the offsets are probably just one of a number
of challenges. There is separation still on how much money the
Farm Bill should spend. There is separation still on how much
reform could be entailed in the bill. So I think there is still
a lot of separation that only coming to some agreement on
offsets probably would not necessarily be the final resolution
of.
I have been in a couple of the meetings. I have not been in
all of them. Most of this is being led by our new Secretary of
Agriculture and his deputy, and I have been invited to a few of
the meetings but have not participated in all of them.
Mr. Cramer. All right. Well, thank you for that insight,
and, Mr. Chairman, that is what I wanted to bring up. Thank
you.
Mr. Serrano. Thank you. Boy, people are treating you well
today.
Mr. Nussle. Bud and I came in----
Mr. Cramer. We were classmates.
Mr. Serrano. We were locker mates.
Mr. Nussle. It is old home week. Does that not mean
anything? I have thought of a nickname, Mr. Chairman, but I
will have to share it with you later.
Mr. Serrano. Ahead. I think ``commandate'' would be a
little too much for the President, do you not think?
OMB INPUT IN BUDGET
Let me ask you a question a little off the path here.
Obviously, your office and you, personally, get involved in all
of the fiscal issues of presenting the budget, but the budget
also carries language issues, visions that the administration
has, and I single out, for instance, this whole issue with the
needle exchange program in Washington, D.C., something that I
worked hard to get rid of--the ban on using local funds.
Now it appears in the budget again. Does your office get
involved in that kind of thing, or does OMB get involved in
that kind of thing, at all, or is that other folks' input into
the budget?
Mr. Nussle. Well, there are many other folks who have input
into the budget. We have policy councils, as you know, that
help make determinations of what should be and what should not
be the official administration policy, and, obviously, the
President has the final decision of what those policies should
be. But there is an entirely separate, from just the budgetary
aspect, an entirely separate policy process that different
policy counsels control within the Administration.
Mr. Serrano. That particular issue is one that is going to
stir up some issues again around here, some feelings, because
it was believed, strongly by many Members, that D.C. should be
able to spend its own money on this particular program. We were
able to accomplish this. They are very happy. They allocated
dollars to it. They have a serious problem with the HIV virus
issues in the city, in the District, and we would just hope
that the Administration would have left that alone.
FEDERAL CONTRACTS
On this whole issue of the value of federal contracts,
which have increased significantly during the Bush
Administration to around $400 billion, about 40 cents of every
discretionary dollar is going into contracts. At the same time,
the Administration has pressed for reduction in the federal
workforce, with many responsibilities being shifted away from
federal employees and toward contractors.
What is most troubling, however, is the increase in the
amount of noncompetitive contracting under this Administration.
Noncompetitive contracting doubled, to about $145 billion in
2005.
So the question is, how does this Administration justify
the enormous expansion of contracting and, in particular,
noncompetitive contracting, over the past eight years? Do you
think the federal government relies too much on contractors,
and how should we define inherently governmental functions?
Mr. Nussle. First, on the contracting in general, we have
gone through a process. I have not been here for much of it,
but, as I understand it, a process of reviewing those contracts
with an eye toward making them competitive in those instances
where a sole-source contract is not either appropriate, or
there are obviously more entities that could compete for them.
So there has been a process undergoing that has attempted
to try and improve on that. Some very good improvements have
been made. The amount of dollars, however, is probably not the
only comparison. When you say it has doubled in 2005, doubling
from when, that is?
Mr. Serrano. From 2000 and 2001.
Mr. Nussle. Okay. I mean, I think there is some comparison
here that is important. We have tried to scrutinize those sole-
source contracts in a new way to ensure that those situations
where there are sole-source contracts are only in those
situations where there is no competition available, that there
is usually one entity that does the kind of work that we are
looking for.
Within the agencies themselves, that kind of competitive
process is one that, frankly, when you allow the workforce to
compete for a contract that is put out for bid, we see that it
not only improves the work that the agencies are doing in those
entities that have been put out for bid, but, in many
instances, the government workers themselves are the ones who
win the contract.
So we think this has improved the system. More improvements
certainly can be made. I think all of those contracts should be
scrutinized. That is why we have gone through that process. We
believe some improvements have been made in this area. It is
not just a matter of looking at how much money is being spent
in these areas as the only comparison.
Mr. Serrano. One of the issues that comes up, Mr. Director,
is the fact that, under contracting, you will have, or already
have, situations where a person under a contract is working in
the same workplace, sitting next to a person who is a federal
employee covered, we understand, under different rules at
times, ethics rules, and so on. One is covered by the people
they work for, and one is covered by the rules that you and I
are covered by. Does that not create a problem, and is that not
a dangerous situation that you could have in the workplace?
Mr. Nussle. It may. It may be more circumstantial. Right
off the cuff, this is not an issues that has been brought to my
attention. I appreciate you doing that. So, I guess what I
would like to do is explore those instances where you feel it
would be a problem.
My gut reaction is that there may be some reason why those
differences are there and that those differences may very well
be appropriate, but you are obviously singling out some areas
where they may not be.
I would be happy to work with you and investigate that a
little bit further.
Mr. Serrano. We would like you to look at that and see if
there is a way of dealing with that.
Let me go to Mr. Regula now.
Mr. Regula. I have no questions. I am okay.
Mr. Serrano. Mr. Hinchey.
Mr. Hinchey. Thank you, Mr. Chairman. Mr. Director, it is
nice to see you.
Mr. Nussle. Good to see you.
FOOD SAFETY AND INSPECTION SERVICE
Mr. Hinchey. It is reminiscent of old times. I wanted to
ask you a question about the Agriculture Department.
Mr. Nussle. Yes.
Mr. Hinchey. We were just at a hearing with the Food Safety
and Inspection Services, and there is a very good man, a man by
the name of Raymond, I think, who is very good. He heads that
program up, and I think he does a very good job.
In the context of the discussion with him, we made the
observation that the number of inspectors for food safety
across the country has gone down by about 10 percent. It was
unclear as to why that was happening. I would not expect you to
be able to answer anything like this now, but I wonder if you
would not mind taking a look at this and seeing why that number
has dropped down.
The reason I asked that question about the Food Safety and
Inspection Service is now, in the context of these lesser and
lesser people out there doing inspections, is the fact that
recently we saw, in fact, last month, the largest withdrawal of
food from the market in the history of the country. It was beef
products.
In the context of that withdrawal, the Agriculture
Department, particularly the Food Safety and Services operation
within the Agriculture Department, was not permitted to reveal
the name of the companies or the stores from which this adverse
product had been sold, and a lot of it had been sold. A lot of
people had bought the stuff.
So that just does not make any sense to me. So I would like
very much to try to figure out and be told, frankly, where
those products are being sold from so that we could get a
better idea as to what the consequences were, and if that
information is put out, we are less likely to see something
like this happening in the future.
So if your excellent staff here would not mind taking a
look at that, and if you would not mind giving us that
information, we would appreciate it.
Mr. Nussle. I am sorry to ask you the question, but you
stated a number. Do you remember what they said? How many
inspectors were less than the year before?
Mr. Hinchey. Yes. The number of inspectors that is supposed
to be out there is 8,000, and that number, I think, has been
standard for quite a while, but the actual number that is out
there now, I believe, is 7,310.
Mr. Nussle. Okay. The reason I am asking that--I do not
mean to ask you the questions--the answer that I immediately go
to is, well, let us see if there has been less money
appropriated. You have increased our request, and we have
increased your request every year.
I think there has been a steady increase here. In fact,
this year, we are asking for a seven-percent increase in that
area, so there may be a deeper issue here that I would be happy
to look into and that you obviously are looking into as well.
But it is probably not as a direct result of cuts as much as
maybe something else that is going on. But I would be happy to
look into it.
Mr. Hinchey. Well, your conclusion is exactly the same as
the one that I came to, based not upon all of the information
but based upon the amount of information that we have. So I
would appreciate it if you would.
Any more time, Mr. Chairman, or is my five minutes up?
Mr. Serrano. For you?
Mr. Hinchey. For me.
Mr. Serrano. You can take a little more time. Do not push
it, though.
Mr. Hinchey. Absolutely not. If you are a guy originally
from Manhattan, and you have to deal with a guy from the Bronx,
you know, there is always that little bit of tension.
PRIVATE CONTRACTORS
I think the issues that were raised earlier, and I was not
here, unfortunately, because of the other committee hearing,
having to do with these contracts, the contractual situations
that are out there, we know, for example, that with regard to
the private contracts that have been engaged in Iraq, they have
been very, very expensive. I think the largest one is something
in the neighborhood of $122 billion--that is Kellogg, Brown &
Root--and there are others that are in the multiple billions of
dollars, many of them in the tens of billions, some of them up
close to 100 billions of dollars.
Huge amounts of money have been spent on these private
contractors, and I think that this is something that really
needs to be overseen much more carefully. I think a lot of that
money, frankly, has been spent corruptly, corruptly in the
sense that the reason for which that money was sent to these
contractors did not result in the expectation that should be
coming from it as a result of it.
This is something that is bad on two counts: It is costing
us a lot of money and not giving us the results.
On a smaller scale, there is now a contracting operation
engaged in security at West Point, and I am wondering why that
is. Why is it that the Army, and I assume this is happening at
Annapolis and the Air Force Academy--I do not know for sure,
but I think it probably is--why is it that the military is not
continuing to be allowed to provide the security for itself?
Why are we bringing in private contractors? I do not like it.
It makes me very uncomfortable.
So I would appreciate it if this is something that you
would not mind taking a look at.
Mr. Nussle. This is an instance, again, where West Point is
providing security to the campus using a private contractor, is
what you discovered.
Mr. Hinchey. Yes. Right.
Mr. Nussle. Okay.
Mr. Hinchey. So when you come into the campus of West
Point, you have to go through a security operation, of course.
All of the cars are checked, et cetera, stopped. I am just
wondering what the policy was. How did it get initiated? Why is
it being carried out, so that the military does not provide
their own security at these bases? Instead, we have a private
corporation providing that security.
Mr. Nussle. Okay.
Mr. Hinchey. I would appreciate it very much.
Mr. Nussle. Thank you.
Mr. Hinchey. Thank you.
Mr. Serrano. Mr. Regula.
AMERICAN COMPETITIVENESS INITIATIVE
Mr. Regula. A couple of quick ones. I noticed you request
$12.2 billion for the American Competitiveness Initiative to
support basic research in world-leading facilities. Tell me how
you see this being achieved. How are we going to use that
money, and how are we going to achieve competitiveness?
Mr. Nussle. Well, giving you this answer--I should ask you
because you have been a leader in this area. Basic research is
vitally important to our country.
Mr. Regula. Well, do you see this money going out to
schools, for example?
Mr. Nussle. Well, there are some instances, yes, where that
is how it could be done. It should be awarded in a competitive
way, and it should be done for basic research, and that is the
basis surrounding this initiative.
Mr. Regula. I like the idea. Do not misunderstand me. Are
you telling me that a university that has a program that will
enhance the competitiveness of the United States through the
students that they educate would be able to apply for a grant
or put a program in place? Would that be the way?
Mr. Nussle. Yes.
Mr. Regula. Well, it will be interesting. Are there defined
guidelines?
Mr. Nussle. Well, we assume, and we will be happy to work
with the Congress on those kinds of guidelines. Our intent is
to try and provide the incentive and the seed money for that
basic research, and there are a number of ways that that could
be handled, some of which have been tried before, and,
certainly, Congress has experience in this area of setting up
these kinds of initiatives, but this is one that the President
felt was an important one.
Mr. Regula. I think so. I agree.
Mr. Nussle. He mentioned this in his 2006 State of the
Union, and it was set up for that purpose. But it was, as you
say, a way to try and get ahead of the curve when it comes to
some of the basic research that we need in order to make sure
that we stay on a competitive edge with not only our partners
but also our competitors around the world.
Mr. Regula. Well, should Members be telling higher
education facilities in their districts, you ought to look into
this?
Mr. Nussle. Well, not until we get it up and funded and
everything else.
Mr. Regula. So you do not have guidelines.
Mr. Nussle. I will trust you on your communication with
your universities, I am sure, but, at this point in time, most
of those are going to be through the agencies that are already
established that, I think, have become partners in this
initiative, or could be partners in this initiative, including
the National Science Foundation and the Department of Energy
and the National Institutes of Standards and Technology Labs.
Those are the ones that we see.
So there are ways that we can formulate this. That is the
way we suggest it being done, and we also suggest that it
should receive a pretty healthy amount. Congress did not see
that last year and cut it back from the request, but we believe
that this is a worthwhile priority that can give us the edge
that we need.
EARMARKS
Mr. Regula. One other question. How would you define a
congressionally mandated earmark, euphemistically known as an
``earmark''? How would you define it?
Mr. Nussle. How would I define it? Well, how I define it is
I think it is any time the Congress designates dollars to a
particular project or program in a noncompetitive way, and the
ones, again, that we believe are the onerous ones are the ones
that are not found in bill language but are in the report
language or within funding that is then phoned in to the
different agencies or departments. Those are the ones that we
find concerning. So that is how I would define it.
Mr. Regula. Would you concede that there are good, useful
earmarks?
Mr. Nussle. Oh, sure, and that is why the President does
not say, you know, get rid of all of them. But I think, too,
what we have tried to do is to shine the light on the problem.
Not only are there situations where they are not all good; they
are not all bad. You are right. Both sides of that coin are
true.
But any time that they are not transparent, when they are
air dropped in at the last minute in a conference report, when
it does not receive the scrutiny of this Committee or the
Congress, that is when I think you start running into trouble,
and that is the reason why I think we have the controversy set
up the way we do right now.
Mr. Regula. Thank you, Mr. Chairman.
Mr. Serrano. Thank you. Mr. Director, our newest Member of
the Committee, Mr. Bonner, who has got nine questions for you.
Mr. Bonner. Mr. Chairman, I am sorry I was absent
yesterday.
Mr. Serrano. It was noted.
Mr. Bonner. My perfect attendance has already been
blemished, and I apologize.
Mr. Serrano. That is okay.
Mr. Bonner. But, in fairness, the Director can probably
appreciate more than some why we were not here. I hope you had
a good, restful night's sleep last night, Mr. Director. Where
were you at twelve-thirty in the morning?
Mr. Nussle. At twelve-thirty in the morning?
Mr. Bonner. Yes, sir.
Mr. Nussle. I hate to admit this. I was in bed.
Mr. Bonner. Well, your former colleagues on the Budget
Committee were not.
Mr. Nussle. I did have an eye on the goings on and was
amazed that it took them so long to get a budget out. We were
always able to do it before midnight.
Mr. Bonner. And you gave us a blueprint that we could have
just rubber stamped, if we had only taken your offer.
JOBS
Mr. Chairman, thank you. I do have one question because
there has been a lot of conversation around the country. Some
television celebrities who pretend to be journalists talk a lot
about the outsourcing of jobs in our country. It is a
legitimate question, and, in some parts of the country, we have
seen tremendous job losses in states like Michigan, who have
seen literally tens of thousands, if not hundreds of thousands,
of people who have to leave because the economy in some states
is not doing as well as it is in other states.
Let me give you quick example of where I am going with my
question, and then I will get to the question.
Fifteen years ago, in my home state of Alabama, we did not
make a single automobile. Despite the image that some might
have about Alabama, we knew how to spell ``automobile,'' but we
did not make an automobile.
Then, about 15 years ago, our leadership in our state went
out, borrowed money in a bond issue, and incentivized a
company, Mercedes Benz, to come to the United States and to
locate in Alabama. Today, that $250 million investment has
created 50,000 jobs in the state of Alabama alone, and Honda,
who is in the Ranking Member's state, and Hyundai, the Korean
company, and Toyota--many foreign companies have invested, have
followed the lead that Mercedes had--BMW is in South Carolina.
So I know it gets to be a tricky question, especially when
people like Lou Dobbs get on TV and talk about all of the
outsourcing of jobs. In your position as director of the
budget, how important is it, would you say, that we also
consider in-sourcing of jobs, foreign investment coming into
this country and creating job opportunities, many times making
two or three times what previous job opportunities were in
those districts and those communities and those states?
Mr. Nussle. That is a huge opportunity and factor in our
growing economy, that we are attractive to capital and that we
continue to promote that kind of investment, whether it is
investment here in the United States or investment from abroad.
All of that is very important to not only job creation and
retention but to the future job growth and economic growth of
our country.
As you know, you do not solve a lot of the budgetary
problems and the fiscal problems with growth alone, but growth
is extremely important, having people who have good-paying jobs
that are able to pay their taxes and to deal with some of the
challenges at the local, state, and federal level is an
important part of how we deal with these things, from a fiscal
standpoint.
So I would view that as a very important component in our
continuing economic growth.
Mr. Bonner. And a positive one?
Mr. Nussle. Yes, sir.
FOREIGN INVESTMENT
Mr. Bonner. Just a quick follow up. Some have said, some of
the critics, have said that, by allowing foreign corporations
to invest in the United States and employ U.S. workers, we are,
in fact, providing an economic stimulus plan to that foreign
country. What role does foreign investment play in support of
the President's economic stimulus plan and plans going forward?
We will have a new president next year, but what role, in
your view, does it play going forward?
Mr. Nussle. Other than just generally answering that, that
I believe it is an important role, and it is a vital part of
our economic growth, I think those are probably questions that
are better asked of the Secretary of the Treasury, who probably
has a little bit more of a handle on all of those different
component parts. But I view it, and I think the Administration
continues to view that, as a very important component of our
continuing economic growth and our success in the future.
Mr. Bonner. Again, we missed you last night and yesterday
in the budget, but we appreciate you coming to this Committee
today.
Mr. Nussle. Congratulations on your committee assignment,
too.
Mr. Bonner. Thank you very much. I not only got on a great
committee, but a great chairman to work with. I said, last
week, that he was handsome, debonair, smart, and he is not
listening to anything I am saying now, but I stand by all of
those comments. Thank you for being with us.
Mr. Serrano. You must be referring to Ralph Regula.
Mr. Bonner. Thank you, Mr. Chairman.
Mr. Serrano. Thank you. Should we read back the record?
Mr. Nussle. It was all good things.
Mr. Serrano. Yes, I understand. I am going to just ask you
a couple of more things. We do not want to keep you here much
longer.
A-76 AND OMB DIRECTION
On this outsourcing issue, OMB has been very aggressive in
telling agencies how and when to use the A-76 process. OMB's A-
76 direction to agencies has taken the form of everything, from
numerical quotas to quarterly PMA score cards. This has
generated bipartisan congressional concern.
The 2008 Financial Services Bill from this Committee
included a government-wide prohibition, 739[d], against, one,
OMB directing or requiring agencies to prepare for, undertake,
continue, or complete any A-76 activity; two, any agency
following OMB's direction or requirements to prepare for,
undertake, continue, or complete any A-76 activity.
On February 20th, OMB issued guidance to ensure compliance
with several A-76 related provisions in the bill, but absent
from the OMB guidance was any discussion of 739[d].
So the first question is, has OMB implemented 739[d]? If
so, how has that happened? Has OMB issued guidance that makes
it clear that OMB will not force agencies to meet privatization
goals if the agencies determine that it is inconsistent with
their missions?
Please provide the Subcommittee with copies of that
direction to agencies and show me how agencies' A-76 schedules
have changed, and, if not, is it reasonable to expect that the
Congress will allow the Administration to pursue its A-76
agenda if OMB cannot follow the law? Should A-76 activity, as
of the date of enactment of 739[d], be suspended
administratively or legislatively until the prohibition is
satisfactorily implemented?
Mr. Nussle. I guess, to start with, Mr. Chairman, I think
it might be good for me to provide this answer in writing for
you and be very direct to your very direct question.
Generally speaking, we believe we are following the law. We
believe we are not giving direction to the agencies on any kind
of specificity of how they should handle this, and we believe
we have followed that directive. But I am sure there is a
difference of opinion on that score, from what I understand,
and so rather than to try and do it here verbally, I would
recommend or suggest that I take that question and give it a
very serious answer, in writing, to the Committee so that you
can review that.
Mr. Serrano. Well, we would appreciate that, but I still
would like to know, if you can tell me, why there was no
mention of 739[d] in the directive.
Mr. Nussle. We thought it was covered within the directive.
That is why I say, I think there may be a difference here in
interpretation. We thought it was covered, would be my answer.
Mr. Serrano. All right. Okay. So we will get that in
writing from you.
PRESIDENTIAL EARMARKS
Last question: Does the President submit earmarks, and, if
so, how much?
Mr. Nussle. The President does not submit earmarks. We
believe that the difference here is that, and I understand
there is a difference of opinion as to what is an
administration earmark and what is not, I think the big
difference here, if I may say, is that, first of all, anything
we propose, as far as spending, was submitted in February and
will be laying out there for the entire world to see, including
justifications for the next however many months it takes for
any of those to be considered before they may be put into
possibly an appropriation bill as much as nine months to a year
later, and they are based on what we think is a meritorious
process.
Often, if they are directed spending, they are directed in
order to complete a task that has been part of a bill for some
time, or part of a spending measure for some time, and in those
instances where they are not, where there are pools of money,
they are meant to be done in a competitive way.
In fact, I went through the budget this year in a specific
way to try and root out any of those that were not done, based
on merit or based in a competitive process.
Mr. Serrano. But here is where we may have the difference,
and here is where you may want to answer later on.
If the president says, ``I want X amount of billions for
education,'' that is no different than if we say, ``We are
allocating, appropriating, X amount of billions to education.''
But if we say, within the bill, ``and with that X amount of
billions, $2 million are going to go to Serrano's district to
build a particular school,'' that is an earmark.
So when the President says, ``I want this from Congress for
a particular program,'' that is fine, but when the president
says, ``And within that, I am going to create a program in your
district for so much,'' is that not an earmark?
Mr. Nussle. You will not find those in our budget. Let me
go back to your----
Mr. Serrano. You do not find in your budgets, for instance,
on the HIDTA, certain amounts of money going directly to
certain communities?
Mr. Nussle. But those are already competitively done as
part of the process. They are based on merit and criteria that
determine that. It is not a decision that was made arbitrarily,
where I say, for instance, for Mr. Visclosky's district, that
it goes specifically to Lake County and Gary, Indiana, based on
only my judgment, as the OMB Director.
Mr. Serrano. Well, that is basically the whole argument
about earmarks. Remember, I started off by saying that I do not
think only someone at an agency level understands what my
district needs. That is where I think the basic difference
comes in.
Mr. Nussle. Sure.
Mr. Serrano. I do not see a difference between me sending
dollars to clean up the Bronx River because, otherwise, that
agency would have never sent dollars to clean up the Bronx
River, or the President, within an environmental dollar
expenditure, sending dollars to clean up a particular river in
California, Texas, Ohio, wherever. To me, that is an earmark,
too. Anyway, to be continued.
Mr. Hinchey. Mr. Chairman, one last question.
Mr. Serrano. I was pointing to my right.
Mr. Hinchey. I am usually to your left, Mr. Chairman.
Mr. Serrano. Anyway, Mr. Hinchey will end our hearing.
Mr. Hinchey. Thank you, Mr. Chairman.
Mr. Serrano. All right.
TCE RISK ASSESSMENT PROGRAM
Mr. Hinchey. I just wanted to ask you about one question
involving the EPA, which is a critical question in a lot of
communities across the country, and it involves a substance
called trichloroethylene, TCE. TCE was used abundantly by a lot
of manufacturing corporations up to a decade or two ago, and a
lot of it is in ground water and is being absorbed by breathing
into homes and businesses in various places. A lot of attention
has been paid to it.
In July of 2006, the National Academy of Sciences, their
National Research Council, came out with a report that said
that the health impacts of TCE were severe in terms of things
like kidney cancer, neurological problems, heart defects, and
that they were particularly severe on women and children,
particularly women with pregnancies.
The EPA went to work on that, and they began to develop a
risk-assessment program. Actually, they revised what they had.
That risk-assessment program now has been essentially
completed, but I understand that putting it into effect, is now
being held up by the information and regulatory affairs
operation of OMB.
Now, if that can be overcome rapidly, it would be in the
very direct and important interest of hundreds of thousands,
maybe millions, of people across the country because there are
thousands of these pollution sites all over the country.
So I would appreciate it, Mr. Director, if you----
Mr. Nussle. I will look into that.
Mr. Hinchey. Thank you.
Mr. Nussle. I am not familiar with where that is in
process, so let me look into that.
Mr. Hinchey. Okay. Would you get back to me on that?
Mr. Nussle. I can, yes, sir.
Mr. Hinchey. I would appreciate it.
Mr. Nussle. Okay.
Mr. Hinchey. Thank you very much. Thank you very much, Mr.
Chairman.
Mr. Serrano. Thank you. Mr. Bonner, you have no further
questions?
Mr. Bonner. No. Thank you.
Mr. Serrano. Mr. Director, we thank you so much for your
testimony and for being here with us today.
Mr. Nussle. Thank you, Mr. Chairman.
Mr. Serrano. We thank you for agreeing with us on earmarks.
Mr. Nussle. That is the way I heard it.
Mr. Serrano. We thank you for the fact that you will now
start recruiting in Puerto Rico and the territories.
Mr. Nussle. I am leaving this afternoon.
Mr. Serrano. We really do. We look forward to working with
you for the benefit of the American people, and I thank you.
And this meeting is adjourned.
Tuesday, April 15, 2008.
INTERNAL REVENUE SERVICE
WITNESSES
DOUGLAS SHULMAN, COMMISSIONER OF INTERNAL REVENUE
LINDA STIFF, DEPUTY COMMISSIONER FOR SERVICES AND ENFORCEMENT
Chairman Serrano's Opening Statement
Mr. Serrano. Good morning to all.
For those who may wonder, although there shouldn't be
anyone who wonders, the 42 in front of my nameplate is a
tribute to number 42 for the Brooklyn Dodgers, Jackie Robinson.
Today is Jackie Robinson Day throughout baseball. It is the day
when all baseball players are being asked to wear 42, or at
least a couple of members on each team.
Of course, my beloved Yankees have the only person
grandfathered with 42, Mariano Rivera. As soon as he retires,
that number will not be used any longer.
And it is just a small way for me to pay tribute to a
person who not just integrated baseball, but in my opinion, he
integrated our country. I don't think our country has been the
same since that 1947 season, and it has been for the good.
And just an aside, Mr. Regula. We claimed that we work a
lot of times under pressure, and we do. I can't imagine what it
must have been like to play that first season under that
pressure and still perform at Rookie of the Year quality. This
is a special person.
The National Archives, one of the agencies in our portfolio
of agencies, just published a document about Lieutenant Jackie
Robinson and his refusal to sit in the wrong bus as an officer
of the military. There was a bus for African American soldiers,
there was a bus for white soldiers, and there was a bus for
officers. So he went into the officers' bus, and he was sent
into the bus for African American soldiers. And he said, ``I am
an officer, and officers go in that bus.'' He was court-
martialed. They didn't get too far with it, but it just shows
you, especially if you are younger than some of us on this
panel, what an incredible person that he was. And so today we
honor, at least this Chairman, and I know this committee joins
me, in honoring number 42.
We would like to welcome our guests today.
The subcommittee will now come to order.
And today is April 15th, not only the day when we honor
Jackie Robinson but it is also the day when we pay our taxes.
And I hope everybody did. I filed, e-filed, and my 22-cent
return came back immediately.
It is fitting that the subcommittee is meeting today to
hear testimony from the Internal Revenue Service on its budget
request for fiscal year 2009. As the largest component of the
Financial Services and General Government Appropriations bill,
comprising more than half the total amount of funds provided by
our subcommittee in fiscal year 2008, the IRS is clearly a
major focus of our work.
In addition, as the collector of approximately $2.4
trillion in Federal revenue each year and as an employer of
more than 100,000 people, the IRS is an important presence in
the Federal Government.
The IRS plays a very public role as a representative of our
Federal Government in the lives of most Americans. In many
cases, it is one of the few contacts many Americans have with
the Federal Government. It is up to all of us to ensure that
the IRS is able to perform its functions in a fair, competent
manner and to ensure that the IRS has the resources to do so.
Today the IRS is involved in numerous activities, including
explaining tax law, answering taxpayers' questions, assisting
with tax return preparation, processing returns, conducting
criminal investigations and much more. At the same time, the
IRS is working to improve its business processes and computer
systems through the multiyear business systems modernization
program.
Currently the IRS is playing a vital role in helping to
implement the Economic Stimulus Act of 2008 and the rebate
program, in addition to processing nearly 140 million
individual tax returns.
We look forward today to discussing some of the issues
facing the IRS.
In the area of taxpayer service, the IRS is in the midst of
implementing the Taxpayer Assistance Blueprint, a 5-year plan
for improving IRS taxpayer services. At the same time, however,
I am concerned that the IRS budget request freezes funding for
taxpayer services at last year's level, even as funding for tax
enforcement is proposed for a 7 percent increase. I look
forward to discussing the IRS budget request today.
Another major concern is the ongoing private debt
collection program at the IRS. If you hear any hissing in the
background, it is not by any Members of Congress; it is just
the general feeling. I continue to oppose the private debt
collection program, as many other people do. The program allows
private companies to collect unpaid taxes and to pocket up to
24 percent of the tax revenue they help collect.
This issue was raised at the Commissioner's Senate
confirmation hearing as well as at this subcommittee's recent
hearing with Secretary Paulson. And I look forward to
discussing the issue again today, as well. It is my hope that
although he has just begun in his new position, the new
Commissioner will have come to the same conclusion as many in
Congress--that this program should not be continued.
On March 13th, Douglas Shulman was confirmed by the United
States Senate to be the 47th Commissioner of Internal Revenue.
We thank you for your service. We thank you for joining us
today. We thank you for accepting this important position in
our Government, this 5-year appointment.
And we look forward to your testimony. We remind you that
your testimony should be held to 5 minutes. Your full statement
will go in the record, and then we will have a chance, as
taxpayers, to get even with you on this special day.
And now a man who has always paid his taxes on time--in
fact, he asks the Government to take more, just to be a great
American--there he is, Mr. Regula.
Mr. Regula's Opening Statement
Mr. Regula. I think I saw somewhere that there is a
proposal for legislation that would allow those who feel that
taxes aren't high enough to add an additional amount to the
taxes they pay. I believe that is a legislative proposal
floating around here somewhere along those lines.
Mr. Serrano. Well, I send an extra bunch of money to New
York every month, but that is because they don't take out city
taxes.
Mr. Regula. Right.
Well, you covered this topic pretty well. I think what the
taxpayers really want is to feel a sense that everyone is
paying their fair share. They understand that you need taxes to
operate Government, but when they read in the paper that $300-
plus billion are not collected that should be, that is always a
little bit distressing to the average taxpayer, because he or
she thinks, ``Well, I am paying my fair share and filing a
return. Why doesn't everybody else have to?''
And I just saw an article--I think it was in Time or
Newsweek, one of them--where a number of corporations aren't
paying all the taxes they owe. And those are the kinds of
things that distress the public.
And I see that, in our budget, we have an additional $358
million to enhance your collection procedures. And I hope that
in your role as the Commissioner that you do push hard to
ensure that we have fair and adequate enforcement of the tax
laws so that everybody is paying their fair share.
One other comment. I think you have done a remarkable job
of adapting to Congress's constant changes of the tax law. And
this year, particularly with the requirement for the extra
funding for citizens and also the changes in the AMT, that you
have had challenges in getting forms out. I am sure this was
quite a difficult problem, to get everything out on time for
taxpayers who wanted to file and were required to file. So we
will be as supportive as possible of programs that ensure
fairness and ensure prompt information to the taxpayers so they
can make the right decisions in filing their own tax returns.
And it has to be a challenging assignment, to say the
least, because going back to biblical times, tax collectors
were not the most popular people in town, when you read about
their role in ancient history. And so we wish you well in your
new assignment.
Mr. Shulman. Thank you.
Mr. Serrano. Thank you, Mr. Regula.
You know, Mr. Regula and I were discussing the other day--
of course, he is leaving Congress, much to the loss of the
Nation. He is leaving Congress, but next year at this time,
what do we do about hearings and about conversations with a new
President, new administration and a lot of new folks that, at
this point next year, may not even know what their budgets
should be like, you know. And we just had a comment from Mr.
Nussle, where he said they would not prepare a budget.
And yet you are one of the few--you, I believe the
Archivist and just a couple of other people--in the Government
who don't have to leave. And so we hope to establish a
relationship with you that will carry over to the next
administration at the White House.
So we welcome you once again, and we welcome your
testimony.
Commissioner Shulman's Testimony
Mr. Shulman. Thank you, Chairman Serrano and Ranking Member
Regula, and thank you to all the members of the subcommittee
for having me be here today.
I have been Commissioner for 3 weeks, as you said. And I
would like to reiterate to all the members what I have assured
the Chairman and Ranking Member in private conversations: that
I look forward to working with this Subcommittee for the years
to come, and to address all the critical issues facing the IRS.
I would also like to introduce the two Deputy Commissioners
of the IRS, Richard Spires and Linda Stiff, and really commend
them for doing an excellent job running the agency for the last
6 months while I was going through the confirmation process--
Linda, as Acting Commissioner; Richard, as Deputy. They helped
guide the agency through a difficult filing season and the
stimulus payment process, which is ongoing.
This morning what I would like to do is touch on the filing
season, stimulus payments and the 2009 budget, take a minute or
two to discuss a few important issues to me as IRS
Commissioner, and then I'd be happy to take your questions.
We are completing what, by all measures, looks like a
successful filing season. I have some statistics from April 5th
that I would like to share with you.
One is the substantial increase in the number of electronic
filers, a substantial--up 10 percent from a year ago. Mr.
Chairman, I was heartened to hear that you are an electronic
filer. And I know, Mr. Regula, you prepare your own taxes.
The number of returns prepared by volunteers through our
VITA program and tax-counseling-for-the-elderly program is up
26 percent year-to-date. Our usage of the Free File program,
which allows 70 percent of Americans to prepare and file their
returns electronically, is up almost 20 percent. And the IRS
Web site, which is really designed to give assistance to
taxpayers, has seen the usage increase 21 percent.
We are also having what looks like a successful filing
season, despite the late enactment of the AMT patch and the
fact that we have been simultaneously preparing to send out
economic stimulus payments to millions of Americans.
Regarding economic stimulus, we conducted extensive
outreach to make sure that the American public understands this
program. And we have put special emphasis on the group of
Americans who normally wouldn't have to file their tax returns,
but need to file a tax return this year to get the stimulus
payment. That group includes people on Social Security, people
getting veterans benefits, low-income workers.
I also want to urge this subcommittee to support full
funding of the IRS's proposed 2009 budget. The budget will
allow us to continue our strong focus on both taxpayer service
and enforcement.
During my confirmation process, I was asked the question
that I think all IRS Commissioners are asked: ``Are you going
to focus on service or enforcement?'' What I told the Senate
Finance Committee and what I tell you is I actually believe
this is a false choice. I fervently believe that, in order for
the IRS to achieve its compliance goals, it needs to focus on
both.
If I state that another way, in my own language, the IRS
should do everything it can to make it as seamless and easy as
possible for those taxpayers who are trying to pay the right
amount of taxes navigate our organization, get their questions
answered, pay their taxes and get on their way.
But for those who understand their Federal tax obligations
but fail to comply, we must have an aggressive enforcement
program. The IRS has been very active in its compliance
programs in recent years. We collected $59 billion in
additional revenue through enforcement activities last year,
which is a substantial increase over the last 5 years. And that
is only direct revenue attributable to specific enforcement
actions, not taking into account the deterrent effect of
enforcement programs.
Another area of focus during my tenure will be maximizing
the effectiveness of IRS's technology and systems. The
evolution of technology has profoundly altered the way that
both business and Government operate. The IRS is continuing to
adapt to this changing world. And our goal is pretty simple: It
is to get the right information into the right hands of the
right people at the right time.
My vision for modernization starts at a fundamental place,
which is that the expectations of taxpayers are high and only
getting higher, and we owe it to them to do everything we can
to meet those expectations.
And finally, during my tenure as IRS Commissioner, we--like
other Federal agencies and other private-sector industries that
are facing a retiring workforce, a change in the demographics
of the workforce--are going to need to continue to focus on our
leadership development and our workforce. A talented, dedicated
workforce will form the foundation of what we do in the future.
Thank you again, Mr. Chairman, for the opportunity to
appear this morning before this Subcommittee. In my short
tenure, I have found the issues complex at the IRS, but the
people and the professionals who lead the IRS and work at the
IRS to be professional, hard-working and dedicated.
You have my commitment to show up every day and try to
provide taxpayers the high level of service that they deserve
and to pursue enforcement actions against those unwilling to
meet their tax obligations. Of course we need resources to
execute our plan. I hope this Subcommittee will support full
funding of the Administration's 2009 budget proposal.
Thanks again for having me here, and I am happy to respond
to questions.
[The information follows:]
ECONOMIC STIMULUS REBATE CHECKS
Mr. Serrano. Well, I thank you.
And I want to echo momentarily what Mr. Regula said. If
there is ever a problem, it is the belief by many Americans--
for our purposes, say some Americans--that some folks are not
meeting their obligations. And sometimes, for instance, when we
see in the budget or we read that there is more emphasis being
made on lower-income or Earned Income Tax Credit folks in terms
of auditing them and that corporate America is getting less and
less audits, that adds to that perception that Mr. Regula
speaks about.
Let me talk to you briefly about the economic stimulus
rebate checks. As we all know, the IRS is working with the
Financial Management Service on getting out the rebate checks
for taxpayers as part of the Economic Stimulus Act.
One thing I would just like to clarify with you: As long as
an individual files a tax return and fits the income
qualifications for getting a rebate check, they will, in fact,
get the check as long as they don't owe back taxes, Federal
taxes--am I correct?--or have outstanding debts like student
loan debt or overdue child support. Is that correct?
And my understanding of outstanding student loan debt means
not that they are ongoing in their payments but that they are
behind in their payments.
Mr. Shulman. That is correct.
Mr. Serrano. So a person who has a student loan outstanding
is not in trouble here, just a person who hasn't made their
payments.
Mr. Shulman. That is correct.
Mr. Serrano. Okay. Now, does that include also child
support issues?
Mr. Shulman. I believe so. Yes, I believe so. It is about
if they are behind in payments, not just that they have child
support payments, student loan payments. And you are correct,
as we had a chance to discuss, regarding Federal taxes.
Mr. Serrano. Okay. Now, do States get into the act?
Mr. Shulman. No. This is a Federal program, not involved
with State----
Mr. Serrano. So if you owe State taxes, this does not
affect your ability to get the check?
Mr. Shulman. Correct.
Mr. Serrano. Have you clarified with the territories--one
of my favorite subjects--how those checks will go out to the
territories?
You know, our big victory was including the territories in
the rebate. Now, we know that they don't have Federal tax lists
for you to work off, so the money has to go--the funds have to
go to the local government. Can the local government then say,
``You owe us, the Commonwealth of Puerto Rico, you owe Guam
money; therefore, we are going to take that out of these''?
Because then technically what we would be doing is using
Federal dollars to subsidize a local issue.
Do we have a reading on that?
Mr. Shulman. Well----
Mr. Serrano. And I don't think we should, just for the
record.
Mr. Shulman. As you know, the territories were included in
this stimulus program that the Congress passed and the
President signed. We do not administer the tax laws in
jurisdictions of the territories. Actually, we are working with
the territories now--it is in the hands of the Treasury
Department--to work out exactly how we will be refunding them
their payments. The final details of those are not settled yet,
but my understanding is, the talks are going very well, and
that these discussions--that a decision is relatively imminent.
It should happen soon.
Mr. Serrano. But these are more Treasury discussions than
IRS discussions, is what you are saying?
Mr. Shulman. Correct.
Mr. Serrano. But if it comes by your desk, it wouldn't make
any of us unhappy if you reminded the territories that this is
not to pay for any local debt.
Mr. Shulman. Understood.
Mr. Serrano. The idea is for them to go spend that money
and stimulate the economy. That was the purpose.
IRS PRIVATE DEBT COLLECTION
Mr. Serrano. Let's turn to something more controversial,
the private debt collectors or, as I have said on a couple of
occasions here, a wonderful idea for a ``Sopranos'' episode,
collecting debt.
The Commissioner doesn't get it.
Any time you give somebody an incentive of 24 percent on
the dollar, the behavior could be something that we live to
regret.
I asked this question of Secretary Paulson, and I would
like to ask it today as well. This time last year, the IRS was
planning to greatly expand the number of private companies
conducting IRS collection work, but now you are planning on
sticking with just the current two companies.
What are your thoughts on the program? Do you believe it
should continue? Does this change in plans indicate that the
IRS is starting to have the same doubts about the usefulness of
this program? Or is it an IRS reaction to the many people in
Congress who disagree that this program should continue?
Mr. Shulman. I am well aware of this program. I had a
number of conversations with Senators about this program
throughout my confirmation process.
If I can step back just a little bit, with the topic of the
hearing being the budget and resource allocation, it is very
clear to me that one of the most important parts of my job is
going to be getting my arms around all of the activities of the
IRS, both the service activities that help taxpayers
voluntarily send in their money and provide services to them,
as well as all of our enforcement tools, whether it be
collection--our internal systems or this private debt
collection--our audit program, our enforcement program, our
criminal investigation resources. And how we choose to fund and
focus those resources will be some of the most important
decisions I make.
This program specifically, like a lot of programs, I am
just getting my arms around it. I make a commitment to all
members of this Committee that this program is one I will focus
on, understand better and come to my conclusions about whether
it is meeting its purpose.
A couple of things I have seen. One is, it is my
understanding it has been authorized by Congress, and I know
that the people at the Service are doing their best to run it
well. ``Run it well'' means to meet the intent of bringing in
taxes that otherwise wouldn't be collected, as well as making
sure that taxpayer rights and data privacy are protected and
that there is proper oversight.
I think it is too early in my tenure to really have a lot
more opinions about the program, but I understand the concerns
that you and others have expressed, Mr. Chairman. And you have
my commitment to get my arms around the program and come back
for more conversations.
Mr. Serrano. Sure. Thank you for that answer.
And let me just clarify something for you in a very
friendly way. You made an interesting point and a right,
correct point. You said this is a budget hearing. There are two
things you should know about the appropriations process. One is
we are not supposed to legislate on appropriations bills, but
it happens all the time. And secondly, we are only supposed to
discuss budget at these hearings, but most of the time we end
up also discussing issues that are not necessarily just budget
issues, although they all have dollars attached to it. So this
stopped being, really, a discussion of dollars a long time ago
and just of the process.
But speaking of dollars, the IRS taxpayer advocate noted in
a hearing last month that the IRS projects that the program
will generate gross revenue averaging about $23 million this
year and next year. At the same time, it is costing $7.6
million a year in appropriated funds, as well as roughly $4.6
million in tax collections that the companies get to keep for
themselves, the 24 percent.
If these two expenditures, the $7.6 million and the $4.6
million in lost revenue, were instead invested in IRS employees
to work these same cases, how much revenue do you believe could
be collected?
Mr. Shulman. Again, I am still getting my arms around these
issues. I have seen a lot of the numbers, and I need to
understand them better.
And if I can just make the point, by no means was I giving
a broad budget update. Any discussion, of course, this
Committee wants to have, I am happy to have.
Mr. Serrano. It was a very friendly comment. Nothing that
is nasty on Jackie Robinson Day, trust me.
I have many more questions, but we will move on now to Mr.
Regula, our Ranking Member.
Mr. Regula. Well, as I said earlier, what most taxpayers
want to have is a sense that everyone else is paying their fair
share. And the question then arises on private debt collection
whether or not that does enhance the ability of the Government
to ensure that that number, whatever it is, $300 billion or so,
is collected.
And they estimate that this increases revenue by $600
million over 10 years. And I know there are other agencies who
have successfully used private contractors, such as Education,
Health and Human Services. And there is some concern that this
takes away from employees, but I think it really provides
assistance to them.
What do you see--and I realize it is early in the program--
as the benefits of this program?
Mr. Shulman. Well, my understanding is that it was
authorized specifically as money to go toward collection
efforts for cases that otherwise wouldn't be pursued by the
IRS. And I know, again, there is a lot of debate about both
sides of this. And so, to the extent it is money that we
wouldn't otherwise get and to the extent it is going after
cases we wouldn't otherwise get to, I think that is the obvious
benefit.
Mr. Regula. Well, if the private debt collectors can
collect, why can't agents of the IRS do the same?
Mr. Shulman. Well, again, I am still getting my arms around
it, and I apologize to the Committee to come so early and that
I still have to get my arms around it. But I want to make sure
that any conversation I have with you is fully informed.
My understanding is that, because these are private
contractors, there are some limitations on the kinds of cases
that they can work. And they clearly can't use some of the
tools that the IRS has, like liens and levies and other things.
So these are cases where there is clearly debt owed, some
lower-dollar-amount cases. The IRS only has so many resources.
It can't pursue every single case and every single time that we
think that there is money that ought to be coming. We have to
allocate our resources appropriately. And so these are cases
that otherwise weren't being worked, that meet those criteria,
and the IRS can pursue these cases with these----
Mr. Regula. I don't think the public would believe that you
can't pursue some cases. If they have dealt with the IRS, they
have been convinced that you do, just like the FBI or whatever.
There isn't any place to hide.
It seems to me you ought to at least take a good look at
whether your collection procedures are adequate, and if
therefore you would not need private debt collectors. They
certainly can't have any magic, as to how they get it done, as
opposed to what could be done by your own agents.
But, again, this is part of ensuring the public that
everybody is paying their fair share.
I have a number of questions for the record, a couple of
things.
IRS TAXPAYER SERVICES
Do you let the public know about your taxpayer services
adequately, like the Taxpayer Advocate Service, Voluntary
Income Tax Assistance and so on? I am not sure the public
realizes that these services are available, and maybe there
ought to be some enhancement of letting people know.
Mr. Shulman. Yes, you know, people have asked me. One of
the main reasons I took this job is because this agency touches
and has interaction with every single individual adult in the
country, as well as every business and every nonprofit group.
It has a profound effect on the way that Americans view their
Government.
And I believe--again, I am still getting my arms around our
exact outreach, et cetera. I am very committed to making sure
our service programs are effective when people come to us and
people understand that the IRS can help.
Because I happened to take this job right around April
15th, which in addition to Jackie Robinson Day is a big day for
us, I had the opportunity to go out and talk with a variety of
people and some media outlets. And one of the interesting
questions that came to me was, ``if someone just can't pay,
what should they do?'' And my notion--you should reach out to
us, you shouldn't disappear, you shouldn't go dark, you should
call us and we have people who will help you work through those
issues--I think a lot of people don't recognize.
And under my tenure, I am going to make sure, it is a major
focus of ours to make sure our services are excellent and let
everybody know that those services are available.
Mr. Regula. Well, I am always struck when I see the TV ads
from the professionals who say, ``Got a problem with IRS? Call
us.'' And they imply that their services will result in your
tax bill being substantially reduced. Now, I question that. The
law is the law, and they don't have any magic understanding of
the law. But at least, if you have the services I have just
described, they ought to be available to taxpayers, in lieu of
having to pay these professionals to do the job.
SIMPLIFYING THE TAX CODE
Tax complexity, we always--that is a very popular thing on
the campaign circuit, is to say, well, we are going to reduce
the tax code and so on. But, of course, so long as you don't
reduce any preference that I might have, why, it is a good idea
to simplify the tax code--1,395,000 words.
I was really struck by the fact that Tom Friedman, in his
book, ``The World is Flat,'' said that 400,000 U.S. tax returns
were done in India last year. I find that rather appalling, in
a way, that people have to send their tax returns to India to
be done and that we can't do that in this country. And there is
an increase in the use of tax consultants, if you will. I know
it is not your responsibility. In a way, it is up to the
Congress to deal with the complexity in the tax code. And we
usually end up adding instead of subtracting.
But do you have any capability in the agency to reduce the
number of outsiders that do tax returns? Is there any
simplification that you can build into the returns themselves?
Mr. Shulman. Well, it is a good question. It is one that I
have asked myself.
What I would say is, I am on the record, I think the tax
code is complex. And as the representative of the Government
trying to interact with the American people getting their taxes
done, the simpler we can make the tax code, the better.
With that said, I am going to stay out of tax policy
questions, leave that to Congress, the Treasury and people who
are more engaged in tax policy than I am.
I think to the extent we can make life easier for people
and simplify things, we should. I actually did some surfing on
our Web site as I was preparing for this hearing and through my
confirmation process. I think we have done a pretty good job of
posting frequently asked questions, having the ability to get
questions answered. I think the more we can do to get good
information out there, the better.
Regarding tax preparers and who prepares people's taxes,
what I will tell you is I want to make sure--you know, they are
a vital part of the system. Whether we like it or not, a lot of
people use professionals to prepare their taxes--sure we have
good information for individuals, we make it as easy and cheap
as possible for them to comply, and we support the professional
community so that their costs are low for people using them.
Mr. Regula. I was in a bookstore, and I saw a whole array
of volumes, and they looked like a telephone book, of how to
prepare your taxes, ``J.K. Lasser'' just one of many. And it
must be sort of overwhelming to the average citizen to go in
there and see all these different volumes of information on how
to do your taxes. And I suppose simplification lies somewhere
out in the far distant future.
Thank you, Mr. Chairman.
Mr. Serrano. Thank you.
I must tell you, Mr. Commissioner, that I know some of
these questions seem leading to some difficulty in the future,
some tough issues. But the good news is that when Mr. Hinchey
and I started out in politics on the same day in 1975, elected
office, the two most disliked agencies in my district were the
IRS and Immigration. Well, since September 11th, you are not
even an issue; Immigration outweighs you. They are highly
disliked in my district, trust me.
And, you know, the Commissioner has a connection to both of
our States. He is from Dayton, Ohio, and he was a school
teacher in my congressional district.
Mr. Regula. Teach for America?
Mr. Shulman. I was involved in the starting of it, Teach
for America. And I taught at Bronx Regional High School off of
Prospect Avenue for a while.
Mr. Serrano. There you go.
Mr. Regula. As someone very interested in education, if you
will permit me, Teach for America I think is a terrific
program. And you were involved in starting it?
Mr. Shulman. I was one of the first few staff members who
put it together. So I am one of the original co-founders.
Mr. Regula. I congratulate you.
Mr. Serrano. You served how many years on the Ed and Labor
Committee?
Mr. Regula. Oh, well, I was Chairman for 6 years, where we
had labor and education and so on.
And I know last year Teach for America had 20,000
applications, with something like 2,000 slots. Terrific
program.
Mr. Shulman. Yes, it is an amazing thing, what they have
done. Wendy Kopp, who runs it, has done a phenomenal job over
the years.
Mr. Serrano. Mr. Hinchey.
Mr. Hinchey. Thank you, Mr. Chairman.
Mr. Shulman, it is a great pleasure seeing you, and thank
you very much for being here. Meeting you has been very
comforting and instilling in confidence. I think that we are
very fortunate to have someone as intelligent and wise and
committed as you are working on this very important job. As you
said, it is the one aspect of Government with which people have
the most contact, and stays in their minds more than any other
aspect of this Federal Government.
And I very much appreciate our Chairman for the questions
he asked and the opening statements that he made. I think they
were really right on target. As he said, we have been friends
and associated for a long time. The only difference now is
immigration is not as big a problem in my district as it is in
his. It is a little bit different situation in upstate New York
as it is in the Bronx.
Mr. Serrano. It was a couple hundred years ago.
Mr. Hinchey. Yeah, it was, I know. When you are having fun,
time flies.
OUTSOURCING DEBT COLLECTION
There is an interesting story in the Post today about--the
headline is, ``Collectors Cost IRS More Than They Raise,''
which was an important question that was raised by the
Chairman. I know it isn't anything that you have been involved
in, but it is something that you have to deal with.
And the interesting part of the story is that we are paying
more for the outsourcing of this activity, almost twice as much
as is being taken in. So it doesn't seem to me to make an awful
lot of sense, and I think it is something that the Congress
really has to address its attention to, as to whether or not
this is the best way for the Internal Revenue Service to have
to function.
I think that it has always functioned best when the work
was done here, locally, internally, within our own country. And
the idea of sending some of this work out to countries in other
parts of the world, particularly as far away as India, just
doesn't make any sense whatsoever. The outsourcing of that work
is, I think, a big mistake.
It is something that was done intentionally, I think, and
it began back in 1995 when a new Congress came into effect. And
the results of what they put into place has reduced the number
of IRS employees by--I think the number is more than 27,000,
reduction in IRS employees.
I think that needs to be corrected. I think we need to
change this set of circumstances and bring back the Internal
Revenue Service wholly within our country and wholly within the
Government. That is the best way that we can make sure that it
operates effectively and in accordance with the law. I think
there are a whole host of potential problems that arise by the
privatization of this kind of work, including the potential
exploitation of people who could have that kind of situation
inflicted upon them as a result of the privatization.
So I just raise these issues, knowing that this isn't
anything that you have had anything to do with. You are just
coming into a situation where you have to confront these
issues. But over time, I would greatly appreciate it if you
would consult with us and provide us with information that you
accumulate as a result of your ongoing experience here, to let
us know what you think about this situation, the outsourcing of
this work, the downgrading in the number of employees.
There is some legislation now which is pending. In fact,
the bill in the House here, I believe, has recently passed
through the Ways and Means Committee, which would change the
privatization and the outsourcing of this work and bring it
wholly back within our own country, within our own Government,
so that I think it works in a much better way.
So I just want to express to you my appreciation and
gratitude. I know you have only been here a few weeks, but you
are going to be here hopefully for a good number of years. What
is it, 10 years?
Mr. Shulman. Five.
Mr. Hinchey. Five. Well, maybe it will be 10. At least 5,
because I have a great sense of confidence in the way in which
you will be able to carry out this very, very important job.
And as I have asked, if you wouldn't mind keeping in touch
with us and letting us know what you see, insightfully from
your position as the Commissioner now, about how this
outsourcing is working, what we need to do about this cutting
back on 27,000 people to make the IRS weaker. And I think a lot
of that weakness was intentionally focused on the highest
potential taxpayers in the country. But that is my own
observation based upon the legislation that was passed back in
1995, something that I opposed then and continue to oppose,
because I believe that this is an issue that the Government
should be involved in, and it should be held accountable to the
people of the country. And I think that is the best way to do
it.
So other than that, I don't have any questions. But I just
want to say again, I am very grateful to you for being here. I
have a lot of confidence in the way in which you are going to
operate the situation. And I hope that you will provide us with
the insightful information that you acquire over the course of
the next few years.
Thank you very much, Mr. Shulman.
Mr. Shulman. Thank you. I appreciate the confidence. And as
I said, I am looking forward to an ongoing dialogue with you
and other members of the Committee.
Mr. Hinchey. Thank you.
Mr. Serrano. Thank you.
Say, are movie stars allowed to claim clothing and other
things? Does anybody know? Because we are on stage a lot.
Mr. Shulman. Somebody does, not me.
Mr. Serrano. Let's find out if they do. Because, you know,
Mr. Hinchey has to keep up an appearance and all that.
Mr. Regula. Deduct our suits?
Mr. Serrano. Why not? We are on stage most of the time.
The gentleman who is never on stage but always performing
properly, Mr. Bonner.
Mr. Bonner. Thank you, Mr. Chairman. I wondered if you
thought about seizing this opportunity with the Commissioner
and asking for the Internal Revenue Service to look into that
dastardly act of some Red Sox fan trying to plant a jersey at
the new Yankees stadium. That seems to be a case worthy of the
IRS's attention.
Mr. Serrano. Let me tell you what almost happened to me,
and I was saved by something wonderful from up above. I was
going to put out a statement saying, ``The nerve of these
outsiders who come and work in the Bronx, work in a poor
community, make a lot of money, and then leave and go upstate
or Long Island and insult us.'' Turns out, the guy lives in the
Bronx, who did that.
But we took it out of there, at the cost to the management
company, to the construction company. And in typical New York
fashion, we kind of gave it back to them. We took the shirt and
sent it to The Jimmy Fund, and The Jimmy Fund will auction it
off in Boston. And it will probably get more than the Barry
Bonds baseball.
Mr. Schiff. Will the Chairman yield?
Mr. Serrano. Only if you say something pro-The Bronx.
Mr. Schiff. I just want to say, go Red Sox. So I yield back
to the Chair.
Mr. Hinchey. Not after the last two days.
Mr. Serrano. Does the phrase ``no earmarks'' sound
familiar?
Mr. Bonner.
IRS SCRUTINY OF POLITICAL ACTIVITY
Mr. Bonner. Mr. Chairman, thank you.
I think each of us represents somewhere in the neighborhood
of 635,000, 640,000, 650,000 Americans as part of the privilege
of serving in Congress. And so I can imagine at least the
635,000 people in my district would probably love to have the
chance I have to question, on tax day, the tax man.
So, Commissioner, as you have heard from others, we thank
you for your willingness to serve in this important position
and certainly look forward to working with you.
Let me ask a couple of questions. Yesterday I don't know if
you had a chance to see Roll Call, which is the Capitol Hill
newspaper, but there was an article on the front page entitled,
``IRS Scrutinizing Political Activity.'' And it went on to say
that the Service has focused on charities and churches in the
past to ensure that they don't violate the tax code by
participating in excessive political activity.
How, in your judgment, would you like to see the Service
intensify its scrutiny of social welfare groups in addition to
charities and churches?
And the article also indicates that the IRS may believe
that its strong arm could be more effective than, say, the
Federal Elections Commission in reeling in nonprofits. And I
was just curious if you had any thoughts about how the IRS
could provide more effective enforcement.
Mr. Shulman. Let me say a few things at a philosophical
level around this issue.
Again, like many programs, this is one that I am going to
need to gain more familiarity about, but I did discuss the
general issue of nonprofits and political activities with the
Senate Finance Committee, and I will repeat here a couple of
things I said here.
One is I think it is very important that we be viewed as a
nonpartisan institution that is administering our laws in a
fair and equitable fashion. And you have my commitment that
will be a focus of ours as long as I am Commissioner of the
IRS, and I have every indication to believe that is what we do.
Second, anyone who gets tax-exempt status gets a privilege
from the Government and gets some monetary relief from the
Government and, therefore, has to abide by the rules. And so my
belief is that the group in the IRS, the professional staff who
has year-in, year-out responsibilities to oversee the tax-
exempt groups--and this will include their political activities
or any other things that fall within the rules--owes it to the
American people to make sure we are fair, we are even-handed,
we give clear guidance. Anyone who is abusing the law, we are
there. For people who aren't abusing the law, we are out of
their way.
And so I will look into it more, but I think the most
important thing we can do is be very nonpartisan, by-the-book,
and administer the law clearly and fairly in this area.
IRS CUSTOMER SERVICE CALL CENTER ACCURACY
Mr. Bonner. Separately, I will give you the example upon
which I am basing this next question. But in your testimony and
in your answer to the first question, talking about the
importance of a group maintaining its tax-exempt status in a
legal way, in your written testimony you provide several
highlights of the IRS's 2007 accomplishments, one of which is
that your customer assistance call centers last year provided a
91.2 percent accuracy rate on tax law questions.
While that number is pretty high, I think a question--and I
will give to your staff the example that I have in mind. How
would you like to see the Service respond to cases where the
taxpayer is given inaccurate information from the IRS, bases
their actions on that information and then brings in a Member
of Congress to try to resolve a dispute with the Service? Is
there a way that we can get that 91 percent up?
Mr. Shulman. Well, my hope would be--and I can't tell you
the resources we have, the skill sets we have, et cetera--that
when anyone has a question, we answer it in a timely and
accurate manner. So that would be my guiding principle.
I think any time there is a mistake by a Government agency,
we should do everything we can to right that mistake. I would
be happy to follow up on specific issues, so I can understand
your question a little better.
Mr. Bonner. All right.
FAIRNESS
And then the last question--the ranking member and the
Chairman both talked about that fairness. And I know you were
not on the job at the time, but last year there was a pretty
high-profile case involving a Hollywood actor who many
taxpayers, at least in my district, were shocked when he was
found not guilty of Federal tax fraud. It sent a public message
to some that you can fail to file a tax return for 6 years,
making millions of dollars during that time, and that you may
not have to pay taxes.
Since we are talking about fairness, does that create a
problem for you and your tens of thousands of employees when
yesterday's USA Today had three other high-profile citizens of
this country who have had tax problems?
We may all one day come into that situation. But does a
situation like the Wesley Snipes case, not to focus
specifically on that gentleman, but just--does that create a
problem, when average Americans who don't make that kind of
money file their tax returns and feel some sense of frustration
that the system is not fair?
Mr. Shulman. As I have gotten a little bit of a look at our
statistics, there are some interesting trends. One is, for
individuals, our audit coverage has increased at the highest
rate for million-dollar-plus incomes. And so we now audit one
of every 11 people who make over $1 million a year. I think
that is a good signal for the IRS to send out, that people who
have a high income must pay their taxes.
The next highest rate is above $200,000, and then we have
some increases for other areas. But we have been putting more
and more emphasis on high-income individuals, which I think is
appropriate. And so I think those statistics that I have seen,
that I support, speak to your question.
Mr. Bonner. Okay.
Thank you, Mr. Chairman.
Mr. Serrano. Thank you.
Now I would like to recognize my former friend, Mr. Schiff.
ALL SAINTS CHURCH OF PASADENA
Mr. Schiff. Thank you, Mr. Chairman.
Commissioner, I want to follow up on Mr. Bonner's first
question and familiarize you with a case out in Pasadena that
you may not have had a chance to become acquainted with yet.
On June 9th, back in 2005, the IRS notified All Saints
Church of Pasadena that it was being investigated for violating
rules regulating political speech for tax-exempt charitable and
religious organizations. An investigation was launched in
response to a sermon delivered by Pastor Emeritus George Regas
in 2004 criticizing the President's policy in Iraq.
All Saints is a large and historic congregation of Pasadena
with a long history of commitment to social justice and peace
values which are deeply rooted in the theology of All Saints.
Pastor Regas's speech specifically declined to make any
endorsement, saying, quote, ``good people of profound faith,''
unquote, may support either candidate.
In its complaint, the IRS relied on a subjective
characterization of the sermon's content from an LA Times
article as a, quote, ``searing indictment,'' unquote, of the
administration's policies in Iraq and at no point provided a
contextual analysis of the sermon to explain why that
investigation was warranted. Indeed, the impression was that
the article, written by someone who I don't think was even
present in the church, and its characterization of the sermon
was more important to the IRS than the actual sermon that was
given.
Over the next 2 years, the IRS and All Saints exchanged
extended correspondence, including an offer from the IRS to
consider the matter closed if All Saints would only admit
wrongdoing. All Saints refused. Finally, in 2007 the IRS sent a
letter to All Saints stating that the investigation had been
closed, yet, in a very self-serving way, still stating that All
Saints had violated the rules against electioneering.
So the IRS couldn't prove its case. All Saints never
admitted wrongdoing. And so the IRS closes the case and says,
``Well, you still did wrong,'' effectively slurring All Saints
without ever giving All Saints the opportunity to clear its
good name.
I am deeply concerned, Commissioner, that nearly 2\1/2\
years after the first notice of a church tax inquiry and after
hundreds of pages of correspondence, All Saints and every other
church or tax-exempt entity in the Nation has no better
understanding of why the IRS found them to be in violation of
their responsibilities as a 501(c)(3) organization. The lack of
guidance from the IRS on tax-exempt organizations and of a
standard of political interference creates the risk that
legitimate political speech, and speech that relates to the
theological roots of a religious organization to the present
world, will be discouraged and shilled.
I have advocated for some time that we develop a brighter
line. I don't support having religious or charitable
organizations get involved in electioneering. They should not.
But I do think that they should have the ability to speak from
the pulpit about issues like war and peace, justice and
poverty, without risking losing their tax-exempt status.
And I think that the line that we have now is so vague, it
is very hard for religious organizations to know what they can
and cannot say. And when the IRS treats a church like All
Saints the way they did, saying, effectively, ``We think you
violated the prohibition, but we won't tell you why, and we
can't prove it sufficiently, so we are going to close the case,
but we are still going to make the declaration that somehow you
violated the law,'' that I think not only disserves that
church, but also the broader community doesn't have any
guidance from that about what it should think.
All Saints wrote a letter to the Acting Commissioner, Linda
Stiff, back in September of 2007 after the IRS closed the case,
posing several significant issues with how the IRS conducted
the investigation and also posing, I think, some very
legitimate questions.
One took issue with the fact that a threshold 7611
determination was never made by a high-level official, as
required by law. Second, pointing out that the IRS had
discussions with the Department of Justice prior to initiating
the investigation and may have violated the privacy rights of
the church, in violation of existing law as well, and asking, I
think, several legitimate questions about the nature of the
investigation.
It has been 6 months since the church made this request of
the IRS. It has not heard back on any of these points. I have
the church's letter, Mr. Chairman, as well as a consent to the
disclosure of tax information, a waiver by the church, so that
you could both speak today about the case if you know any facts
of the case or respond to this committee as well.
And I would ask that both of these be admitted for the
record.
And I will provide them to you, Mr. Commissioner.
Mr. Serrano. Without objection.
[The information follows:]
Mr. Schiff. What I would ask is that, number one, the
church has been waiting 6 months to have legitimate questions
answered. I would ask that in 30 days that you give the church
and this committee a response to the legitimate questions the
church has asked. Seven months ought to be a sufficient time to
answer these questions. So that is my first request.
And beyond that, I would like to know, if you can, with
greater specificity, how you think religious organizations can
be guided, what do you advise a church that wants to talk about
war and peace, that doesn't want to just talk about it maybe
certain times of the year or during certain years but has to
forgo discussing it around elections, what kind of advice do
you give a religious institution?
So if you could answer both those questions. Will you
commit to responding within 30 days? And could you give us your
thoughts on how a religious organization is supposed to know,
based on this kind of track record, what it can and cannot say?
Mr. Serrano. The Chair will note that the gentleman's 5
minutes are up. However, this merits an answer, and so we will
take the answer.
Mr. Shulman. Let me make a couple of brief comments.
One is, as I told you, I am 3 weeks on the job, and am not
familiar with the details of this case. I don't want to speak
about anything that I can't speak about on a specific
investigation. And so I really don't know where this case is
and where the request is.
And so I can make a commitment to you that I will go back
and look into this and come back in what I view is a prompt
fashion. Thirty days, I just--I don't know where this is in the
pipeline and most of the information I have about this case
comes from you.
Mr. Schiff. Let me ask you for this commitment. The church
has been waiting 6 months for an answer to this letter. Will
you commit to giving a response to this committee in 30 days
either to the questions or tell us in 30 days why you can't
answer the questions yet?
Mr. Shulman. I will commit to come back to you within 30
days and have a discussion.
As a general principle, whether it be for this kind of
guidance or other guidance, I think we are well-served as an
agency to be as clear as we can with individual taxpayers,
corporate taxpayers, nonprofit taxpayers, churches, about what
are our rules, how do you stay on the right side of the line,
so that there is not confusion.
I have made public statements about that. I have talked to
the staff about it, that during my tenure at the IRS I plan to
push to have clear guidance. I think in this area, it is
especially important that we have clear guidance because it is
a sensitive area for churches, for politics, et cetera. It is
also incredibly important that we be a nonpolitical,
nonpartisan agency. The more we can be clear up front, the more
that there is never any question of perception about that.
And so I can't speak to the specific guidance to churches
now. I am still getting my arms around a variety of issues. I
can tell you, on a general level, I truly do believe that clear
guidance is a good thing. This is something that I think is a
valid point. And I will definitely be happy to come talk to you
and talk to other members of the nonprofit community and church
community about this going forward.
[Clerk's note.--Upon completion of the hearing,
Commissioner Shulman informed Congressman Schiff there had been
additional correspondence with All Saints Church in Pasadena,
and pursuant to the disclosure waiver, provided the Congressman
with a copy. The correspondence is included for the record.]
Mr. Schiff. I thank the chairman for his indulgence of
someone from Boston; and I look forward to, within 30 days,
hearing back from you either in writing or if you want to meet
instead.
I would like to have the church involved, since it has most
directly impacted them; and I will provide you with a waiver
that they provided as well as their written request. And I
thank you.
Mr. Serrano. Thank you. The problem is not indulging over
the 5 minutes. It is that Boston comment that keeps haunting
me.
Mr. Schiff. I realize that, Mr. Chairman. You are Mets, not
Yankees, right? Or you are Yankees, not Mets?
Mr. Serrano. I really think, Mr. Schiff, that you should
talk to Mr. Hinchey and cut your losses just about now.
Mr. Alexander.
ECONOMIC STIMULUS REBATE CHECKS
Mr. Alexander. Thank you, Mr. Chairman.
Commissioner, I don't know if this will come as comfort to
you, but in my congressional district you are still just like a
lot more than immigration.
When you say one has filed their tax statement, that
doesn't necessarily mean that they owe money; is that correct?
Mr. Shulman. I----
Mr. Alexander. There were many people who filed income
taxes but don't owe anything?
Mr. Shulman. Oh, absolutely.
Mr. Alexander. So of this number of people that have filed,
if some owe money but have not yet paid, do we still expect
them to get a stimulus check? The rule is you have to file a
return.
Mr. Shulman. Yes, we do. I think until you are delinquent
on your taxes and it is clear that you owe us, that once you
file you get a stimulus check, unless you are in dispute and it
has not been established that you owe us money.
Mr. Serrano. That is a good question. If someone files an
extension and we still don't know at that point if they owe,
does that hold up their ability to get a check or does that
take them out of the running to get a check?
Mr. Shulman. Well, it doesn't take you out of the running.
You actually have to file your return to get your stimulus
payment. So if you file an extension, the government owes you a
stimulus payment once you file your return.
Mr. Serrano. Your return?
Mr. Shulman. Your return.
Mr. Serrano. This answers another question. So not
everybody well get a check at the end of May?
Mr. Shulman. What is that? Oh, no, you need to file.
Mr. Serrano. So some checks will go out throughout the
year?
Mr. Shulman. Absolutely.
Mr. Serrano. Okay, that is good to know. There is hope for
all of us here. We don't qualify.
IRS TAXPAYER SRVICES FUNDING
The fiscal year '09 budget proposes to increase funding for
enforcement by 7.1 percent. But funding for taxpayer services
is flat. Why is this, Mr. Commissioner? If services plus
enforcement equals compliance, why shouldn't both categories be
increased, especially as the tax-paying population continues to
increase? Couldn't the IRS make use of an increase in taxpayer
services funding, especially as it continues to implement a
taxpayer-assistance blueprint?
Mr. Shulman. I know that the people at the IRS have been
continuing to work on the taxpayer-assistance blueprint.
Another thing I should point out is modernization funding
isn't for widgets and servers and guys with propellers on their
heads. It is to support enforcement and services. So part of
the modernization funding actually supports services.
I think the most important thing happening in modernization
is trying to get real-time information into the hands of the
people at the IRS who are helping people on the phone. So when
you send in information in a real-time fashion you have to have
the right information in their hand.
And so, again, I am still getting my arms around the budget
issues. I would say some of the modernization budget really is
going to help with services. I think on the enforcement and
services I would really need to understand better.
This is a budget I inherited. I support full funding of it
because our team has said it would help move the IRS forward. I
think some of the very specific issues are trying to target
areas where we know there is noncompliance. There is only so
much money in the pot, and we needed to adjust it and make
resource allocation decisions accordingly. And so my belief,
from what I know now, is this budget will move us forward and
will allow us to focus on both service and enforcement.
I think there is always room for a very legitimate debate
about how much you are putting in one till or the other. My
goal is to get the right amount of money for both service and
enforcement year in and year out to pursue our dual mission.
Mr. Serrano. This makes me think about my initial comment
about you having something in common with the Immigration
Department. Mr. Hinchey can attest to this. There are many
people who support border protection; and there are others who
feel like we do, that, yes, border protection is important but
also make it easier for those people waiting in line to become
citizens who have been waiting for years to become citizens,
balance it off.
Here is the same thing. We want enforcement, but we also
want you to supply tax services so that there is a balance, so
it doesn't look only that you are going after a problem but
rather helping people figure out the system. And that is where
the discussion will always be on what money we are allocating,
what you are asking for and what you are putting into it.
EARNED INCOME TAX CREDIT DELAYS
Let's talk a little bit about the Earned Income Tax Credit
delays. At previous hearings I have raised the issue of IRS
delays in processing many Earned Income Tax Credit refunds.
This hurts those hard-working, low-income Americans who
legitimately claim a credit. Do you have updated data on, one,
the number of legitimate EITC claims that experience delays
each year; two, how long, on average, are these delays; and,
three, what is the IRS doing to further minimize the number of
the legitimate EITC claims that experience delays?
Mr. Shulman. If you would let me come back to you with the
data, I don't have it at my fingertips.
I will tell you I have sat down and talked with our team
about the Earned Income Tax Credit. I think everyone at the IRS
recognizes it is an incredibly important program for the
Federal Government and for the taxpayers it serves. We have an
extensive outreach program on the Earned Income Tax Credit.
I think, regarding the delays, my understanding is new
procedures were put in place to expedite getting out legitimate
Earned Income Taxpayer Credit refunds. Anytime there is a
question about it being a questionable claim, we apply due
process to quickly resolve issues and avoid delaying legitimate
payments.
When I met with the team, it was very clear to me that they
were trying to balance fraud prevention and fairly
administering a refundable credit, which is susceptible to
fraud, with making sure that low-income taxpayers, who often
don't have the same resources to wrestle with their government,
are getting very quick service.
They are trying to balance both of these issues. I know the
people are very dedicated to that, and I will remain dedicated
to it. And if you let me come back to you with the numbers, I'd
appreciate it.
[The information follows:]
Questionable Refund Program (QRP), Earned Income Tax Credit (EITC)
April 8, 2008--Response to GAO's question about our proceses to
ensure that legitimate EITC claims are given to the taxpayer
expeditiously if selected for QRP.
The IRS makes every effort to ensure legitimate refunds are not
unnecessarily delayed. Improvements to the Questionable Refund Program
since 2006 include notification to taxpayers when refunds are held and
implementation of a systemic release of refunds when the IRS has been
unable to verify the refund is false within 70 days.
Criminal Investigation (CI) uses the Electronic Fraud Detection
System (EFDS) to identify returns claiming false income and credits,
i.e., withholding and Earned Income Tax Credit (EITC), and where
appropriate criminally investigates perpetrators who create the
schemes. Last year more than 200,000 returns were verified as false
with refunds claiming $1.4 billion.
EFDS screens all refund returns and flags suspicious returns for
review. Refunds on approximately 400-500 thousand (includes both EITC
and non-EITC returns) of the 100 million refund returns filed (\1/2\%)
are delayed up to two weeks while CI reviews the returns. CI completes
the verification within 14 days on average and remaining refunds (not
verified false) are systemically released at 70 days. When income is
verified as false, IRS disallows the income and resulting false
credits, including EITC.
TAX PREPARERS
Mr. Serrano. Okay. Let me ask you a related question. Some
folks, like the ranking member, prepare their own taxes, but
the folks who do the EITC for the most part go to someone, and
at times it may be a tax service. That is totally legitimate.
It seems that around this time of the year I see, in
neighborhoods like the South Bronx, every store front that is
empty has a tax place open up. When you look at these alleged
claims of abuse and fraud, is there anything within your power,
the agency's power, to look at the folks preparing those
returns, also?
Mr. Shulman. Well, some of the fraud that you see, from
what I understand, is people processing lots of returns and
sending in false information, et cetera.
Mr. Serrano. When you say ``people,'' you mean like a tax
place?
Mr. Shulman. Well, there are two types of preparer issues I
am trying to get to. There is the preparer who doesn't sign the
return, and the circular--I think it is 230--that oversees
activities of certain preparers. So we do have some outreach
there. And then there are people who are just preparing returns
and claiming to be the taxpayer in order to get refunds, and
perpetrating clear fraud that we can easily and obviously reach
into.
I think this is one of the discussions I had with the
Finance Committee about our ability to enforce the law vis-a-
vis preparers, not just taxpayers. I think, given the number of
people that avail themselves of preparers, it is clearly an
issue we are spending more time on now, seeing what our options
are, to make sure the taxpayer and the person they work with
are----
Mr. Serrano. Do you have the ability to enforce law there?
Mr. Shulman. We do with accountants, lawyers, enrolled
agents, but not with all preparers; and that is the ongoing
discussion.
Mr. Serrano. Because the law doesn't cover all preparers?
Is that the reason?
Ms. Stiff. We actually do have a program that allows us to
screen preparers for IT concerns.
Mr. Serrano. But is there a law that allows you to go after
these storefront operations, with all due respect to them, that
open up in the poorer neighborhoods?
Ms. Stiff. If there is tax fraud, the law does give us the
ability; and we do that every year. We actually prosecute
several hundreds of these a year.
Mr. Shulman. We will come back with the statistics.
Mr. Serrano. Okay. One of the advantages of having a tax
accountant, if you will, is that if I have a problem he's going
to go with me. But Mrs. Rivera, who went to a place and she
might have been given some information as to what was available
to her that actually wasn't available to her, now she's alone
because these places don't show up to give her support when she
has to go face you folks; and that is something that we have to
keep a look on.
Mr. Shulman. As you know, I come from----
Mr. Serrano. Mrs. Rivera is just a name I picked out. It is
like Jones. I don't want anybody to go look for Mrs. Rivera.
Mr. Shulman. I come from an agency responsible for
regulating an industry, the financial industry, so I am pretty
familiar with overseeing professionals who deal with ordinary
Americans; and so this is something that I am committed to
really grappling with.
Mr. Serrano. I would like us to stay in touch about that.
That is an issue that concerns me.
I have no proof of any wrongdoing, in all honesty, but I
just see that in every available storefront in my district,
somebody opens up a tax preparer office, and people stand
outside handing out fliers for customers to come in. The whole
thing about the payday loans--there is just something that
doesn't feel right to me. It may be that everything is fine,
but I would like to stay in touch to see if everything is, in
fact, fine.
COORDINATED CASE AUDITS
Let me ask one last question before I turn it over to my
colleagues. Audits of larger corporations--now you know that
liberals like me have to finally ask this question, right? A
new study released by the Transactional Records Access
Clearinghouse at Syracuse University and reported in the New
York Times shows that the number of coordinated industry case
audits, the in-depth audits of the largest corporations,
declined from 428 in fiscal year 2002 to 353 in fiscal year
2007. This is despite the fact that coordinated industry case
audits uncovered $24 billion in unpaid taxes in 2007. Why such
a sharp decline in coordinated case audits?
Mr. Shulman. I looked at the TRAC data and had a chance to
discuss this with our large business division. Let me make a
couple comments, if I could, about this.
First, I have made it very clear, and said this in the only
speech I have given and in statements, that focusing on large
corporate taxpayers, making sure that they pay their fair due,
is going to be a focus of mine as Commissioner. I really think,
for the integrity of our system, that Americans expect large
corporations to be good corporate citizens, which means paying
the amount of taxes due.
Regarding the TRAC data, I think it is one view and an
interesting view for me to see as a new person coming in, but
it doesn't paint the full picture of what has happened in the
large corporate area. Enforcement revenue is up, which means
the IRS has been doing something right in the large corporate
area.
Second, and it is a program that I support, the IRS has
taken a number of large corporations, like 70 some odd
corporations, and moved them to a program called the Compliance
Assurance Program, which means they are in with the large
corporation before they file their return negotiating all of
the taxes due so that when the number goes in there is not
going to be an audit and there is not going to be a dispute.
And a lot of the CAP data was showing the disputed amount. This
brings in money to the FISC, and so that is not reflected in
the TRAC data.
Mr. Serrano. It sounds like a preemptive rehab program.
Mr. Shulman. Well, I think it is along the lines that I
mentioned to Mr. Schiff. The more we can be clear up front,
that is a good way to administer the tax law and be clear with
our guidance. And so we are trying to do some innovative
things, which I applaud.
Third, there was a conscious decision to shift some of the
people who can deal with sophisticated large business audits to
tax shelters, promoters of tax shelters, and to get some more
coverage in the mid market.
So those are management decisions that are made every day
at the IRS. I am not going to tell you that everyone got it
right in the past or I am always going to get it right, but
trying to get that balance right was important, and those
decisions were made.
And then, finally, just around large cases, I would be
remiss if I didn't say this. I talked in my opening statement
about the fight for talent that we are going to have with the
private sector and on having to work on our workforce. In a
Sarbanes-Oxley environment, in a pretty heavy regulatory
environment, the people working large cases are very attractive
to people in the private sector; and I think we are going to
have to stay focused on keeping our best people here. It is not
going to be the easiest thing in the world for us to do. And so
I think this was one slice. I think we will be focused on large
corporations, and we will use a variety of tools to do that.
Mr. Serrano. Well, that is very encouraging, and I thank
you for those comments, and I thank you for that initiative. We
will stay in touch on that, but it is encouraging to know that
you understand the issues here for what they are and want to do
something about them.
Mr. Regula.
Mr. Regula. I thought about how I went by an auto dealer
the other day. They had a sign out: We will do your tax
returns. Obviously, what they want to do is do the tax returns
so they get the refund and sell you an automobile while they
get that refund for you.
Mr. Serrano. Really?
Mr. Regula. I assume they have somebody doing it at the
dealership. But it is interesting that they are into tax
returns.
Mr. Serrano. Don't ever get your tax returns done by your
auto dealer. That is the only advice I can give.
NARCOTICS TRAFFICKING
Mr. Regula. A couple questions. I notice the oversight
board recommended a $24 million increase to enhance
investigations of narcotics trafficking, and I think back that
Al Capone was convicted by using the IRS code, rather than for
killing people or whatever else he was involved in. Are you
doing an adequate job of using the tools that you have on
narcotics, in the narcotics area?
Mr. Shulman. You know, I am not familiar with the narcotics
area. Our Criminal Investigation division works on everything
from counterterrorism to anti money laundering to narcotics to
pursuing all of the criminal tax violations. I think we are
asking for sustained funding for that division. I think that is
important.
PROTECTING TAXPAYER DATA
Mr. Regula. Another area of concern is identity theft. I
think with the use of credit cards there's a growing problem
with that. Do you feel that the IRS is adequate in its
protection of very sensitive information that is contained on
tax returns?
Mr. Shulman. Um----
Mr. Regula. And that is, again, a subject I assume is
somewhat new to you at this point.
Mr. Shulman. Protecting taxpayer data or protecting
personal data is new to me at the IRS. We did examinations of
brokerage firms in the past, and we had brokerage firm
information, sensitive information. So I am familiar with the
issues of data protection.
What I would say is the IRS doesn't do it perfectly. There
have been some recent reports that have pointed that out. This
is hard for everyone to do. I know the IRS has made some
progress. It has encrypted all laptops, which is a step
forward. It is in the process of centralizing all of its
information technology access, which will allow us to have
clear protection, and we are reviewing everyone inside the
agency who has access control.
So we are basically saying, the presumption is you don't
have access to a system until you prove that you need it; and
every division is working through that right now.
I also have a strong belief that data protection is as much
about a culture as it is about firewalls and encryption and all
the sophisticated language that we use.
And something I am proud of, which we are launching right
now, is Operation RED. We are taking every single IRS employee,
all 100,000 plus, off-line for at least 2 hours so they may
have discussions with their managers about what data comes in.
What are you doing about it to protect it every day? It's not
just about the procedures, because everyone is always getting
e-mails about procedures, but to have a real discussion about
it and to try to make it top of mind for every employee. They
have a sacred trust with the American people and need to
protect this data.
My second week I actually filmed a video that every single
employee is going to see, with me talking about how seriously I
take this issue. I actually think that the IRS has a long
tradition, because of taxpayer privacy rights, thinking about
this issue, but since technology has changed we just need to be
all over this.
So I have every indication to believe when I came in Linda
and Richard understood this issue and were focused on it and we
are going to keep pushing. It is very hard to do. The private
sector and the government are wrestling with these issues, but
we are going to do what we can to make sure we are taking very
seriously the protection of taxpayer data.
Mr. Regula. Thank you.
TAXPAYER ADVOCATE SERVICE FUNDING
The taxpayer advocate program has worked in Ohio in my area
very effectively on behalf of people that use the service, and
I notice there is a proposed reduction of $7.5 million below
the current year. Do you think, in your opinion, the budget
request is adequate to do the job on the Taxpayer Advocate
Service?
Mr. Shulman. Let me say a couple of things. One, I think
the Taxpayer Advocate Service is an asset to the IRS and a good
thing for the American people. I met twice with the current
Taxpayer Advocate and plan to work with her going forward.
I think these budgets are always a balance. The IRS has
billions of dollars focused on taxpayer service. We do a lot of
taxpayer service. The Taxpayer Advocate does some things. I
wasn't there when this budget was put forward, but that balance
was trying to be met.
What I do know is over the last 2 years the Taxpayer
Advocate Service budget has risen 9 percent. The IRS budget as
a whole has risen about 7 percent. So I think it is important
that we fund it well. I can't speak to the specifics beyond
that.
Mr. Regula. Well, I can only say my experience in Ohio
works very well. It does provide the taxpayers a place to go
for help if needed.
Thank you, Mr. Chairman.
Mr. Serrano. Thank you.
Mr. Hinchey.
Mr. Hinchey. Thank you very much Mr. Chairman.
Mr. Shulman, thank you very much. It has been an
interesting session here; and I very much appreciate the candor
and the way in which you are effectively trying to deal with
the situation, even though you have only been there a short
period of time.
One of the things I want to say, again, in gratitude and
appreciation, is the way that the IRS has set up these helping
operations, these offices, phone operations, to help people,
particularly senior citizens, retired people who are interested
in trying to qualify for the help that is coming in as a result
of the stimulus package--my understanding is that just in New
York alone there were 37 operations set up across the State. I
think that was a very good thing to do, and I very much
appreciate that being done.
TAXPAYER COMPLAINTS AGAINST PRIVATE COLLECTION AGENCIES
I want to talk a little bit more about the privatization
action that is taking place; and I know that this is going to
be the major focus of your attention, to make sure that it is
working right and to even consider excluding it, as some of us
have recommended.
There were, according to my understanding, something in the
neighborhood of five dozen taxpayer complaints against private
collection agencies, including violations of taxpayer privacy
laws. So there is a certain amount of uncertainty or
unhappiness about that.
I wonder if, not now but as a result of maybe some of the
people who are with you here, they might be able to give us the
number of actual complaints that came in as a result of the
privacy operations and maybe even the amount of fines imposed,
if there were any, on private collection agencies for taxpayer
violations and the number of validated penalty cases and the
overall number of taxpayer complaints that were filed against
the private collection agencies.
[The information follows:]
Of the 108,905 cased placed with the private collection agencies
(PCA's) though March 2008, the IRS has received 102 complaints, with 17
of these received from or on behalf of taxpayers and the remainder
self-reported by the PCA's. All complaints are investigated by both the
IRS and the PCA's, with a validity determination made by a Contract
Concerns Review Panel. There have been 5 validated complaints (0.005%).
There are three categories of complaints, classified based upon the
severity of the incident. Type One validated complaints involve
inappropriate PCA employee behavior (rudeness, poor attitude). Type Two
complaints involve intimidation, heavy-handed behavior, or similar
activity rising above the level of a Type One complaint and bordering
on a statutory violation. Type Three complaints involve a violation of
statute or applicable law.
There have been two validated Type One complaints which were not
serious enough to warrant monetary fines; however, corrective actions
were implemented. Three validated Type Three complaints have resulted
in monetary fines totaling $10,000.
Any validated complaint, IRS or contractor, is one too many. We are
committed to improving the protection of taxpayer rights throughout all
IRS programs.
AUTOMATED COLLECTION SYSTEM FUNDING
Mr. Hinchey. Also, the Appropriations Act of '08, this
appropriations bill requires the IRS to spend $7,350,000 to
increase personnel in the automated collections system. I
wonder if--I don't expect it now, but if you could look into
that and inform us where the IRS is in implementing that
provision and whether or not the managers statement which
accompanied the bill urging the IRS to take the $7.35 million
in funding from the private tax collection program, whether or
not that actually occurred. That was in the managers amendment
asking that that $7.35 million, which was put in the
appropriations bill to upgrade the automated collection system,
if that could be taken out of the private collection system.
[The information follows:]
We are on track to spend the $7.35 million increase for the
Automated Collection System (ACS) functions as required by the FY 2008
Consolidated Appropriations Act. We allocated the funding evenly
between our Wage and Investment (W&I) and Small Business Self-Employed
(SB/SE) functions and will be spent on new hires, overtime and support
costs.
In total, this funding equates to 126.5 FTE for ACS operations. We
allocated 83.8 FTE to ACS and ACS Support hiring, and 42.7 FTE to
overtime. We hired in eleven of the fourteen call sites and three of
the four support sites. We started hiring in February 2008 and will
complete the remaining hires June 2008. We based the new hire
allocation on the sites' capacity levels and ability to recruit and
deliver the training. We are using the overtime to provide training
support and to work ACS inventory and correspondence.
The following worksheet provides a breakdown by FTE and Dollars.
--------------------------------------------------------------------------------------------------------------------------------------------------------
FTE new hire New hire cost Overtime Overtime cost Total FTE Total dollars
--------------------------------------------------------------------------------------------------------------------------------------------------------
SBSE ACS..................... 37.2 $2,008,800.00 12 $873,600.00 49.2 $2,882,400.00
SBSE ACS Support............. 9.3 502,200.00 4 291,200.00 13.3 793,400.00
--------------------------------------------------------------------------------------------------------------------------
46.5 2,511,000.00 16 1,164,800.00 62.5 3,675,800.00
WI ACS....................... 29.8 1,442,863.00 21.4 1,498,000.00 51.2 2,940,863.00
WI ACS Support............... 7.5 363,137.00 5.3 371,000.00 12.8 734,137.00
--------------------------------------------------------------------------------------------------------------------------
WI Subtotal.............. 37.3 1,806,000.00 26.7 1,869,000.00 64.0 3,675,000.00
Grand Total.......... 83.8 4,317,000.00 42.7 3,033,800.00 126.5 7,350,800.00
--------------------------------------------------------------------------------------------------------------------------------------------------------
EXXON MOBIL
Mr. Hinchey. And just finally, I would be very interested
to learn what the tax amount was on the $40.6 billion that was
earned by Exxon Mobil last year. I don't expect the answer now,
Mr. Chairman, but if that number could be provided to us at
some point soon we would appreciate it.
[The information follows:]
The Congressman is referring to the earnings reported by ExxonMobil
for the year ending 12-31-07. Returns for last year won't be filed
until September 2008, so the IRS does not have the data requested at
this time. In addition, the IRS cannot respond to the request at the
present time, since the IRS is prohibited from disclosing taxpayer
information requested without proper authorization, pursuant to
disclosure rules and privacy laws.
Mr. Hinchey. Again, I want to thank you very much for doing
this job and the confidence that we have in how much better
this operation is going to work. Thank you very much.
Mr. Shulman. Thank you.
Mr. Serrano. On a personal note, I bet you that it was a
large amount that they paid but probably a lower percentage
than Mrs. Rivera paid in my district on her $25,000, maybe.
One of the dangerous things, Commissioner, to do at a
hearing like this is to praise you as much as we have.
Mr. Shulman. It feels dangerous.
Mr. Serrano. But there seems to be a sense in this
committee that you are very interested in doing this in a very
fair and balanced way. Does that sounds like a news station or
something? And we appreciate that, and we hope that that
continues. And we also commit ourselves to trying to help you
in any way we can to do your job. And so I have a few questions
that I will submit for the record.
Mr. Regula. Same here.
Mr. Serrano. And so will you and so will you.
And we thank you for your testimony today. We thank you for
taking Mr. Hinchey's tax return personally to handle for him,
and we stay committed to helping you. And I personally thank
you for no Boston Red Sox comments, as my colleagues like to
make.
Thank you so much. The hearing is adjourned.
Wednesday, April 16, 2008.
SECURITIES AND EXCHANGE COMMISSION
WITNESS
CHRISTOPHER COX, CHAIRMAN
Chairman Serrano's Opening Statement
Mr. Serrano. Good morning. The subcommittee will come to
order.
But before I do, Mr. Regula, I would like to ask you a
question in public because you have been a chairman much longer
than I have.
When the Pope calls a meeting of Cardinals, am I supposed
to show up?
Mr. Regula. Absolutely.
Mr. Serrano. Just checking.
Mr. Regula. Let him know ahead of time, so he can deal with
the problem.
Mr. Serrano. Get used to me, right?
I welcome you to this hearing on the Financial Services and
General Government Subcommittee. Today the subcommittee will
hear from the Chairman of the Securities and Exchange
Commission, the Honorable Christopher Cox. Always nice to see a
former colleague with us.
Chairman Cox, welcome to the hearing. We are pleased to
have this opportunity to discuss the fiscal year 2009 budget
with you.
The SEC is responsible for promoting investor protection
and education as well as for overseeing the integrity of
capital markets. These responsibilities are essential so that
businesses have access to capital so they can grow, add jobs
and contribute to the Nation's economic strength.
The Commission's budget request for fiscal year 2009 is
$913 million, which is $7 million above the enacted fiscal year
2008 spending authority level. Part of this funding will be
provided through $42 million of prior year balances, resulting
in an appropriated level of $871 million. This modest funding
increase is allocated toward the 2009 Federal pay raise as well
as promotions and merit pay increases.
However, this funding increase will not be enough to pay
for all of the agency's salary needs at its authorized
personnel level. To meet its salary requirements, the
Commission is proposing to decrease its authorized number of
full-time employees down to its actual fiscal year 2007 levels.
This troubles me, as recent market trends have raised
legitimate questions about the overall integrity of the market.
It seems that a reduction in workforce at the SEC would send a
signal that the government is not committed to the important
goals of improving market structure and transparency. We want
to be sure that you have enough people to accomplish your
mission, and I will be interested in your comments on the
staffing at the Commission.
The SEC has been in the news a lot recently resulting from
the Treasury plan for regulatory reform. This plan would
dramatically change the structure of the SEC by merging it with
the Commodity Futures Trading Commission. The subcommittee
looks forward to hearing the Commission's response to this
plan.
And we welcome you today it, and we will remind you that
your statement will be fully put in the record. You have said
this yourself so many times, and we ask you to keep your verbal
comments to 5 minutes so that we can drill you and grill you
and put you through all kinds of terrible things.
But a man who has never put anyone through anything
terrible is Mr. Regula, our ranking member.
Mr. Regula's Opening Statement
Mr. Regula. Thank you, Mr. Chairman.
And as you know, Chairman Cox, recent events have put you
in the eye of the storm. And people are having some misgivings
as to whether there is adequate regulation in the market to
protect the average investor. Bear Stearns of course is a
classic where you go to $172 a share--thousand a share down to
$2, ultimately $10.
But I am sure you are challenged always to strike a
somewhat delicate balance between regulating and letting the
market work in a free way, which historically we have done. So
I will be interested in your insights as to how we address that
problem. I know that you have a somewhat limited budget number.
And how do we go about restoring confidence? We went
through this with Enron, Global Crossing, Arthur Andersen; the
result was a doubling of your budget.
As people understood it, the fragility of these
institutions and now the temptation is to say, okay, we will
just double the budget, and somehow this solves subprime and
all the other problems go with it. So I am very interested in
your comments. I think the chairman did a good job of
summarizing the challenges that confront the Subcommittee.
Mr. Serrano. Thank you. You are on.
Chairman Cox's Testimony
Mr. Cox. Thank you very much, Chairman Serrano.
Ranking Member Regula, Representative Kilpatrick, members
of the subcommittee who are not here but represented
undoubtedly by staff. I want to thank you for the opportunity
to testify today about the President's 2009 budget request for
the SEC.
To answer directly your question, in return for the SEC's
not quite $1 billion budget, the taxpaying public is getting
significant value. The SEC oversees the nearly $44 trillion in
securities trading every year on America's public equity
markets; the disclosures of almost 13,000 public companies; the
activities about 11,000 investment advisors; nearly 1,000 fund
complexes and 5,700 broker dealers. And the Commission is
active on a number of other fronts: working to protect
investors, promote capital formation and foster healthy
markets.
The SEC is pursuing wrongdoers in all corners of the
securities markets while applying enforcement resources to the
areas of greatest risk for investors. The Enforcement
Division's subprime working group is aggressively investigating
possible fraud market manipulation and breaches of fiduciary
duty. The SEC is also investigating insider trading; wrongdoing
in the municipal bond market, Internet and microcap; fraud and
scams against seniors.
In our most recent year, we brought the highest number of
corporate penalty cases and the second highest number of all
enforcement cases in the agency's 74-year history. In the
current fiscal year, the Commission has already broken the
record for the largest penalty ever assessed against an
individual defendant when the former CEO of United Health paid
over $600 million to settle charges related to options
backdating.
Through our Office of Compliance, Inspections and
Examination, the SEC is aggressively using a risk-based
approach to our program of regular examination of securities
firms. Those examinations are focused on the firms' controls
over valuations; their controls to prevent insider trading; the
procedures they have in place to protect seniors in our
markets; and the adequacy of the firms' compliance programs to
prevent violations of the securities laws.
The SEC is also working closely with our fellow regulators
to promote the fairness and stability of the markets. Under a
recently concluded Memorandum of Understanding with the CFTC,
we have established a formal cooperative process to better
regulate today's increasingly interconnected markets.
The SEC has immediately acted to implement the new
authority from Congress in the Credit Rating Agency Act. Under
this new authority, the Commission is conducting inspections of
rating agencies to evaluate whether they are adhering to their
published methodologies for determining ratings and managing
conflicts at interest. Very soon this year, the Commission will
formally consider new rules to regulate credit rating agencies
that build on the lessons learned from the subprime market
turmoil.
To anticipate future problems, we are more than doubling
the size of the SEC's Office of Risk Assessment. It will help
staff throughout the Commission look around corners and over
the horizon to identify potentially dangerous practices before
they impact large numbers of investors and the economy as a
whole.
The failure of Bear Stearns has brought to the fore the
regulatory gap in the supervision of investment banks. Although
Federal law provides for the supervision of commercial banks,
no such scheme exists for the largest investment banks. The
Commission created the Consolidated Supervised Entities program
to fill this gap. Without this voluntary program, there would
have been no consolidated information available to regulators,
including the New York Fed, when Bear Stearns precipitously
lost liquidity in mid-March. While the CSC program is at
present voluntary and receives no dedicated funding from
Congress, we understand that Congress may be acting to fill
this gap.
The Commission has also taken additional steps to safeguard
investors and protect the integrity of the markets in short
selling transactions, by proposing a rule that would specify
that abusive naked short selling is a fraud.
Since the SEC first received authority under the Sarbanes-
Oxley Act to use Fair Funds, we have returned a total of more
than $3.7 billion to wronged investors. We expect to distribute
another $1 billion in the next 6 months alone.
The SEC is also building on its growing success in
returning funds to harmed investors by creating the Office of
Collections and Distributions to professionalize this task. We
are also using a new computer tracking system, called Phoenix,
to speed up the return of funds to investors and a new agency-
wide enforcement database called The Hub.
The SEC's efforts in the international arena have by
necessity been a key focus of my chairmanship. The world's
regulatory and enforcement authorities are finding that we have
to collaborate if we hope to protect our own investors.
Accordingly, the SEC is working closely with our international
counterparts to monitor the markets and pursue fraudsters
wherever they may run. We are also exploring the idea of mutual
recognition among a very few high-standards countries with
robust regulatory and enforcement regimes.
In recognition of the interconnectedness of global markets,
the SEC will continue to expand our own expertise in IFRS and
explore additional ways that U.S. investors might benefit from
increased comparability using a high-quality international
standard.
After years of experience through the SEC's voluntary
interactive data pilot program, the Commission will consider a
rule in 2008 that requires the use of interactive data to give
investors the ability to easily find and compare key data about
the companies and the funds in which they invest.
There are other investor-friendly improvements in store for
mutual fund disclosure. In the coming months, the SEC will
consider authorizing mutual funds to issue a summary prospectus
that will present key facts about the fund up front with more
detailed information available for investors on the Internet or
in paper on request. These improvements build on the resounding
success of our comprehensive enhancements to the disclosure of
executive compensation, which took effect last year.
Mr. Chairman, these are only some of the highlights of what
the SEC has recently been focused on and what we have planned
for the coming year. The agency's mandate is as broad as it is
important to America's investors and to our markets.
The budget request for fiscal year 2009 will allow the SEC
to continue to aggressively pursue each of these ongoing
initiatives on behalf of investors as well as to address new
risk areas as they emerge. The request will allow the SEC to
fully maintain our current program of strong enforcement; of
risk-based examinations and inspections; our disclosure review
program for America's public companies and mutual funds; and
our extensive rulemaking agenda across a wide array of
regulatory topics.
I want to thank you for this opportunity to discuss the
SEC's appropriation for fiscal year 2009, and, on behalf of the
over 3,600 men and women at the SEC, I want to thank you and
this subcommittee for the support that you have so well
provided over so many years for these vital efforts.
I look forward to continuing to work with you. And I would
be happy to answer your questions.
[The information follows:]
TREASURY REGULATORY REFORM PLAN
Mr. Serrano. Thank you so much for your testimony.
As we all know, Chairman Cox, last month the Treasury
Department issued its plan to dramatically overhaul the entire
financial regulatory structure. One of the key proposals
highlighted in this plan is the merging of the SEC and the
Commodity Futures Trading Commission, CFTC.
Chairman Cox, was the Commission consulted during the
development of this plan? Has your agency developed an official
response in favor or against the Treasury plan?
Mr. Cox. The Treasury plan was the Treasury plan. It was
not a product of the President's Working Group on Financial
Markets, of which the SEC is a member. It was, rather, the
effort of the Department, and I think the Secretary personally,
to set out a vision for how things might be different in the
future and to challenge the status quo. I think, in part to
achieve that objective, it was deliberately not a consultative
process. It was not a committee process. The SEC was certainly
aware that this was going on. And we have discussed in other
fora the possibility of better integrating the balkanized
financial regulatory structure in the United States. But, to
directly answer your question, this was a Treasury product, and
the SEC was not part of its preparation.
With respect to the specifics of a CFTC-SEC combination, it
has been advanced by people over a number of years. For
example, former Chairman Arthur Levitt wrote an op-ed in The
Wall Street Journal, I believe it was last year, urging this
combination. Since the Treasury report, he has said that there
is a right way and a wrong way in his view to do this and that
it matters greatly how it is done. But I would simply observe,
as a former Member here, that there are serious jurisdictional
challenges for Congress in what is obviously a legislative and
not an executive initiative. If that merger were to occur, it
would have to be done by legislation.
From an authorizing standpoint, jurisdiction over the SEC
rests with the Financial Services Committee in the House.
Jurisdiction over the CFTC has existed with the Agriculture
Committee for many years through many administrations. That
jurisdictional divide has presented a significant barrier to
consideration of legislation of that kind.
Mr. Serrano. So you feel that it has to be a congressional
decision?
Mr. Cox. Indeed, I would say that about the entirety of the
Treasury proposal. There is one item in the entire blueprint
that is susceptible of being accomplished by executive action,
and that is an initiative of the President's Working Group.
That can be done by executive order. Everything else is
entirely a legislative proposal.
Mr. Serrano. All right. It is interesting, just for the
information of the members of the committee--Mr. Regula knows
this already--but the only difference between the Senate
Financial Services Appropriations subcommittee and our
subcommittee is that the commodities in our jurisdiction exists
in the Agriculture Subcommittee of Appropriations. Whereas Mr.
Durbin's committee, Senator Durbin's committee in the Senate
includes it already. That is the main difference. So it has an
effect on this subcommittee. But certainly that is not what we
should base the decision on.
So unless I didn't hear right, you didn't tell me you are
supporting the merger.
Mr. Cox. Well, I think----
Mr. Serrano. Or has it reached that point yet? It has been
presented by Treasury.
Mr. Cox. Well, I think, first, the merger of the CFTC and
the SEC is something that is far beyond the capacity of the
Chairman of the SEC or the SEC as an agency or the executive
branch in its entirety to accomplish. It is solely up to the
Congress to do that. So, I mean, I suppose I can tell you that
I think it would be very wise for the Congress to take a look
at how better to integrate our financial services regulation.
But beyond that, unless the Congress wants to initiate this, it
is not possible for me, as Chairman, to undertake it.
I will tell you that I have recently executed a Memorandum
of Understanding with the CFTC that takes the landscape as it
presently exists and makes it work. It puts a little grease in
the gears so that, while they do their job under their
statutes, their rules and their approach, and we do ours under
ours, it makes sense. But as you know, options and derivatives
can compete head to head.
Mr. Serrano. Right. But just one last comment on this. If
it reaches a point where it is before Congress and you are
asked about this, what would be your answer?
Mr. Cox. It would be entirely dependent on the how. But I
would be at a very broad level supportive of closer
integration, not just of regulations and derivatives and
options, but commercial and investment banking across the
board. We have in this Nation a lot of different regulators for
things in the marketplace that become very much intertwined.
FTE ISSUES AT THE SEC
Mr. Serrano. Chairman Cox, since fiscal year 2008, the SEC
has had some form of performance-based pay system. The goal of
these performance-based systems is to stimulate retention and
recruitment so that the highly qualified workers at the SEC and
the best and brightest college graduates that the Commission
recruits are not as enticed by the greener pastures of the
private sector.
In recent years, however, the SEC has not fully budgeted
for the increases needed to adequately pay the salary increases
that were earned by their employees. In fact, the SEC has seen
an uptick in attrition during this time period. This year's
budget request only includes a 2 percent increase over what was
approved in 2008. It is very unlikely that this level will
provide the Commission's employees the pay increase they
deserve.
So my question is, at a time when we need a strong
workforce at the SEC to maintain and improve the integrity of
the securities markets, why is the agency putting itself in the
difficult situation of risking the loss of its best employees
in order to save a few dollars?
Mr. Cox. Mr. Chairman, for the coming year, the budget that
we are submitting assumes that the SEC will offer merit raises
and COLAs equal to an average of about 4.5 percent. And that
puts us at parity with other financial regulators against whom
we compete in the Federal Government.
We also offer a competitive compensation package across the
board. We offer some things that others don't. We provide
health and vision and dental benefits, the latter two which the
SEC pays for in its entirety, that others do not. We just
opened a Cadillac of a child care center, which I am very proud
of. It has been one of my initiatives as Chairman. That really
contributes to the quality of life for employees with families
at the SEC. And we have currently been rated one of the top
places to work in the Federal Government, number three in the
last year.
So I think that we are doing everything necessary to make
sure that the SEC continues to set the pace for being the best
place to work in the Federal Government.
Mr. Serrano. Well, obviously, we respect your comments and
your knowledge on the issue. But I have to tell you that on
this side of where we are sitting today, there seems to be a
sense that maybe not enough is being done to protect your
workforce and to retain the folks you have now and to make sure
you can recruit the people you need. And again, as we get into
this situation that we are already in to a certain extent, you
will be looked at, the Commission will be looked at, to provide
assistance and commentary in how we deal with this crisis. I
was going to say looming crisis, but the crisis may be here
already. So please understand that it is not our intent to
banter you about the issue, but there is a sense on this side
of the table that we are running the risk of losing good people
and not getting the opportunity to bring some bright folks into
the Commission.
Mr. Cox. Well, that is why you have me here to ask me
questions and share the data. I will just start by observing
that we are, in terms of turnover, at 25 percent lower rates of
turnover than were common during the 1990s. Turnover is now,
you know, historically low. And from 2006 to 2007, the most
recent year, it went down. So I think we are in very, very good
shape. Experientially, in terms of whom one can attract to work
at the SEC, the quality of people that come to our agency and
that dedicate their lives and their careers to it is just
absolutely striking and extraordinary. So we have absolutely
the best people at the SEC that the country can offer. And you
know, this is sometimes not the case in the Federal Government
where you have to compete against the private sector. But, not
only do we go toe to toe with the private sector, but when
people do leave the SEC, they are recruited to the very top
ranks of the private sector and not because of their contacts
with government but because of their skill and experience.
Mr. Serrano. Thank you.
Mr. Regula.
Mr. Regula. Thank you, Mr. Chairman.
And I do note that you have been rated very high as a
desirable place to work. And I think you have some unique
authority on matters of benefits and wages as compared to other
government agencies, which has enabled the SEC to attract top-
rate employees.
SUBPRIME MORTGAGES
Question, what was the role, if any, of the SEC in the
recent meltdown of the subprime activities which caused bank
stocks to take a real hit? And it certainly has, to some
extent, eroded investor confidence. Was there an SEC role? If
so, what was it?
Mr. Cox. Most certainly. We are not the frontline
regulators for lenders, of course. And that is where the
problem started, with a deterioration in underwriting standards
for loans, which you are all too familiar with from your work.
Mr. Regula. But that started at the root. The cause was a
collateralization of these subprime mortgages were made into
financial instruments.
Mr. Cox. Yes, the securitization of those loans then had
that problem bleed into the securities markets. The rating of
the packages by the rating agencies was a contributor to this
problem. Congress wisely, with uncommon foresight--usually we
find that we are passing remedial legislation after the fact
when it is too late--just completed work on the Credit Rating
Agency Act and gave the SEC the authority to go in and
regulate. So we don't need to write new legislation. We have
brand-new legislation. We worked very, very fast so that, at
the first opportunity, we put rules in place and then started
inspecting these rating agencies. We have been in with the
credit rating agencies examining them for some months now. That
will inform our rule writing this year. So that is a piece of
it that the SEC did not have but now does, and we are using
that authority very, very aggressively.
With respect to the large investment banks, as I mentioned,
our Consolidated Supervised Entities program was being put
together when I first came to the Commission. It is a voluntary
program. It doesn't exist in law. I believe it should. But
thank God that that program existed because then, when the Fed
needed to go into Bear Stearns and look at what was going on,
there was a history of at least a few years of Bear Stearns
having to compute at the consolidated level for the whole
entity, not just the regulated broker-dealer subsidiary that we
have authority over, their Basel capital ratios and so on.
SEC AND FEDERAL RESERVE AUTHORITIES
Mr. Regula. Does the Fed and SEC have corollary authority?
Or do they each have a niche in this regulatory structure?
Mr. Cox. Well, the Fed is traditionally a bank regulator.
Mr. Regula. Right.
Mr. Cox. And post-Gramm-Leach-Bliley, we have a regulatory
gap. We don't have in law a program of consolidated supervision
for investment banks, and we need one.
Mr. Regula. You will in the future?
Mr. Cox. That is up to the Congress. We have a program,
just to be very clear, at the SEC, the Consolidated Supervised
Entities program, that we created as it were out of thin air.
It is built on the slender reed of an exemption from the net
capital rule. The reason that I think there was largely take-up
among the major investment banks in this voluntary program is
that, if the United States did not offer something like this,
Europe was going to. Probably what the firms would have done,
although we won't know for sure, in that circumstance is that
they would have perhaps ring-fenced their operations in
Europe--separately set up European operations and consolidated
supervision by the European regulators, and then we would have
had no consolidated supervision whatsoever of the consolidated
entity.
So I think it is vitally important that there be
consolidated supervision of the large investment banks, and it
is something that, post-Bear Stearns, has gotten your attention
in Congress.
BEAR STEARNS COLLAPSE
Mr. Regula. Are we gaining understanding as a result of
Bear Stearns, which was the most visible evidence of this, as
to preventing these things from happening in the future?
Mr. Cox. No. There is no question that an important lesson
was learned in the Bear Stearns debacle. And that is that
short-term secured funding can be a significant risk factor.
SOVEREIGN WEALTH FUNDS
Mr. Regula. A couple of other things. What is the role of
sovereign wealth funds as investors in the U.S. financial
markets, and they are more and more in our marketplace? Is this
a cause for concern? And will it affect governance and
corporate governance in the United States?
Mr. Cox. Sovereign wealth funds and other large private
investors that are generally lacking in transparency challenge
our regulatory system in a number of ways. As a matter of
national policy, the Treasury just made it very clear that the
United States welcomes this type of investment. Our markets are
open to all forms of foreign investment.
At the same time, at the Securities and Exchange
Commission, our approach is to treat sovereign wealth funds the
same way in which we would treat any large nonpublic investor.
We have challenges that are somewhat unique in the case of
sovereign wealth funds, however, such as the fact that, whereas
normally we would ask for enforcement cooperation from the
sovereign, if the investor that we might have an enforcement
concern with and the sovereign from whom we have asked for
enforcement assistance are one and the same, you can see the
conflict of interest.
U.S. FINANCIAL MARKETS CHALLENGES
Mr. Regula. What do you see as the biggest challenges
facing U.S. financial markets? And how do you see the SEC
adapting to build future investor confidence.
Mr. Cox. Well, the SEC comes at that question from the
investor standpoint. It probably matters where you get on the
circle. They are all related answers. But if one tackles that
question from the investor standpoint, then the rest of your
question is extremely relevant. It is all about market
confidence. People, not just in this country but around the
world, put their money where they think it is going to be safe,
first, and, second, where it can earn a fair or perhaps an
impressive return. They want to make sure that they have the
rule of law, predictability, sound and orderly markets and so
on. That is the part that the SEC provides. So it is vitally
important, as our markets become increasingly interconnected,
that the United States play to its strengths, that we align
ourselves with other high-standard countries and that we not
join in a race to the bottom because that is not America's
comparative advantage, and we would lose that race.
PENSION FUNDS
Mr. Regula. Well, obviously a great chunk of pension funds
are invested in the market, and therefore, the individuals who
are depending on the financial security of their pension funds
ultimately tracks back to SEC, I think, in ensuring that these
funds are invested in what would be a stable market. Is this a
concern? And is this something that is part of SEC's mission,
to give the John Q. Public a sense of security that his pension
fund is going to be there when he needs it?
Mr. Cox. Orderly markets are at the center of the SEC's
mission.
ORDERLY MARKETS
Mr. Regula. The SEC was created in the absence of orderly
markets, wasn't it, back in the 1930s?
Mr. Cox. Yes.
Mr. Regula. I think Franklin Roosevelt said we have to do
something about this.
Mr. Cox. In fact, our three missions are investor
protection, orderly markets and capital formation. Those three
are highly complementary.
MARKET SECURITY AND STABILITY
Mr. Regula. Well, I have a lot of questions for the record,
but is the present environment conducive to capital investment
and a sense of security? Because moneys have to flow from many
different sources to build our industrial and our business
structure.
Mr. Cox. Well, I think it is a testament to the strength of
the U.S. market and the resiliency of our economy that, despite
all of the shocks that we have been through, including record
high oil prices and other commodities prices, tax increases on
the horizon and subprime crises and so on, equity values,
although there is a great deal of volatility in the market, are
remaining fairly constant.
Mr. Regula. Well, I see the Dow Jones keeps kind of
fluctuating where they are trying to decide whether the market
is stable.
Mr. Cox. Well, that is right. There is a good deal of
volatility now. And, of course, the market is off significantly
this year. So while we are stable, I think, from a standpoint
of investors, the best investor protection is a rising market.
Mr. Regula. A lot of 401(k)s riding on that.
Thank you, Mr. Chairman.
I will have some questions for the record.
Mr. Serrano. Thank you.
I was going to ask the Chairman if the Yankees were still a
better investment than the Red Sox. But I don't want him to
break my heart on national television. So I won't ask.
Ms. Kilpatrick.
SEC'S RELATIONSHIP WITH OTHER REGULATORS
Ms. Kilpatrick. Thank you, Mr. Chairman.
Good to see you again, Chairman Cox.
Interesting discussion, and you are very calm in light of
what I see as a very unstable financial market. Probably in the
world because we do contribute to much of that, everyone looks
at the U.S. in terms of the world market and how we are doing,
which is why I see much of the instability that we are
witnessing today. I have a couple of questions, and I love the
ranking member's dialogue as he was taking us through it
because one of the things, when he talked about Bear Stearns
originally, early March, and JP Morgan buying them out, $30
billion by the Fed, and then it ended up at the end of March at
$2 a share. I think they settled at $10 and that JP would take
$1 billion of that loss, and the Fed would take $29 billion,
give or take something, still the $30 billion.
It is amazing to me, and I am a retired investor in much of
that system, so I watch it regularly. Thought I could retire
early, and I will have to work 5 or 10 more years, as it goes,
as it is spiraling. I am concerned that we have helped Bear
Stearns. I believe that--I used to be a high school teacher
many years ago--and taught how stable it was and how it kept
the rest of the country strong. Today I am not so sure. And
with some of the other financial institutions having the
problems that they are having and then going to the market and
having China and India and Singapore and others buy them or
save them--save them would be better--I am concerned about what
that means for our children and my grandchildren as well as our
economy as a whole. And as the SEC looks at it, and you talked
about the regulatory gap, and I honestly believe there is one,
I am not sure what it ought to be and how we can bring it
together to make it more sound and perfect and healthy for our
nation as well as for our investors. And I hope you will come
to that.
You also talked about a race to the bottom, which I don't
want to put in the universe right now because we are not there;
we are not going to be there, and we are going to stay up high.
I believe that because we are the strong country that we are.
But with foreign investment buying up much of our, not only
real estate and housing, you also mentioned short-term secured
funding, which is what a lot of Bear Stearns and other banks
rely on, mortgages in this instance. What do we see? Give us a
picture. I want to hear from you. You are the professional on
this. And as we go back and talk to our institutions as well as
our constituents, they really want to know. And I know you
don't have a crystal ball. You can't really predict this. But
as it goes now and as we have been seeing all of this year and
really at the end of last year, what can the SEC do in
partnership with the Fed? And what is that relationship between
the Fed and the SEC? Separate of course, both in Treasury. How
do you work together? How do you save America's financial
institutions and investors at the same time? By doing what?
Mr. Cox. Well, increasingly, as commercial banking and
investment banking, and as securities products and derivatives
products all start to become of interest to investors from an
economic standpoint and compete against one another to be
substitutable, regulators that decades ago used to have very
well-defined, if you will, stovepipe functions are now forced
into one another's arms. And I should add that this isn't just
true in the United States. It is also true overseas. Almost
everyone here today, if you have any kind of a mutual fund or a
retirement plan of any kind, probably is invested in foreign
equities and foreign securities as well as domestic ones in
that way, and you might have chosen to do that even directly on
your own.
The fact that there is so much cross-border trading now has
forced the United States and regulatory counterparts overseas
also into one another's arms. We have to work together and
collaborate as never before. What will provide the confidence
that every single individual investor needs to put their money
in the market is a sense that in this country and abroad--it is
increasingly necessary abroad--there is a rule of law and there
is a certainty and a predictability to the rules that they can
rely upon. We will never erase the risk that is inherent in
what we call a security because the prices will go up and down.
That is part of the arrangement. But we can take away the risk,
or at least we can minimize it, that the system itself is
somehow not on the level. And we want people to be very, very
highly confident that the system is set up to protect them.
And that also extends, I should add, to disclosure. The SEC
administers a rather elaborate system of disclosure to put
information out there so people can make up their own minds.
That is really important for the market to work. Information is
really the oil that greases the wheels in the market.
Increasingly over the last many decades, I think that
disclosure has been junked up with a lot of people writing, as
it were, an insurance contract for themselves to cover their
own assets but not with a view to inform investors and making
the information accessible to them. So a lot of our initiatives
at the SEC are aimed at making that big investment that public
companies make in disclosure more useful for individual
investors and for the marketplace.
BUDGETARY AND LEGISLATIVE NEEDS
Ms. Kilpatrick. So does the SEC have what it needs to do
what you just described? Or are you recommending or will you
recommend that Congress take further action? It is a global
market. It has been heading that way for the last couple
decades. We seem to be spiraling down; others spiraling up. Do
you have what you need in terms of law and policy,
administrative rule that will keep us strong?
Mr. Cox. The budget that we are proposing this year for the
SEC will be the largest in the agency's history, and it will be
the second year of rising budgets after 3 years of flat
budgets.
Ms. Kilpatrick. Sometimes it is not budgetary, because you
get most of your operating money from fees. So if we are just
giving you under a million, you will handle the $44 trillion in
securities. Do you have enough wherewithal, legislative power
as well as other things, with the world market changing, should
we be doing something different than we did in 1930 or 1940? Is
the market now--because it is different and you are the
professional here, we need some help.
That click there, one last question, sir, may I?
Mr. Cox. Just to be clear, I want to say that our budget is
entirely appropriated. We do not get to use the fees that we
collect. So the budget that I am submitting to you, the just
under $1 billion budget.
Ms. Kilpatrick. $913 million.
Mr. Cox. That is the real number.
Ms. Kilpatrick. All right. So you didn't understand my
question then. Is SEC as strong as it possibly can be in terms
of the global economy and the world that we live in?
Mr. Cox. The SEC is exceptionally strong. We are doing the
job I think better than ever before. There is nearly unlimited
opportunity for us to do more. The markets are vast. But, given
that we are making choices and we operate in a world of finite
resources, by asking for the largest budget that the SEC has
ever had, I think we are putting ourselves in a position to do
the job well.
Ms. Kilpatrick. Thank you.
Mr. Serrano. Thank you.
Mr. Bonner.
IMPACT OF SARBANES-OXLEY ON SMALL BUSINESS
Mr. Bonner. Thank you, Mr. Chairman.
Chairman Cox, welcome. I must confess that I was telling my
10-year-old son, who lives in Alabama, that I was coming to
this hearing today, this morning when I was wishing him well as
he went off to school. And he said, ``Well, who is coming
before the committee?'' And I said, ``Well, the Chairman of the
SEC.'' And while this is a baseball, and Yankees predominantly,
committee, in Alabama, he was thinking I was talking about the
commissioner of the Southeastern Conference. So he will be
disappointed that I don't have that opportunity.
Mr. Cox. You won't be surprised to know the same thing has
happened to me.
Mr. Bonner. We all recognize the need for the reforms that
came about as a result of Sarbanes-Oxley. But there are many
small- and medium-sized public companies that have been hit
with unnecessary and expensive regulatory requirements as a
result of that legislation. What steps could the Commission
take to address some of these problems? And how quickly do you
think that it could be done?
And also, if it were to require legislation, would you be
willing to submit that or work with Congress to help enact such
legislation?
Mr. Cox. When I first came to the Commission 3 years ago,
compliance with Sarbanes-Oxley, section 404, was a major
irritant across, in particular, the smaller public company
regulated community, but really across the markets as a whole.
And there was great concern, not only in this country but also
abroad.
I have met extensively with Members of Congress to
formulate a plan of attack to solve that problem. And, with a
great deal of support in the House and in the Senate, we
overhauled completely the audit standard that the Public
Company Accounting Oversight Board was using for 404
compliance. We also introduced the first ever management
guidance so that the companies in their own assessments would
not have to rely on the very elaborate, extensive and
complicated guidance that had been given for auditors. That new
guidance and the new audit standard are now in place. So this
will be the first year that we will see whether or not the 404
process is efficient as we expect it to be.
When Congress wrote that provision of Sarbanes-Oxley, as I
well recall because I was a Member of the House-Senate
conference committee, no one expected that it would be a poster
child for waste and inefficiency. Everyone wanted to get the
benefits of strong internal controls for the benefit of
investors. So that is the object.
We want to get the benefits that were intended by Congress
but not all of the waste. And to make sure that smaller public
companies don't have to be a guinea pig as we try out what we
would expect to be the vastly different, more efficient
approach, we have postponed for another year their compliance
with the audit portion of section 404(b). And the SEC has
undertaken a very formal study of the costs this year, in the
first year of the new procedure. That will then inform our
determination of how to proceed at the end of this year.
CURRENT MARKET STATUS
Mr. Bonner. Thank you. To follow up on the line of
questioning the vice chairwoman and the ranking member had for
you, I noted in your biography that when you served in
President Reagan's administration, one of the things that you
advised the President on was the 1987 stock market crash. And
since there is so much concern about consumer confidence is not
strong and there is a lot of concern about the economy, I know
you are not the Chairman of the Federal Reserve or the
Secretary of the Treasury, but from the position you sit on and
with your historical perspective and knowledge, fundamentally
is the market strong, weak, sound? How would you describe it?
Mr. Cox. Well, long ago, it was appropriately noted that
the market will fluctuate. In these days, it is fluctuating. I
think that is going to continue. The question of the market's
strength ultimately is and should be connected to the Nation's
economic strength. I think our market should be and generally
is a good reflection of that at any moment because I strongly
believe in the overall sustenance of the American economy. I
think it is a good bet for the long term to invest.
What the SEC is responsible for, however, is not the
prevailing price level in the market but rather the rules of
the road so that the price discovery works. And we are
doubling, as you might imagine, our efforts on the enforcement
side, on the regulatory side. I mentioned credit rating
agencies here, and there are other important initiatives
relating to these current topics, so that everyone can take
away confidence that the rules of the road are sound and
security will be enforced.
FTE REDUCTION
Mr. Bonner. And the chairman and the vice chairwoman both
focused on whether you have the staff and the tools that you
needed to do the work. And I noted that the SEC budget more
than doubled since fiscal year 2001. But what considerations
led to your decision to request a less than 1 percent increase,
eliminating 97 positions? And what positions would be
eliminated? And how were those chosen?
Mr. Cox. Well, first, you need to understand that we are
talking about FTEs, full-time equivalents. In real life, what
happens is that we don't have FTEs working for us. We have real
people. And so as always there is a difference between the
authorized level, the number of slots and actual people that
you have working. There is normal turnover. People, some of
them sometimes die. Sometimes they leave and go on to other
things. New people join and so on.
What we are talking about doing in real life is actually
slightly increasing the number of human beings that work at the
SEC compared to last year.
Mr. Bonner. Thank you, Mr. Chairman.
Mr. Serrano. Thank you.
Mr. Cramer.
TREASURY REGULATORY REFORM PLAN
Mr. Cramer. Thank you, Mr. Chairman.
Welcome back, Chairman Cox. We are glad to see you here. We
have enormous respect for your role there at the SEC.
I want to make reference to, Secretary Paulson a few weeks
ago announced the biggest overhaul of the financial regulations
since the Depression, and there has been reaction and
commentary. I am referring right now to an AP story that looked
or reacted to that plan, that proposal. And it seemed to be
evaluating whether the power and authority of the SEC could
diminish as a result of that plan. So I would be curious, I
know Kathy Casey is one of your Commissioners for whom I have a
lot of respect, and I have known her since she was at the
Senate Banking Committee, seemed to be carefully defensive or
clear to say that your regulations would not be affected and
that investors would be protected under this planned plan and
that your regulatory approach is really not different from the
principles-based philosophy recommended in Paulson's proposal.
So, for the benefit of investors, particularly small investors,
I would like for you to give us some insight as to your
reaction of that plan, your participation in that plan, and if
in fact the SEC's role could be diminished.
Mr. Cox. Let me pick up where I left off. We had a brief
discussion in my colloquy with the Chairman on this topic. As I
mentioned, the Treasury proposal is a Treasury proposal. It is
meant I think to stimulate discussion and thought. And it has
as its major premise the notion that there is a balkanization
of regulation of financial services in the United States today.
I agree with that major premise. I think we can do a much
better job. And in this respect, I may be wearing my U.S.
Government hat or my former Congressman hat as much as my SEC
hat.
But if you are looking government-wide, there is a better
job that we can do at coordinating the regulation of the
financial services and products that today are much more
integrated than when we first came up with these legislative
schemes. One of the things that we do at the SEC is try to
stretch the Investment Company Act of 1940 to cover today's
mutual funds and their competition with ETFs. None of this was
really imagined when the law was written, and it gets
increasingly harder with every passing year.
But with respect to the particulars, it is important to
recognize not only that this is a Treasury proposal, not an SEC
proposal or Fed proposal or anything collaborative in that
sense, but also that it is 100 percent a legislative proposal.
So whether you go with the three-pot approach in that blueprint
or twin peaks approach that others have adopted or the unified
approach that some have recommended, there is an awful lot
there for the Congress to chew on. And it would be entirely
your choice how to do it.
Then you get into some of the fine print, the detail, such
as, do we want to be more principles-based or rules based? And
that discussion to me has always reminded me of the old beer
commercial, ``Tastes great. Less filling.'' How one comes down
on the question of whether you want to be more principles-based
or more rules-based is something of a Rorschach test. In a
principles-based system, or at least a system that wishes to be
called that, such as the U.K.'s system, they actually have a
big rule book that sits behind their principles. We, on the
other hand, have a lot of detailed rules that everyone is aware
of, but we also have some pretty broad principles that we like
to put into effect. We start out with very sturdy notions of
investor protection and orderly markets and the promotion of
capital formation that I hope that ultimately our rules always
build towards.
So I don't know that calling yourself one or the other is
going to help resolve what ultimately would be very difficult
questions of implementation. There are different marginal rules
that apply for derivative products on the one hand and options
on the other. At some point, whether you call it principles-
based or rules-based, somebody in Congress, if you were going
to merge those things, will have to say, here's how it is going
to be done. Those are tough questions. And apart from the
jurisdictional divide that I mentioned earlier, if some day
there is a conference committee hammering those things out, you
are going to need the future Kathy Caseys of the world to sort
this out.
Mr. Cramer. Thank you. I think that is part of my point.
This is a little overwhelming, and it is extremely important
that we get this right, especially in the context of the
problems of today. So I appreciate that comment and further
information.
Thank you, Mr. Chairman.
Mr. Serrano. Thank you.
Sen'6or Kirk, por favor.
Mr. Kirk. Mi jefe supremo.
Mr. Serrano. Comandante.
CREDIT RATING AGENCIES
Mr. Kirk. Mr. Chairman, I want to thank you for all you
have done on Sarbanes-Oxley 404 for the small companies. I know
we are in a new delay for small companies, and my hope is maybe
we just permanently extend that to relieve what was a huge
unintended burden on the most dynamic part of our economy.
I want to turn to another topic raised in your testimony.
With the Credit Rating Agency Reform Act, we eventually gave
you the power to look at these agencies. You started operation
in June of 2007. Just 4 months later, the price of non-agency
asset-backed securities plunged. Assets declined. Investors
lost confidence. We then entered into a decline in the U.S.
market and a severe liquidity crisis. And did you do that?
Mr. Cox. Well, I want to congratulate, once again,
Congress. I don't know that Congress had a crystal ball, but it
is always better to legislate authority ahead of time rather
than after the fact. The statute got enacted towards the end of
2006. We put our rules out lickety split. You know, under the
Administrative Procedure Act, there has to be notice and
comment and so on and so forth. So, by June 26, 2007, we had
the opportunity then to go out and start our program.
Mr. Kirk. It is a bad timeline that you got there.
Mr. Cox. Well, I wish that it had been a year earlier. That
would have made a big difference.
Mr. Kirk. Absolutely.
Mr. Cox. But the good news is that we are going to be able
to put sturdy rules in place this year based on what we learned
without having to come to you and ask for legislation.
Mr. Kirk. So here is the appropriations question I have
though. The Consolidated Supervised Entities program, which is
voluntary, and we don't have a dedicated funding stream by the
Congress, let me ask you the direct question, would you support
this committee providing that dedicated stream so that we
have----
Mr. Cox. Yes.
Mr. Kirk. Which is the correct answer I think for us. And
secondly, you know the legislation limited the operations of
your staff and operations so that we can't rewrite credit and
agency reports. We can just expose them. But I am wondering, do
we have a long-term problem with market concentration of credit
rating agencies? Because if there is too much power in just
three firms, then an arrogance and concentration and market
ability to have customers with no other place to go means that
this committee would have to appropriate an enormous amount of
resources.
On the other hand, if there were not three powerhouses but
say seven or eight, a credit rating agency that poorly advised
its clients would quickly lose--well, officially but really we
are talking three. And I am thinking of it like a Justice
Department antitrust lawyer would look at it. You just look at
the HHI index and see, do we have real market power here?
Obviously, that is a similar problem with the big four and a
half accounting firms. What do you think of that? With a
dedicated stream, do we also need to look at market power of
the agencies themselves?
Mr. Cox. Yes, and I think that that is one of the two main
purposes of the Credit Rating Agency Reform Act. It went after
conflicts of interest, and it went after the problem of
competition or the lack of it. So what we have been able to do
with new standards for NRSRO rules that are in place under the
new law is to start and grant registrations for new
competitors. And I think that with the rules that we will put
in place later this year, we will have even more grounds for
fair competition because you will have some data to be able to
compare and contrast the performance of others. And if a firm
is routinely putting out bad ratings, then it will be in the
interest of the other competitors, just as Coke goes against
Pepsi, to point out why they are better and others are not.
Mr. Kirk. Bud raised the point that the Secretary raised,
which is the systemic risk which is not your purview; you don't
have that portfolio yet. He made some proposals here. But for
me, let me nail you down further.
Could you get back to us on what your recommended funding
line-item for the CSE would be?
Mr. Cox. Yes, and in fact, I would endorse the same thing
for CRAs, because when that new authority was given to the SEC
regarding credit rating agencies, it was without any specific
allocation of resources to it.
[Clerk's note.--The Securities and Exchange Commission
provided the following in response to the question:]
Below is proposed report language for the Subcommittee's
consideration:
Proposed Committee Report Language
related to sec's consolidated supervised entities (cse) and credit
rating agencies programs
``The Committee's recommendation assumes that no less than
$5,750,000 will be obligated for the personnel compensation expenses of
the Consolidated Supervised Entities (CSE) program and that no less
than $2,200,000 will be obligated for the personnel compensation
expenses of the oversight of nationally recognized statistical rating
organizations (NRSROs).''
Mr. Kirk. Yeah. I would just say, Mr. Chairman, I mean you
are presiding over the implementation of Basel II, FASB 157 and
now which are giving you tools to look at these agencies.
Obviously, if they had got it right, the market would have
corrected itself without this huge jolt. And so I want to make
sure that you have the resources to create much greater
transparency within at least these three agencies and maybe
give some opportunities to the competition, which would also
help.
Mr. Cox. But I think there is great reward for a very small
investment relatively speaking of money and people in these
areas.
Mr. Kirk. Yes.
Thank you, Mr. Chairman.
Mr. Serrano. Thank you. I was getting a little nervous
where you were going with that line of questioning, when you
asked him what he had to do with something at the beginning
there. Because just a day or two I was announced--it was
announced that I would be chairing this committee, the market
crashed in New York. I hope----
Mr. Kirk. The Havana stock market went up.
Mr. Serrano. Oh, that went up big. Chavez was very happy.
The whole socialist world was very happy.
Mr. Hinchey.
HEDGE FUNDS
Mr. Hinchey. Thank you very much, Mr. Chairman. I must say,
this is the most entertaining subcommittee on the
Appropriations Committee.
Mr. Serrano. In more ways than one.
Mr. Hinchey. Mr. Cox, great to see you. And thanks very
much for the job you are doing. I think you are involved
currently in what appears to be a very complex set of
circumstances. And I think that that is primarily associated
with the hedge funds and the way in which they are behaving.
Hedge funds apparently have been around for a long time. I
think they go back to 1949. But I don't think they have ever
been anywhere near as prominent as they are today. And I think
the main reason for that is the deregulation legislation which
was passed by this Congress and which opened up the ability for
a number of financial operations to engage in practices which
are not overseen by the government, and that is particularly
true of hedge funds.
I agree with what you said; I think the investor should
have some confidence in their investment. But the confidence
that they should have in their investment doesn't come about
without the regulation, the oversight of these investment
operations. So the deregulation of investment I think has had a
major impact on the way these hedge funds operate. And right
now, they are very, very prominent. They control something in
excess of $2 trillion of investment capital out there in the
economy.
So my first question I think is, what do you think we
should do? There is a speculation out there now that calls for
internal monitoring. All of the people involved in hedge funds
should now start behaving in a different way. This is what we
are recommending. But there is no guarantee that they are going
to do that, even though the most responsible people involved in
hedge funds are saying that, yes, this is the way it should
happen. I think that we need is to go back to regulation.
Senator Grassley has introduced a piece of legislation in the
Senate which would begin to move us in that direction.
A lot of people around the country now are blaming the
subprime mortgage, subprime market, rather, and the fact that
people unable to pay their mortgages for the decline in the
economy that we are experiencing. But I don't think that that
is exactly accurate. I think that that is more a result of the
decline in the economy. And I think a decline in the economy is
primarily driven by the manipulative way in which investments
have been engaged in, including the incorporation of large
amounts of these mortgages into these hedge fund investments.
So I would be very interested to hear what you think about that
and how quickly you think we should go back to a system of
complete regulation of this operation.
Mr. Cox. Well, two points. First, the term hedge fund
covers a variety of animals, as you know.
Mr. Hinchey. Yes.
Mr. Cox. And I think we would all agree, given the breadth
of the definition, that there is a lot of good that goes on in
that space and there is a lot that goes on to be concerned
about or to be suspicious of. Based on the fact that we are
primarily a law enforcement agency, we are bringing scores of
enforcement actions against hedge funds, 71 since I have been
the Chairman, focused on a number of areas, including fraud and
insider trading.
Mr. Hinchey. Yes. Well, that is a good point, what you are
making right now. The kind of fraud that is being engaged in by
investment practices is becoming more and more obvious. I mean,
things like money laundering, for example, the hedge funds are
not exempt from money laundering. They can bring all kinds of
money in from any place; nobody knows where it came from, what
were the circumstances, how legal it may have been, how corrupt
it may have been, how it may have been involved in the
importation of narcotics, for example, and things of that
nature. None of that is being overseen.
Mr. Cox. Well, I am not sure that is the case. I think----
Mr. Hinchey. No. It is specifically the case. There is no--
there is no monitoring of the introduction of money. So money
laundering is fully capable within the operation of hedge funds
if there are some hedge funds who want to engage in that kind
of activity.
Mr. Cox. Well, the AML surveillance that is conducted
routinely, since it is directed, among other things, at
notorious felons and so on, does not require that it be set up
in any specific way in order for it to work. And I know that,
to the extent that anyone suspects that a particular hedge fund
were engaged in that, law enforcement would be interested, and
we have tools, and the SEC does civil work of course. But we
have the Department of Justice and many other authorities that
are interested in that.
Mr. Hinchey. Yes. Well, I am not suggesting that the SEC is
at fault there. Because the SEC can only engage in the kind of
oversight examination, insight that they are allowed to under
the law.
Mr. Cox. That is right. And that is the second point that I
want to make. As you know, shortly after I became Chairman, we
went effective with a rule requiring a registration of hedge
fund advisors which was then thrown out by a court. And there
was a good deal of concern at the time that that meant the end
of the SEC's program of registering hedge fund advisors. What
has happened--in fact, we now have a good experiential base to
look at--is that nearly 2,000 hedge fund advisors representing
over $2.5 trillion, the number that you quoted, are registered
with the Commission voluntarily. And so, in addition to the
anti-fraud authority that we have with respect to any hedge
fund, whether it is registered or not, we also then have the
opportunity to go in and examine those hedge funds and to
subject them to our regulatory regime.
Mr. Hinchey. How frequently has that been done?
Mr. Cox. We do that as a matter of course through our
Office of Compliance, Inspections and Examinations.
Mr. Hinchey. But how frequently has it been done? What is
the major head hedge fund that has been examined in great
detail recently?
Mr. Cox. I would be happy, in response to your question, to
submit a detailed answer for the record.
Mr. Hinchey. Okay.
Any more time? My time is up?
INVESTOR EDUCATION
Mr. Serrano. Thank you.
It is not the practice of any committee to mention folks
that come into a hearing. But it is interesting that my next
question relates to the fact that some young folks walked into
our audience a few minutes ago. The Fiscal year 2009 budget
requests states repeatedly that the SEC Office of Investor
Education and Advocacy will continue to focus on educating
seniors and retirees about ways to assess investment commonly
marketed to them and detect and avoid potential frauds and
scams. This is clearly an admirable goal that the subcommittee
fully supports.
However, this subcommittee is concerned because no other
demographics are mentioned in the request when there are
clearly additional groups in need of investor education. For
example, for many young investors and recent immigrants, the
recent market downturn is the first time that they have seen
their investments negatively impacted by market conditions.
Are there any other demographics that the office is trying
to actively reach, such as minorities or young investors?
Mr. Cox. Indeed, that is the pedigree, Mr. Chairman, of
this office. Young people are the first demographic that
everyone thinks of when they think of investor education or any
kind of education. The good news is that young people have the
most to benefit by having this education because they have the
one thing that some of us older people don't, and that is time.
As you know, a major premise of investor education is to help
people understand the time value of money. If you set aside
money and leave it there for 20, 30, 40 years at a reasonably
safe prudent investment with compounding and with growth, you
get something that you just can't get for yourself when you are
50 years old or 60 years old or 70 years old.
So getting the young people with those kinds of messages is
really important. We work in a number of ways, not only through
schools, as you would expect, and groups that are set up across
the country to help young people with financial literacy, but
with our armed services. A lot of men and women in the armed
services are getting a steady paycheck for the first time when
they first join, and they are remarkably busy people. They
don't have a lot of time to spend thinking about what to do
with their money. And so, at the highest levels, including the
Commissioners themselves, we go out to these bases and put on
big educational events. We are doing everything that we can to
focus on that demographic.
Second, with respect to different language groups and
ethnic groups and so on, we try and have our over, you know,
800 tapes that we have and other means of presentation
translated into a number of languages and make them available
through channels that are likely to reach the target audience.
So the reason you are hearing about seniors from us is that
that is a new addition to an old line-up. We have always been
interested, of course, in older Americans as well, but having a
big push for seniors has been thought appropriate because of
the aging of the population and the fact that there are going
to be a lot of people living longer without the kind of nest
eggs that they thought they needed when they followed their
parents' example, you know, 30 years before. And that is going
to present a lot of new risks that we have never faced before.
Mr. Serrano. Let me ask you a question, a related question.
Do you get any kind of a pushback on the issue of immigrants
and helping them invest? You see, as you know, we have two
immigrants in this country. We have the one who is here with
documents and is on his way to becoming a citizen; or who has
become a citizen and we don't call an immigrant any longer.
Then you have the person who is not here documented. That
person may have money. One of the biggest mistakes we make is
that we seem to stop those people from taking their money to a
bank or investing because they are not here legally. Do you
single out just folks for help that are here legally? Do you
ask that question at all? Do you get a pushback when you meet
with other folks and say, well we are not supposed to be
dealing with those folks? Because I suspect that there is a lot
of money under mattresses in this country out of fear of
putting it somewhere else because that somewhere else may
indicate how you are here in this country. And meanwhile, the
economy is hurting because that money should be invested and
put up somewhere.
You know my whole theory on this immigration thing is, all
right, you have a border issue; deal with that. You have an
issue of what to do about folks in the future; deal with that.
But while you are here, while you are here, you are paying
taxes. You have money, some money, then let's make use of that.
Let's not keep you apart because that only hurts the rest of
us. Any thoughts on that?
Mr. Cox. Well, first, our investor education initiatives
are aimed through a lot of channels, including the Web, and at
as many people as we can find. For all I know, we are reaching
people around the world, and I hope we are.
Second, some of the problems that you have described with
people who are, for a number of reasons, are either frozen out
or freezing themselves out of the financial system, there are
some good initiatives underway that start with trying to get
people to open up savings accounts and checking accounts so
that they are not completely disintermediated. That, of course,
is a commercial banking initiative ultimately, but we are all
aware of the paycheck cashing services and the fees that people
pay and how much abuse and potential for abuse exists in that
space. And we find ourselves partnering, even though commercial
banking is not our line of country, we find ourselves
partnering with them in our investor education initiatives.
SUBPRIME LENDING
Mr. Serrano. Right. Right. I have a few questions that I
will submit to the record. I just have one more that I want to
ask you. And it is, of course, on the subprime lending issue.
Chairman Cox, in the testimony you submitted for today's
hearing, you mentioned that a subprime working group was formed
within the enforcement division of the SEC and that this group
is investigating possible fraud, market manipulation and
breaches of fiduciary duty related to the subprime crisis. The
group was probably formed too late to help prevent or mitigate
this particular crisis, But what steps are being taken by the
group, or by the SEC in general, to prevent a crisis like this
from happening again? Is the SEC working with other agencies on
a lessons-learned strategy, if you will, from the recent
housing crisis?
Mr. Cox. Yes, to the second question. And I will answer it
in more detail. To the first question, what are we doing in the
subprime working group? We have, as a matter of public record,
as you know, ongoing law enforcement that we have some trouble
talking about publicly. But as a matter of open record, we have
opened up approximately three dozen investigations through this
task force. The kinds of issues that we are tackling with the
subprime task force include whether or not the underwriter that
was involved in the offerings knew or was reckless in not
knowing that the issue and the lender were not complying with
its disclosed lending policy, whether the lender was
misrepresenting the loan or the loan's characteristics or
whether the lender failed to maintain adequate reserves. We
are, in fact, working closely with other agencies that have
regulatory oversight over subprime lenders as well as
coordinating our investigative efforts with the Federal
Reserve, the FDIC and the Department of Justice. There have
been a number of international fora that I have been heavily
involved with that have also been inferring lessons learned
from this, including the Financial Stability Forum, which
reports to the G-7, and the International Organization of
Securities Commissioners, where I am going to become chairman
of the technical committee this summer. I am the co-chairman of
the task force that is looking at this from an international
level. And you full well know there are many countries, not
just the United States, that have been harmed by this problem.
Mr. Serrano. Thank you.
I will submit, Mr. Regula, the rest of my questions for the
record.
Mr. Regula.
Mr. Regula. I am curious, do other countries, industrial
countries, have an agency comparable to the SEC?
Mr. Cox. Yes.
FOREIGN REGULATORS
Mr. Regula. It seems like financial securities don't know
borders anymore.
Mr. Cox. The answer to your question is, most definitely,
other countries do have agencies that are our counterparts to
the Securities and Exchange Commission. And in fact, the SEC,
for most of them, has been the model. Since we created the
genre in 1934, virtually every country with a market economy
has thought it necessary to have a securities regulator. Our
International Securities Regulation Institute, which we conduct
at the SEC and is currently underway, has attracted 78
countries to come and be trained and learn how we do things at
the SEC and to share best practices.
MONOLINE INSURERS
Mr. Regula. One of the keys to security in the marketplace
is monoline insurers, because they guarantee to some extent. Do
you regulate them in any way?
Mr. Cox. No. We are not the frontline regulators for
monoline insurers. They are regulated by the State insurance
commissioners chiefly.
Mr. Regula. Mr. Chairman, I will submit the rest of my
questions for the record.
Mr. Serrano. Thank you.
Mr. Hinchey.
HEDGE FUNDS IMPACT ON ENERGY PRICES
Mr. Hinchey. Thank you very much, Mr. Chairman.
Chairman Cox, I wanted to ask you another question about
the hedge funds and the way in which they seem to be having an
impact on the price of energy, particularly on gasoline and
home heating oil.
One of the things that we have seen recently is a statement
by the Energy Information Administration and a brief quote is,
``Weakness in the U.S. economy has led to softening gasoline
demand.'' And we know that is true. The demand has gone down
because of the fact that there is a weakness in our economy,
and particularly people throughout the middle class are having
a very difficult time meeting their daily obligations, whether
it is energy, food, whatever it might be. So I am just curious
as to what extent the hedge funds in bidding out for large
amounts of these commodities, these oil commodities, are
driving up the price, particularly in the context of the weaker
dollar. It seems to me that, based upon the information I have
been able to look at, that that is exactly what is happening.
And a large amount of the increase in the price for energy,
particularly oil, is going up based upon hedge funds intruding
themselves in there and investing in those commodities. I have
to laugh a little bit when I say intruding themselves in there
because I mean they are free and open to do that. There is no
regulation against them. They can just do it in whatever way
they want to. But do you think that we ought to have some sort
of regulation on these kinds of investments to ensure that
people aren't doing this or these funds aren't doing it in ways
that are making it more and more difficult for ordinary people
to be able to drive their car back and forth to work, feed
their family, all of the things that people are having a
difficult time doing in this country today?
Mr. Cox. Well, the abuse of trying to corner the market or
manipulate the price of the commodities is sufficiently old
that one of the oldest playing card games in the country, Pit,
is based on that. We can go back to the early 20th century and
find an example with that pathology. So not only should there
be regulation against that kind of manipulation of the market,
but there is. And, to the extent that surveillance can detect
it, to the extent that we can get a trail of evidence that
leads us to it, our law enforcement can be all over it. It is
even possible for that kind of behavior to run afoul of the
criminal laws as well, so not only the SEC but the Department
of Justice could become involved.
Mr. Hinchey. Is that an internal regulation within the SEC?
Is it based upon Federal law? What is the basis for it? How
does it operate?
Mr. Cox. Yes. The manipulation of a market or other kinds
of abuses or manipulative behavior that is designed to
influence particular security of any kind is prohibited by
section 10(b) of the Securities and Exchange Act of 1934. And
we have a special rule that implements that, rule 10G-5 that we
have used very aggressively and for a long time.
Mr. Hinchey. To what effect was the Deregulation Act of
1999 impinging upon that? How does that make it weaker and more
difficult----
Mr. Cox. I don't think that in any way affects our ability
to use rule 10G-5.
Mr. Hinchey. So can you give us an example, and I don't
expect you to do it right now, but can you give us some
examples directly how the SEC is engaging in actions to try to
ensure that hedge funds manipulative investments are not
actively engaged in driving up the price of energy,
particularly oil?
Mr. Cox. I will do my level best to answer the question. In
fact, if I provided the answer for the record, I might be able
to provide you more information than I could in this public
hearing about ongoing law enforcement and give you a good
inventory of the cases that we have had of late on hedge funds.
And then, second, to tell you what we have got going on with
respect to energy in particular.
Mr. Hinchey. Okay. I appreciate that very much. Thank you.
Thank you, Mr. Chairman.
Mr. Serrano. Thank you. Well, we thank you for your
testimony today. We thank you for your service to our country,
and we thank you for your agreement to give us some further
information.
Mr. Regula.
REFORMS RESULTING FROM SUBPRIME MELTDOWN
Mr. Regula. One more question. Are we putting in place
regulatory mechanisms to preclude another meltdown
prospectively as a result of the subprime situation? Are we
doing something to avoid this down the road?
Mr. Cox. Yes, indeed, I would say that not only in the
United States but around the world we are very rapidly putting
in place reforms that are designed to address each of the kinds
of problems that have been identified. We talked about one of
them in this hearing, credit rating agencies. There is a great
deal of international focus on that and a good deal of focus on
the new rules that we will be writing this year. There are
accounting issues that are very central to these questions.
There were a lot of off-balance-sheet activities that ended up
affecting sponsors when either directly or indirectly it was
taken back on. There are obviously problems with underwriting
standards for lending that gave rise to all of this in the
first place. And there are important lessons to be inferred
from the Bear Stearns incident. And we are already adjusting
both the Federal Reserve and the SEC, the way we look at
liquidity measures.
Mr. Regula. Well, the Fed is getting into the investment
banking field, which they had not traditionally regulated. Is
that correct?
Mr. Cox. Yes. By opening up the discount window, they have
done that in a very significant way.
Mr. Regula. Thank you, Mr. Chairman.
Mr. Serrano. Thank you.
Once again, we thank you for your testimony, and we thank
you for your service.
Mr. Cox. Thank you, Mr. Chairman.
Mr. Serrano. Meeting is adjourned.
Securities and Exchange Commission
April 16, 2008
Page
Chairman Serrano's Opening Statement............................. 261
Mr. Regula's Opening Statement................................... 262
Chairman Cox's Testimony......................................... 262
Treasury Regulatory Reform Plan.................................. 274
FTE Issues at the SEC............................................ 275
Subprime Mortgages............................................... 277
SEC and Federal Reserve Authorities.............................. 277
Bear Stearns Collapse............................................ 278
Sovereign Wealth Funds........................................... 278
U.S. Financial Markets Challenges................................ 278
Pension Funds.................................................... 279
Orderly Markets.................................................. 279
Market Security and Stability.................................... 279
SEC's Relationship with Other Regulators......................... 280
Budgetary and Legislative Needs.................................. 281
Impact of Sarbanes Oxley on Small Business....................... 282
Current Market Status............................................ 283
FTE Reduction.................................................... 284
Treasury Regulatory Reform Plan.................................. 284
Credit Rating Agencies........................................... 285
Hedge Funds...................................................... 288
Investor Education............................................... 290
Subprime Lending................................................. 291
Foreign Regulators............................................... 292
Monoline Insurers................................................ 292
Hedge Funds Impact on Energy Prices.............................. 293
Reforms Resulting from Subprime Meltdown......................... 296
Questions for the Record: Chairman Jose'1 E. Serrano............
297 Ranking Member Regula.............................................
302 Mr. Hinchey.......................................................
308