    [Senate Hearing 110-285]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 110-285

                                                            Senate Hearings

                                     Before the Committee on Appropriations

    _______________________________________________________________________

                                                         Financial Services

                                                     and General Government

                                                             Appropriations

                                                           Fiscal Year 2008

                                                                  H.R. 2829

    COMMODITY FUTURES TRADING COMMISSION
    DEPARTMENT OF THE TREASURY
    DISTRICT OF COLUMBIA
    FEDERAL DEPOSIT INSURANCE CORPORATION
    NONDEPARTMENTAL WITNESS
    OFFICE OF MANAGEMENT AND BUDGET
    SECURITIES AND EXCHANGE COMMISSION
    SMALL BUSINESS ADMINISTRATION
    THE JUDICIARY

                                                            S. Hrg. 110-285

      FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL
                                   YEAR 2008

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

                                    HEARINGS

                                    before a

                              SUBCOMMITTEE OF THE

                COMMITTEE ON APPROPRIATIONS UNITED STATES SENATE

                           ONE HUNDRED TENTH CONGRESS

                                 FIRST SESSION

                                       on

                                   H.R. 2829

        AN ACT MAKING APPROPRIATIONS FOR FINANCIAL SERVICES AND GENERAL
    GOVERNMENT FOR THE FISCAL YEAR ENDING SEPTEMBER 30, 2008, AND FOR OTHER
                                    PURPOSES

                                   __________

                      Commodity Futures Trading Commission
                           Department of the Treasury
                              District of Columbia
                     Federal Deposit Insurance Corporation
                            Nondepartmental witness
                        Office of Management and Budget
                       Securities and Exchange Commission
                         Small Business Administration
                                 The judiciary

                                   __________

             Printed for the use of the Committee on Appropriations

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

                                   __________

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                          COMMITTEE ON APPROPRIATIONS

                    ROBERT C. BYRD, West Virginia, Chairman
    DANIEL K. INOUYE, Hawaii             THAD COCHRAN, Mississippi
    PATRICK J. LEAHY, Vermont            TED STEVENS, Alaska
    TOM HARKIN, Iowa                     ARLEN SPECTER, Pennsylvania
    BARBARA A. MIKULSKI, Maryland        PETE V. DOMENICI, New Mexico
    HERB KOHL, Wisconsin                 CHRISTOPHER S. BOND, Missouri
    PATTY MURRAY, Washington             MITCH McCONNELL, Kentucky
    BYRON L. DORGAN, North Dakota        RICHARD C. SHELBY, Alabama
    DIANNE FEINSTEIN, California         JUDD GREGG, New Hampshire
    RICHARD J. DURBIN, Illinois          ROBERT F. BENNETT, Utah
    TIM JOHNSON, South Dakota            LARRY CRAIG, Idaho
    MARY L. LANDRIEU, Louisiana          KAY BAILEY HUTCHISON, Texas
    JACK REED, Rhode Island              SAM BROWNBACK, Kansas
    FRANK R. LAUTENBERG, New Jersey      WAYNE ALLARD, Colorado
    BEN NELSON, Nebraska                 LAMAR ALEXANDER, Tennessee

                        Charles Kieffer, Staff Director
                      Bruce Evans, Minority Staff Director
                                     ------

           Subcommittee on Financial Services and General Government

                     RICHARD J. DURBIN, Illinois, Chairman
    PATTY MURRAY, Washington             SAM BROWNBACK, Kansas
    MARY L. LANDRIEU, Louisiana          CHRISTOPHER S. BOND, Missouri
    FRANK R. LAUTENBERG, New Jersey      RICHARD C. SHELBY, Alabama
    BEN NELSON, Nebraska                 WAYNE ALLARD, Colorado
    ROBERT C. BYRD, West Virginia (ex    THAD COCHRAN, Mississippi (ex
        officio)                             officio)

                               Professional Staff

                                 Marianne Upton
                             Diana Gourlay Hamilton
                            Mary Dietrich (Minority)
                            Rachel Jones (Minority)

                             Administrative Support

                                  Robert Rich
                           LaShawnda Smith (Minority)

                                C O N T E N T S

                                  ----------

                             Friday, March 9, 2007

                                                                       Page
    Commodity Futures Trading Commission.............................     1
    Small Business Administration....................................    19

                           Wednesday, March 21, 2007

    The judiciary....................................................    49

                           Wednesday, March 28, 2007

    Department of the Treasury: Office of the Secretary..............   111

                           Wednesday, April 11, 2007

    Office of Management and Budget..................................   155

                             Wednesday, May 2, 2007

    District of Columbia: Courts.....................................   201

                             Wednesday, May 9, 2007

    Department of the Treasury: Internal Revenue Service.............   253

                            Wednesday, May 16, 2007

    Securities and Exchange Commission...............................   341

                  Material Submitted Subsequent to the Hearing

    Federal Deposit Insurance Corporation............................   373
    Nondepartmental Witness..........................................   377

      FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL
                                   YEAR 2008

                                  ----------

                             FRIDAY, MARCH 9, 2007

                                           U.S. Senate,
               Subcommittee of the Committee on Appropriations,
                                                        Washington, DC.
        The subcommittee met at 8:50 a.m., in room SD-138, Dirksen
    Senate Office Building, Hon. Richard J. Durbin (chairman)
    presiding.
        Present: Senators Durbin, Bond, and Allard.

                      COMMODITY FUTURES TRADING COMMISSION

    STATEMENT OF HON. REUBEN JEFFERY III, CHAIRMAN
    ACCOMPANIED BY:
            MIKE DUNN, COMMISSIONER
            WALT LUKKEN, COMMISSIONER

                     statement of senator richard j. durbin

        Senator Durbin. Good morning and welcome. I'm going to
    start a few minutes early, which is totally atypical of Capitol
    Hill but it's an indication of the fact that we are going to
    have a rollcall vote at about 9:30 and I have a dual
    responsibility of chairing this important subcommittee and
    serving as majority whip on the floor. So I'll have to be there
    right as the rollcall begins and we'll have to interrupt this
    hearing for a brief time, as two votes are taken. So I
    apologize to those who may be a little bit surprised by a 10-
    minute earlier start but I hope that we can get this underway,
    make some progress, break for the votes and return and
    conclude.
        I'm pleased to welcome those who are in attendance to the
    first in a series of public hearings we're going to conduct to
    consider the funding requests of several of the dozens of
    Federal agencies within the jurisdiction of this new
    Appropriations Subcommittee on Financial Services and General
    Government.
        I appreciate the willingness of those who are in attendance
    to accommodate their scheduling to the date, time, and
    location. I'm glad you're all here. I welcome my colleagues who
    will join me, I'm sure, as the subcommittee hearing is
    underway. This morning, we will be hearing from two
    distinguished panels of witnesses.
        First, I'm pleased to welcome Chairman Reuben Jeffery of
    the Commodity Futures Trading Commission (CFTC). I believe
    Commissioner Mike Dunn is here. I don't know if Mr. Lukken is
    in attendance at this point but he may join us a little later.
        Our second panel will feature testimony from Steven
    Preston, Administrator of the Small Business Administration
    (SBA). To a casual administrator, these two agencies may seem
    quite dissimilar and oddly matched. Certainly their assigned
    missions and obligations are distinctive yet both of these
    agencies occupy pivotal positions at the forefront of
    stimulating economic growth in our country.
        The Commodity Futures Trading Commission, created in 1974,
    is responsible for fostering the economic utility of futures
    markets by encouraging their competitiveness and efficiency,
    their integrity and protecting market participants against
    manipulation, abusive trade practices and fraud. That oversight
    and enforcement mission becomes tangible when you consider that
    the prices established by the futures market directly or
    indirectly affect the lives of all of us. Futures prices impact
    the prices we pay for necessities of life--our food, clothing,
    shelter, fuel for vehicles, and heat in our homes. Moreover,
    since the agency's inception, there has been a remarkable
    transformation in this futures industry. Thirty years ago, the
    vast majority of trading occurred in the agricultural sector.
    Today, novel, highly complex financial contracts based on such
    things as foreign currency, interest rates, Treasury bonds,
    weather, real estate, economic derivatives, stock market
    indices--the list goes on. But that list has gone far beyond
    the original mission of agricultural contracts.
        Financial derivatives now comprise approximately 82 percent
    of all exchanged derivative activity, 8 percent for
    agriculture. Ever expanding complexities pose ever demanding
    challenges. I'm proud to have the two largest futures exchanges
    in the United States, the Chicago Mercantile Exchange (CME) and
    the Chicago Board of Trade (CMBOT) headquartered in Illinois
    and one of CFTC's three regional offices located there as well.
    These exchanges recently set an all-time total daily trading
    volume record of 24,915,515 contracts cleared through CME,
    CMBOT Clearing Agreement.
        The President's budget proposes $116 million in funding for
    the CFTC for the next fiscal year. This sum represents a hike
    of 18 percent over the $98 million provided for fiscal year
    2007 under our continuing resolution. It is 9 percent below the
    $127 million level the President sought in fiscal year 2007.
        Now the Small Business Administration will follow after the
    CFTC. It was established in 1953. We know its general mission
    to promote and protect the viability of America's
    entrepreneurs, innovators, and small business owners. In my
    home State of Illinois, the contributions of the estimated
    1,087,700 small businesses are critical to our economy,
    creating over 2.6 million jobs in my State. Our Nation depends
    on the SBA to ensure that capital assistance is available for
    those who need it the most.
        Like the CFTC, the SBA has experienced dramatic growth in
    the programs it offers. SBA's programs now include financial
    and Federal procurement, management assistance, specialized
    outreach to women, minorities, and Armed Forces veterans.
        For the Small Business Administration, the President seeks
    $464 million in new budget authority for the next fiscal year.
    No new budget authority is requested for disaster loan
    programs, since there are sufficient carryover balances to
    operate them. The amount requested is a reduction from the last
    fiscal year's continuing resolution of $108 million. This can
    be attributed to the fact that funding was provided in that
    continuing resolution for disaster loan administrative expenses
    and no new funds are requested for that purpose.
        There are many questions that I will raise about the SBA as
    we get into it, particularly about the microloan program but in
    the interest of moving this forward, I would like at this point
    to introduce Chairman Jeffery and welcome him to this new
    subcommittee of Appropriations, the first inaugural hearing and
    say that the floor is yours and I'd invite you to proceed with
    your testimony.

                         statement of chairman jeffery

        Mr. Jeffery. Thank you very much, Mr. Chairman. It's an
    honor to be here today to testify on behalf of the Commodity
    Futures Trading Commission. Today, I'd like to discuss the
    impact of the commodity futures and options industry on the
    everyday lives of Americans, the mission and program
    responsibilities of the agency and finally, our fiscal year
    2008 justification for the $116 million funding level requested
    by the administration.
        This proposed funding level will enable the Commission to
    address two major needs: staff increases and technology
    investment.
        During the past 10 years, as can be seen in figure 1 on the
    screen to my left, trading volume on U.S. futures exchanges has
    quintupled. Today, in a single day of trading, markets will
    move more than $5 trillion of notional value. The industry, as
    you, Mr. Chairman, correctly and very eloquently pointed out,
    has grown from largely agricultural product hedging risks to a
    broad array of complex products related to both physical
    commodities and financial instruments.
        At the same time, however, Commission staffing levels have
    fallen to 458 full-time employees. This compares with 497
    employees in 1976, the Commission's first full year of
    operation. Commission employees work hard. They work smart and
    they use technology effectively. But they are severely
    stretched.
        While the daily business of CFTC can appear from the
    outside looking in to be somewhat obscure and highly technical
    in nature, the mission of the agency is quite clear and two-
    fold: First, to protect the public and market users from
    manipulation, fraud and abusive practices and second, to
    promote open, competitive and financially sound markets for
    commodity futures.
        This is important because the futures markets are used in
    the price discovery process, affecting the price of a bushel of
    wheat, the cost of a gallon of gas, the interest rate on a
    student loan. If the futures markets fail to function properly,
    all consumers are affected.
        The CFTC is the sole Federal regulator responsible for
    overseeing these futures markets. Through effective oversight,
    the CFTC enables the futures markets to better serve their
    vital function in the Nation's economy, providing an effective
    marketplace for price discovery and risk management.

                       record growth in futures industry

        To achieve these goals, the Commission employs a well-
    trained and dedicated staff who work within three major
    programmatic areas: market oversight, clearing and intermediary
    oversight, and enforcement. Market oversight ensures that the
    markets are operating efficiently and without manipulation and
    fraud. One workload indicator is the number of actively traded
    contract types on U.S. exchanges. As can be seen in figure 2,
    the number has more than quintupled in the past decade, with
    particularly significant growth seen in the last 5 years. In
    fact, by next year, the number of actively traded contracts is
    anticipated to climb to nearly 1,600, a record high. There is
    every indication that this significant growth in new and novel
    products will continue.
        The CFTC must maintain a sufficient level of specialized
    expertise to review and analyze a very diverse group of
    instruments and products to ensure that they are economically
    viable and not susceptible to manipulation.
        Clearing and intermediary oversight ensures the financial
    integrity of transactions on the futures markets. The CFTC
    oversees the principle clearing operations associated with the
    major commodity exchanges in Chicago, in Kansas City, and in
    New York. And the agency oversees market intermediaries,
    including some 200 futures commissions merchants, the ranks of
    which include banks and broker dealers with specialized futures
    and commodities operations as well as stand-alone futures
    trading houses.
        Figure 3 shows that the amount of customer funds held by
    futures commissions merchants in segregated accounts has
    quadrupled over the past decade, meaning that more and more
    Americans are investing in the futures markets, either directly
    or indirectly through their participation in pension funds,
    mutual funds, or other institutions.

                                  enforcement

        Turning to enforcement, this is an area in which the CFTC
    takes great pride. The CFTC polices the markets through strong
    enforcement, going after unscrupulous firms and individuals,
    both on and off exchange. Manipulation, fraud, and other
    violations undermine the integrity of the market and confidence
    of market participants.
        Figure 4 has some statistics related to the Commission's
    recent enforcement activity in the areas of foreign currency
    and energy over the past 5 years. In the FX markets, 93 cases
    have been filed resulting in judgments approximating $500
    million. In the energy area, the CFTC has brought 35 cases
    resulting in over $300 million of civil sanctions.
        With the demand for enforcement resources, however,
    exceeding capacity, the CFTC must make hard choices every day
    on how to prioritize scarce investigative and litigation
    efforts.

                          increased funding for agency

        We are grateful for the administration's recognition of the
    need for increased funding for the agency. The 2008 President's
    budget request as depicted in figure 5, is for an appropriation
    of $116 million and 475 employees--an increase of approximately
    $18 million and 17 people over the fiscal year 2007 continuing
    resolution level.
        Specifically, compared to 2007, the key changes in the 2008
    budget are roughly $3 million to provide increased compensation
    and benefit costs for the existing staff of 458, another $3
    million to cover the salary and benefits related to the 17
    additional full-time employees and $12 million for increased
    operating costs associated with information technology
    modernization, lease-hold expenses and other services.
        This funding increase provides the Commission with the
    financial wherewithal to hire additional staff and to invest in
    technology. In staffing, the CFTC must compete for talent not
    only with the private sector but also with other financial
    regulators. Four years ago, the Congress improved the CFTC's
    ability to compete, granting the agency comparable pay
    authority with other financial agencies, so-called pay parity
    through Federal Institutions Reform, Recovery, and Enforcement
    Act of 1989 (FIRREA). For this authorization, which leveled the
    compensation playing field, all of us at the CFTC are deeply
    grateful. It's been a huge help. However, the agency has not
    yet been fully funded to the level of comparable FIRREA
    agencies.
        Second to human capital, technology is the single most
    effective tool in assisting those professionals who oversee the
    markets. Budgetary constraints have required the Commission
    over several years to put new systems development initiatives
    and hardware and software investment on hold, as indicated in
    figure 6. That's not a trend of which we are particularly
    proud.
        CFTC analysts rely primarily on two proprietary computer
    systems for visibility into the markets. One gives us the
    ability to see who is trading in the markets and who is
    building leverage in the market or becoming a large trader,
    thus developing a position that may influence market
    conditions. The second allows us to pull in all transactional
    data from traditional exchanges to identify trading patterns
    that might be indicative of inappropriate or manipulative
    trading activity.
        These two systems are unique in their ability to provide
    transparency into cross-market trading activity across all
    futures markets under the Commission's jurisdiction. Their
    importance to ensuring market integrity cannot be overstated.

                               prepared statement

        In conclusion, all of us at the CFTC take great pride in
    our work. I can assure you that we are working diligently and
    efficiently to fulfill the important responsibilities with
    which the Congress and the American people have entrusted us.
    Thank you again for the opportunity to appear before you today
    on behalf of the agency and I'd be happy to attempt to answer
    any questions that you might have.
        [The statement follows:]

                    Prepared Statement of Reuben Jeffery III

        Thank you, Mr. Chairman and members of the subcommittee. I am
    pleased to be here to testify before you on behalf of the Commodity
    Futures Trading Commission, and I appreciate the opportunity to discuss
    issues related to the Commission's 2008 budget request.
        Today I would like to discuss the impact of the commodity futures
    and options industry on the everyday lives of Americans, the mission
    and program responsibilities of the agency and, finally, our fiscal
    year 2008 congressional justification for the $116 million funding
    level requested by the administration. This proposed funding level will
    enable the Commission to address its two major needs--staff increases
    and technology investment.
        During the past 10 years, as can be seen in figure 1, trading
    volume on U.S. futures exchanges has quintupled. Today, in a single day
    of trading, our markets will move more than $5 trillion. The industry
    has grown from largely agricultural product hedging to a broad array of
    complex instruments related to both physical commodities and financial
    instruments. Trading volume, measured by numbers of contracts traded,
    has more than tripled in just the past 6 years. At the same time,
    Commission staffing levels have fallen to 458 full-time employees. This
    compares with the 497 FTEs 30 years ago in 1976--the Commission's first
    year of operation. Commission employees work hard, work smart, and use
    technology effectively, but given the complexity of the markets we
    oversee, they are stretched.

            Figure 1.--Growth of Volume of Contracts Traded and FTEs

                             mission of the agency
        While the daily business of the CFTC can appear from the outside
    looking in to be somewhat obscure and highly technical in nature, the
    mission of the agency is very clear: (1) to protect the public and
    market users from manipulation, fraud, and abusive practices and (2) to
    promote open, competitive and financially sound markets for commodity
    futures. This is important because the futures markets are used in the
    price discovery process affecting the price of a bushel of wheat, the
    cost of a gallon of gas, and the interest rate on a student loan. If
    the futures markets fail to work properly all consumers are impacted.
        Congress created the CFTC in 1974 as an independent agency with the
    mandate to regulate commodity futures and option markets in the United
    States. The Commission's mandate has been periodically renewed since
    then. In December 2000, Congress reauthorized the Commission through
    fiscal year 2005 with passage of the Commodity Futures Modernization
    Act of 2000 (CFMA).
                              commission structure
        The CFTC is the sole Federal regulator responsible for overseeing
    the futures markets by encouraging competitiveness and efficiency,
    ensuring market integrity, and protecting market participants against
    manipulation, abusive trading practices and fraud. Through effective
    oversight, the CFTC enables the commodity futures markets better to
    serve their vital function in the Nation's economy--providing an
    effective marketplace for price discovery and risk management.
        To achieve these goals, the Commission employs a well-trained and
    dedicated staff who work within three major programs--market oversight,
    clearing and intermediary oversight, and enforcement.
    Market Oversight
        Market oversight ensures that the markets are operating efficiently
    and without manipulation and fraud. One workload indicator is the
    number of actively traded contracts trading on U.S. exchanges. As can
    be seen in figure 2, the number has more than quintupled in the last
    decade, with particularly significant growth seen in the last 5 years,
    or since the passage of the CFMA. Prior to 2000, the number of contract
    types traded was relatively stable at a level of around 250. By next
    year in fiscal year 2008, the number of actively traded contracts is
    anticipated to climb to nearly 1,600, a record high. There is every
    indication that this significant growth in new and novel products will
    continue.

                   Figure 2.--CFTC Actively Traded Contracts

        The CFTC must maintain a sufficient level of specialized expertise
    to review and analyze a very diverse group of instruments and products
    to ensure that they are economically viable and not susceptible to
    manipulation. The types of new products run the gamut from traditional
    commodity areas, such as new agricultural and energy futures, to novel
    financial derivatives based on credit risk, weather-related occurrences
    and effects, pollution allowances, real estate, and instruments having
    characteristics of both securities and commodities. Our analysts employ
    various methods to ensure an understanding of how the markets are
    functioning to develop a flexible, effective regulatory response to
    market conditions.
    Clearing and Intermediary Oversight
        Clearing and intermediary oversight ensures the financial integrity
    of all transactions on the markets that we regulate. The work of the
    staff is to ensure that the intermediaries managing these funds are
    properly registered, perform appropriate recordkeeping, have adequate
    capital, employ fair sales practices, and fully protect the funds their
    customers invest. The principal clearing operations are associated with
    the major commodity exchanges in New York, Chicago and Kansas City.
    Intermediaries overseen by the CFTC include some 200 futures commission
    merchants, the ranks of which include banks and broker-dealers with
    specialized futures operations, as well as stand alone futures trading
    houses.
        In figure 3, one can observe that the amount of customer funds held
    by futures commission merchants has quadrupled over the past decade--
    meaning more and more Americans are investing in futures markets
    directly or indirectly through their participation in pension funds,
    mutual funds, and other institutions.

                   Figure 3.--Customer Funds in FCM Accounts

    Enforcement
        The CFTC prides itself on its vigorous enforcement operation.
    Through strong enforcement, CFTC polices the markets--going after
    unscrupulous firms and individuals both on and off-exchange.
    Manipulation, fraud and other violations undermine the integrity of the
    market and the confidence of market participants.
        Figure 4 presents the results of the Commission's recent
    enforcement activity in the foreign currency and energy areas
    respectively. In the foreign currency or FOREX markets, 93 cases
    involving 354 entities or persons were filed with over $292 million in
    sanctions levied and $182 million in restitution. Since the collapse of
    Enron, CFTC brought 35 cases involving energy markets and charged 55
    entities or persons with manipulation, attempted manipulation, and/or
    false price reporting. The collective civil monetary sanctions levied
    exceed $302 million in these matters.

    ------------------------------------------------------------------------
     Actions Taken Since Passage of the CEMA in
                   December 2000                   Foreign Currency Markets
    ------------------------------------------------------------------------
    Number of Cases Filed or Enforcement                                  93
     Actions...................................
    Number of Entities/Persons Charged.........                          354
    Number of Dollars in Penalties Assessed:
        Civil Monetary Penalties...............                 $292,042,098
        Restitution............................                 $182,471,571
    ------------------------------------------------------------------------

    ------------------------------------------------------------------------
      Actions Taken Since Enron Bankruptcy in
                   December 2001                        Energy Markets
    ------------------------------------------------------------------------
    Number of Cases Filed or Enforcement                                  35
     Actions...................................
    Number of Entities/Persons Charged.........                           55
    Number of Dollars in Penalties Assessed:                    $302,863,500
     Civil Monetary Penalties..................
    ------------------------------------------------------------------------

          Figure 4.--Spotlight on Foreign Currency and Energy Markets

        With the demand for enforcement resources exceeding capacity, CFTC
    must make hard choices every day on how to prioritize our investigative
    and litigation efforts.
    Mission Support
        The three major Commission programs are complemented by other
    offices, including our Office of the Chief Economist, Office of the
    General Counsel, Office of International Affairs and Office of
    Proceedings. The Commission's Executive Direction is comprised of the
    chairman's and Commissioners' offices providing agency direction, and
    stewardship over CFTC's human capital, financial management, and
    information technology resources.
        The Commission is headquartered in Washington, DC, and maintains
    regional offices in Chicago, New York, and Kansas City. In recent
    years, budgetary considerations led to the decision to close the Los
    Angeles and Minneapolis offices.
        When looking at the increased volume of activity across all areas
    of the CFTC mission, and the scope of the industry change since 2000,
    the resulting increase in specialized workload is demonstrable.
    Accordingly, it is critical that the CFTC have sufficient resources to
    hire and maintain requisite skilled talent, as well as provide a steady
    stream of technology investment commensurate with the agency's
    expanding and evolving mission.
                  fiscal year 2008 president's budget request
        We are grateful for the administration's recognition of the need
    for increased funding for our agency.
        The fiscal year 2008 President's budget request, as seen in figure
    5, is for an appropriation of $116 million and 475 staff-years, an
    increase of approximately $18 million and 17 staff-years over the
    fiscal year 2007 continuing resolution appropriation of $98 million
    which supports a level of 458 staff-years.

        Figure 5.--Fiscal Year 2008 Budget Request Provides for Current
                        Services and 17 Additional FTEs

        Compared to the fiscal year 2007 continuing resolution
    appropriation, key changes in the fiscal year 2008 budget are:
      --$2.8 million to provide for increased compensation and benefit
            costs for a staff of 458 FTEs;
      --$3.0 million to provide for salary and expenses of 17 additional
            full-time equivalent staff-years;
      --$12.1 million to provide for increased operating costs for
            information technology modernization, lease of office space,
            and all other services.
        This funding increase provides the Commission with the financial
    wherewithal to hire additional staff and to invest in technology. In
    staffing, the CFTC must compete for talent not only with the private
    sector, but also with the SEC and other Federal financial regulators.
    Four years ago, the Congress improved our ability to compete, granting
    the CFTC comparable pay authority with other financial agencies (so
    called ``pay parity'' through FIRREA). For this authorization to level
    the compensation ``playing field'' all of us are deeply grateful.
    However, the agency has not yet been fully appropriated to the level of
    comparable FIRREA agencies.
        Second only to our human capital, technology is the single most
    effective tool in assisting those professionals who oversee the
    markets. Budgetary constraints have required the Commission over
    several years to put new systems development initiatives and hardware
    and software purchases on hold, as indicated in figure 6.

                        Figure 6.--Technology Investment

        CFTC analysts rely primarily on two proprietary computer systems
    for visibility into the markets. One gives us the ability to see who is
    trading in the markets and who is building leverage in the market or
    becoming a large trader--thus developing a position that may influence
    market conditions. The second allows us to pull in all transactional
    data from traditional exchanges to identify trading patterns that might
    be indicative of inappropriate or manipulative trading practices. These
    two major systems are unique in their ability to provide transparency
    into cross-market trading activity across all futures markets under the
    Commission's jurisdiction. Their importance to ensuring market
    integrity cannot be understated.
        The Commission respectfully requests the proposed funding increase
    for mission-critical investments in people and technology in order to
    keep up with the dynamic commodity futures and options industry. While
    relatively small in dollar terms this funding increment is necessary to
    ensure that CFTC continues to be able to fulfill its statutory mandate.
        All of us at the CFTC take great pride in our work. I can assure
    you that we are working diligently and efficiently to fulfill the
    important responsibilities with which the Congress and the American
    public have entrusted to us.
        This concludes my formal testimony. Thank you for the opportunity
    to appear before you today on behalf of the CFTC. I would be happy to
    answer any questions you may have.
        An electronic version of the Commodity Futures Trading Commission
    ``FY 2006 Performance and Accoutability Report'' is available on the
    Internet at www.cftc.gov/cftc/cftcreports.htm.

        Senator Durbin. Thank you very much. I note the presence of
    Commissioner Walt Lukken. Thank you for joining us and I'd say
    to Senator Bond, I started a few minutes earlier with my
    opening statement because of the vote we face at 9:30 but I'll
    give you a copy to read on the plane back to St. Louis.
        Senator Bond. I can't wait.
        Senator Durbin. I know you can't. Thank you for joining us
    this morning. Let me ask you a few questions, Chairman Jeffery
    and then turn to my colleague.
        Your current staff level is 450. It's the lowest in the
    history of the CFTC Commission as I understand it. The graph
    you presented at the outset depicted the surge in industry
    volume growth and it's a sharp contrast with stagnated staffing
    levels. It makes a compelling case as to whether or not you are
    prepared to really meet this vast increase in the volume of
    activity and the increased sophistication of the trading
    mechanisms that are at hand.
        I'm informed the CFTC lost 58 experienced employees in
    fiscal year 2006, 23 more to date in fiscal year 2007. The 81
    staff that have departed include 26 attorneys, 7 economists, 8
    futures trading specialists, 9 division office directors, 2
    commissioners, 15 executive and management support and 14 staff
    in other job categories. Moreover, since October 2005, you've
    been operating under a hiring freeze.
        I also have jurisdiction in the subcommittee over the
    Securities and Exchange Commission. It is interesting to note
    what is going on there. In 1976, there were 2,054 employees at
    the Securities and Exchange Commission. By 2006, the number was
    up to 3,549, a 73-percent increase in staffing at the
    Securities and Exchange Commission, which has a similar
    responsibility as the CFTC. While their staffing went up 73
    percent, in the period of time here, yours has gone down by
    about 10 percent while the volume of trading and activity, as
    we mentioned earlier, has increased dramatically.
        Let me ask you this. Is the $17.9 million increase in
    funding that the President seeks adequate for you to meet your
    responsibility to protect those who were involved in this
    marketplace?
        Mr. Jeffery. Thank you, Mr. Chairman, for that excellent
    question. The $17 million--let me put that into perspective. Of
    that $17 million, $14 to $15 million is simply to maintain
    current levels of operating activity. That pays for built-in
    cost-of-living increases, salary increases, et cetera,
    leasehold increases, and other operating expense increases of a
    normal course nature. Only $3 million of that number is for an
    increase in service, if you will. That will allow us to hire an
    additional 17 full-time equivalent employees. I would say
    that--were Congress to approve, to appropriate $116 million for
    the CFTC this year--in our view, it would help maintain current
    levels, modestly increase our capability in certain areas but
    it should be viewed as a beginning not an end point of
    addressing what has been, as you correctly point out in your
    observations, a steady erosion in our capabilities over the
    course of the past several years.
        Senator Durbin. In the 1980s banking crisis, Congress
    passed FIRREA, the Financial Institutions Reform, Recovery, and
    Enforcement Act of 1989, which replaced the Federal Home Loan
    Bank Board with the Office of Thrift Supervision and also
    provided pay parity, which you referred to in your testimony,
    among Federal financial regulatory agencies. You noted in your
    testimony that you were glad that you were given the authority
    to pay at equal levels to similar operations in the Federal
    Government but you also noted that you weren't given the money
    to raise the pay at your agency so that you could reach parity.
    Is this, do you believe, part of the reason that you've lost so
    many staff people in the last 1\1/2\ years?
        Mr. Jeffery. Thank you, Mr. Chairman. There are a number of
    reasons for the staff level reduction, most significantly,
    budgetary. I should also add that at the CFTC, like many areas
    of the Federal Government, we're managing what one could
    describe as a difficult sort of demographic development where
    there are any number of employees who started at the Commission
    really at the time of inception, going back 25, 30 years who
    have now reached that period in their careers, in their lives,
    where they are eligible to retire in the normal course.
        With respect to pay parity, I believe we have funded pay
    parity to a large extent. Based on the best data we have
    available today, we're probably about 85 percent fully funded.
    In other words, on the average and on the whole, our people are
    at the 80 to 85 percent level relative to their peers at other
    pay parity agencies that are fully funded. This increment to
    the budget will allow us to continue to close that gap. I
    should stress again on pay parity, the importance of having
    that flexibility for our agency in retaining people who might
    otherwise be attracted to another U.S. Government financial
    regulatory agency, let alone the private sector.

                         STUDENT LOAN REPAYMENT PROGRAM

        Senator Durbin. Chairman, a few years ago I tried to
    reinvigorate or invigorate, I should say, a student loan
    repayment program, to recruit high quality individuals to
    Federal service who might otherwise be discouraged by Federal
    pay and student debt. I'd like to know if your agency is using
    student loan repayments to help attract skilled employees?
        Mr. Jeffery. Senator, I don't believe so, Mr. Chairman but
    I would like to come back to you for the record with a proper
    and correct answer to that question.
        [The information follows:]

        The Commission has not had the opportunity to develop the
    Student Loan Repayment Program as a recruitment tool. Funding
    constraints have required the Commission to make significant
    reductions in operating accounts and to place a freeze on the
    hiring new staff since October 2005. The few limited exceptions
    to the hiring freeze have been to fill behind key critical
    losses in hard to fill and one of a kind positions. This
    limited number of hires has been at the upper levels of
    management, which is generally not the target beneficiary group
    of the Student Loan Repayment Program. We understand and
    appreciate the recruitment benefit of the Student Loan
    Repayment Program and given the financial flexibility to fill
    our ranks with more junior talent would look to such a benefit
    as a key recruitment tool.

                    CRITICAL INFORMATION TECHNOLOGY SYSTEMS

        Senator Durbin. My last question relates to technology,
    which was, I think, your last graph. I understand that two of
    the Commission's three critical information technology systems,
    market surveillance, and trade practice, are becoming
    antiquated. I've been advised that $4 million in investments in
    these systems and other crucial technology has been deferred,
    due to your budget challenges. What impact is this situation
    having on your ability to keep pace with the rapid, explosive
    technological, and global growth evolution of the markets,
    which you have the responsibility to supervise? I think we're
    all aware that this marketplace has not only changed
    internally, it's changed externally. We're now in global
    competition and the technology that is available for around the
    clock trading around the world is a challenge not only to the
    markets in the United States but to others and to your agency.
    So have you been able to keep up in terms of technology
    changes? Do you have the tools to do your job effectively?
        Mr. Jeffery. Mr. Chairman, technology, as you correctly
    note, is an extremely important tool to all of us who work in
    the Federal Government, particularly to a financial market
    regulatory agency. The $116 million budget request has within
    it a technology spend level of approximately $17 million, which
    is more than double our spend on technology in the current
    fiscal year. That allows us to continue to operate our existing
    systems with some degree of efficacy but it does not allow us
    to modernize those systems in the way that we believe will be
    essential for us to continue to be able to fulfill our
    responsibilities in the years to come as these markets continue
    to evolve.
        They are working currently but we are at risk of them, at
    some point, becoming outdated if we don't continue to invest in
    technology and particularly in the two critical systems, trade
    practice and market oversight, which I described in my
    testimony.
        Senator Durbin. I'll just conclude and turn to my colleague
    here by saying that I think that the competitive edge for
    America in futures trading is the efficiency and integrity of
    our marketplace. Your agency has the responsibility to make
    certain that we do everything in our power to protect that
    competitive edge and to protect those who are participating in
    the marketplace. When I see the staffing levels that you're
    struggling with, in comparison even to other agencies of our
    Government with similar responsibilities, and when I see the
    problems that you face in developing the technology and
    capability to keep up with market changes, I'm very concerned.
    I think that if you are going to be the cop on the beat, you
    need to have the tools to make sure that you can enforce the
    laws and catch those who are violating them and I'm worried
    that this budget will not give you that capability. So we'll
    take a close look.
        Senator Bond.
        Senator Bond. Thank you very much, Mr. Chairman. It's a
    pleasure to be with you on this newly formed subcommittee and I
    look forward to working with you and Senator Brownback and the
    other members of the subcommittee. I share your interest and
    the views that you have expressed and the importance of
    adequate and effective regulation by the CFTC. I know the
    chairman has a specific interest in things going on in Chicago
    as I have an interest in things going on in Kansas City. So we
    will look forward to working through this subcommittee to
    provide, try to provide you the assistance that you need to do
    an effective job in regulation.
        And speaking of parochial matters, I noticed that Josh
    Kinney underwent Tommy John surgery, putting the Cardinals
    bullpen at risk for this season but I will save my comments for
    Mr. Preston because I have a particular area of interest there
    and I will await his appearance to make my statement about
    that. Thank you.
        [The statement follows:]

               Prepared Statement of Senator Christopher S. Bond

        Mr. Chairman, Senator Brownback: I am pleased to be with
    you at the first meeting of the newly formed Subcommittee on
    Financial Services and General Government. It is an honor to be
    a member of this Subcommittee. I look forward to working with
    both of you and other Subcommittee members during the coming
    months.
        Welcome Mr. Jeffrey and Mr. Preston; we are pleased to have
    you with us.
        With all due respect to Mr. Jeffrey, in the interest of
    time, I will focus my comments on the Small Business
    Administration.
        Mr. Preston, congratulations to you and Ms. Carranza on
    your successes. SBA under your leadership is a revitalized
    agency. I am hearing very good things about the agency. So
    please keep up the good work.
        That said, there are a couple of areas of the SBA's
    Performance Budget that I am concerned about.
        With respect to procurement, the Performance Budget states
    that there will be a review of the Small Business Innovative
    Research (SBIR) and Small Business Technology Transfer (STTR)
    programs and ``based on these reviews, SBA will recommend
    legislative, and proposed regulatory, changes.'' The
    Performance Budget goes on to state ``The SBA will continue to
    improve oversight and evaluation of SBIR and STTR Programs.''
        As we all know, the SBIR and STTR programs function as more
    than simply procurement programs. The SBIR program was created
    by Congress in the early 1980s to provide new contracting
    opportunities for small companies and to foster innovation and
    commercialization of innovative products by small companies.
        The NIH SBIR program, for example, helps small medical
    device, biotechnology and diagnostic firms to access critical
    early stage capital. These funds help companies get a product
    off the drawing board and, after a great deal of time and
    significant additional private funding, to the marketplace.
        I continue to be concerned that the SBA is stifling
    innovation in cutting edge companies in biotechnology and other
    industries that rely heavily on venture capital funding.
        The biotech industry is like no other in the world because
    it takes many years and intense capital expenditures to bring a
    successful product to market.
        According to a study by the Tufts Center for the Study of
    Drug Development, it takes roughly 10-15 years and $800 million
    for a company to bring just one product to market.
        For 20 years--until 2004--the Small Business
    Administration's Small Business Innovation Research program was
    a catalyst for developing America's most successful companies,
    helping to fund the critical start-up and development stages of
    a company.
        But then, the SBA decided that small businesses relying
    heavily on venture capital research funding no longer qualified
    for the SBIR program.
        The arbitrary change in eligibility standards inequitably
    penalized biotech firms and has delayed--maybe even prevented--
    lifesaving drugs and life-enhancing medical innovations from
    reaching patients and consumers.
        Last year I offered legislation to correct this situation
    which restores the original interpretation of eligibility and
    allows more biotech and medical device companies again to
    compete for funding under the SBIR program.
        My amendment was included in the Small Business
    Administration's reauthorization bill, which unfortunately fell
    victim to late session realities at the end of last year.
        I am also concerned about the Administration's lack of
    enthusiasm for the HUBZone program.
        Ten years ago, as Chairman of the Small Business Committee,
    I wrote the legislation authorizing the Historically
    Underutilized Business Zone, or HUBZone program.
        Enacted in 1997, the program provides an incentive for
    companies to locate and provide jobs in the nation's inner
    cities and depressed rural areas by giving them a government
    contracting preference.
        Last time I checked, there was still a need for good jobs
    in the distressed areas of our big cities and small towns.
        I look forward to working with you on these and other small
    business issues.
        Thank you, Mr. Chairman.

        Senator Durbin. Thank you, Senator Bond and I also note for
    the record, this is the 99th anniversary of the last World
    Series appearance of the Chicago Cubs.
        Senator Bond. That's why I'm glad you're also a Cardinal
    rooter.
        Senator Durbin. He knows my roots.
        Senator Bond. I hate to blow your cover.
        Senator Durbin. He knows my roots in east St. Louis,
    Illinois. I just--I'll close by thanking you for being here. We
    will work informally with you beyond this hearing to talk about
    your staffing and technology needs. I really have a special
    interest in this because I know how important these markets are
    to the United States and to my home State of Illinois and I
    know the people there want to make sure that your agency has
    the tools and the resources to be effective. Chairman Jeffery,
    thank you for testifying today.
        Mr. Jeffery. Thank you very much, Mr. Chairman. It's a
    pleasure.

                         ADDITIONAL COMMITTEE QUESTIONS

        Senator Durbin. As I mentioned at the outset, for those who
    weren't here, we have a 9:30 vote and I'll have to--it was
    originally scheduled for 9:15. I think it was changed to 9:30.
    We'll double-check on that and so I may have to break and leave
    here to tend to my responsibilities on the floor and then
    return.
        [The following questions were not asked at the hearing, but
    were submitted to the Commission for response subsequent to the
    hearing:]
                  Questions Submitted by Senator Sam Brownback
        Question. Some members of Congress have introduced legislation
    placing additional regulations on energy derivatives and the over-the-
    counter (OTC) markets? Do you think these proposals are necessary?
        Answer. We believe that the CFTC has adequate authority to address
    fraud and manipulation on the regulated futures exchanges subject to
    CFTC oversight. In regard to transactions on Exempt Commercial Markets
    (ECM) or bilateral over-the-counter (OTC) transactions, the CFTC
    supports legislation that would clarify the Commission's fraud
    jurisdiction in certain principal-to-principal energy transactions
    under the Commodity Exchange Act (CEA). The CFTC requested the
    enactment of such legislation during the reauthorization proceedings
    conducted in the 109th Congress. We support this clarification that the
    CFTC has the authority to bring anti-fraud actions in off-exchange
    principal-to-principal transactions, such as those connected with Enron
    Online. These provisions were included in the House-passed
    reauthorization bill last year and the bill reported out of the Senate
    Agriculture Committee.
        In regard to legislation directed at ECMs, it is important to note
    that in recent months the CFTC has exercised its existing ``special
    call'' authority under the CEA to obtain market information from the
    electronic ECM operated by Intercontinental Exchange (ICE) in Atlanta.
    The CFTC has utilized this authority to request trader position data on
    an ongoing basis related to those ICE natural gas contracts that are
    directly linked to NYMEX contracts. Compliance with these special calls
    by ICE is mandatory, not voluntary. These special calls have enhanced
    the CFTC's surveillance of the NYMEX contracts by providing a better
    window into this marketplace. In regard to the trading of futures
    contracts based on NYMEX crude and heating oil contracts traded on
    ICE's London subsidiary, a foreign board of trade fully regulated under
    U.K. law, the CFTC also has stepped up its coordinated surveillance
    efforts with the Financial Services Authority in the United Kingdom and
    is receiving position information on those contracts on an ongoing
    basis as well.
        In regard to bilateral OTC energy transactions, legislation
    proposing additional regulation could confront significant practical
    obstacles due to the absence of a centralized marketplace. Under
    existing enforcement authority, though, the CFTC's Division of
    Enforcement has committed significant resources to combating problems
    in the energy arena, and has achieved significant success in
    prosecuting manipulation and false price reporting cases. During the
    last four fiscal years, the CFTC has filed actions charging more than
    50 defendants with false reporting, attempted manipulation, or
    manipulation in the energy sector and has obtained over $300 million in
    penalties. These cases have been based on well-established CFTC cash
    market enforcement authority that has been clearly recognized by the
    courts.
        Since the passage of the CFMA in 2000, the futures markets continue
    to rapidly evolve and grow, domestically and globally--and the CFTC is
    always monitoring these developments.
        Question. It is my understanding that some companies use these
    over-the-counter (OTC) trading markets to hedge their energy risk and
    that some of the proposals may provide a disincentive for companies to
    use these markets. Would a decrease in participants in the OTC markets
    lead to less transparency?
        Answer. There are a number of different kinds of over-the-counter
    markets, all of which have different levels of transparency. They
    include cash spot and forward physical markets, bilateral OTC swaps and
    options markets, and ECMs. It is possible that regulations aimed at
    increasing transparency in some OTC markets generally could discourage
    some traders from participating in these markets, resulting in their
    trading positions being moved to venues not visible to U.S. regulators.
    However, transparency to the regulator will not necessarily be less
    than is currently the case. For example, as discussed in the answer to
    question number one above, transactions moved to ICE in London actually
    became more transparent to foreign regulators and the CFTC. Finally, it
    is important to note that exchange markets under CFTC jurisdiction are
    among the most transparent in the world for both market participants
    and the regulator.
        Question. I am concerned with the recent regulatory direction that
    the Commission has taken, in apparent conflict with the spirit and
    intent of the Commodity Futures Modernization Act of 2000 (``CFMA'').
    As you know, the CFMA eliminated prescriptive regulation in favor of
    Core Principles that provide exchanges flexibility in determining the
    best method for achieving compliance with each such guiding Principle.
    An example of my concern with your regulatory direction is the
    Commission's final rules regarding acceptable practices for safe harbor
    compliance with Core Principle 15 pertaining to conflicts of interest
    in self-regulatory organizations. While there are a few provisions
    within this final rule that I have concerns with, one in particular is
    the definition of a ``public director'' which by its literal reading
    would appear to exclude almost everyone in corporate America and
    academia. The test of $100,000 of payments from the exchange or any
    member or affiliate thereof collectively will result in not only a
    requirement difficult if not impossible to test for, but will eliminate
    nearly everyone an exchange could draw from for public director
    service. How do you expect exchanges to cope with such a wide reaching
    ``public director'' definition that eliminates almost all qualified
    possible public director candidates?
        Answer. The CFTC is strongly committed to both the spirit and
    intent of the CFMA. The CFTC believes that its new Acceptable Practices
    for Core Principle 15--safe-harbors which exchanges may choose to
    implement--are an important indicator of that commitment. The
    Acceptable Practices promote the flexibility inherent to all Core
    Principles while simultaneously offering the specificity necessary for
    effective, ``pre-approved'' regulatory safe-harbors.
        With respect to the definition of ``public director,'' the CFTC has
    determined that it is important to offer all exchanges a clear
    articulation of those director relationships that may interfere with a
    director's ability to deliberate objectively and impartially. The
    definition of ``public director'' adopted by the CFTC reflects that
    determination, and is consistent with Core Principle 15's instruction
    that exchanges must minimize conflicts of interest in their decision-
    making processes. The CFTC is confident that qualified, competent
    public directors are available and can be readily identified by all
    exchanges.
        At the same time, as sometimes is the case with legislative text or
    rule making, the Commission recently proposed certain technical
    amendments to the definition of ``public director'' in the Acceptable
    Practices to correct a drafting error and clarify ambiguities. Among
    other things, the proposed amendments would clarify, with respect to
    the $100,000 payments from the exchange test, that ``payments'' means
    compensation for professional services. The amendments also provide
    that, consistent with the Acceptable Practices as originally proposed,
    entity affiliates of members are not included as payment providers for
    purposes of the $100,000 payments test. The Commission believes that
    these amendments should facilitate the inclusion of public directors on
    exchange boards while maintaining the strong level of public director
    independence intended by the Acceptable Practices.
        The proposed amendments to the definition of public director will
    be published in the Federal Register and will be open for a 30-day
    public comment period.
                                     ______

                   Question Submitted by Senator Wayne Allard
        Question. CFTC is currently the only federal financial regulator
    that is not supported by fees paid by the entities it regulates.
    Accordingly, the budget proposes a new transaction fee to fund the
    commission. Can you please describe how this fee would work? How would
    the fee be paid and at what level would it be set? What would be the
    impact in the marketplace of adding a new transaction fee?
        Answer. In the President's Budget for fiscal year 2008, the
    Administration included a user fee based on its view that it is
    appropriate for futures markets to at least partially offset or
    contribute toward the cost of providing those programs which provide
    clear benefits to market participants. Unlike last year's proposal,
    this year's budget recommendation is not dependent on the Appropriators
    enacting the fee proposal.
        If enacted, the proceeds from the fees would be returned to the
    general fund of the Treasury, to be used to offset the deficit impact
    of continuing to fund the CFTC's operations through direct
    appropriations. They would not impact the discretionary spending
    allocations for the relevant Appropriations subcommittees. The fees
    would be set at a level equal to the costs to the taxpayer of funding
    Market Oversight and Clearing & Intermediary Oversight functions, about
    $86 million during 2008. The Office of Management and Budget in the
    Administration has not provided us with final details as to how exactly
    the fee would work or at what level it would be set.
        The CFTC has not studied the impact of a transaction fee, nor is it
    aware of any executive branch agencies that have done so. The
    Congressional Research Service prepared a report entitled ``The
    Proposed Transaction Fee on Futures Contracts'' in April 2006 (RS2241).
                         SMALL BUSINESS ADMINISTRATION

    STATEMENT OF HON. STEVEN PRESTON, ADMINISTRATOR
        Senator Durbin. But at this time, I'd like to ask the
    Administrator of the Small Business Administration, Steve
    Preston, to please come to the table.
        I started a few minutes early, Mr. Preston and said a few
    words about your agency and the budget request so if you'd
    like, I'd invite you now to give us your opening statement.
        Mr. Preston. Great, thank you. I'd hoped to start on a high
    note but after your comment about the Cubs, I'm a little
    depressed. So I'll try to regroup here.
        Thank you, Chairman Durbin and Senator Bond, for inviting
    me here to talk about our 2008 budget and I'd also like to
    thank you for the support you all gave us in getting through
    the 2007 process. We're very excited about the funds that we
    have for this year and we think we can do a lot with them.
        As of tomorrow, I will have been on the job for 8 months. I
    also want to thank you for approving our Deputy, who was
    confirmed in December. She is a terrific addition to our team,
    with 30 years of business experience.
        Our 2008 budget request reflects continued commitment to
    America's small business and the vital role they play in our
    economy and in our society. Enactment of this request will
    enable us to continue serving the small business community
    while also being a good steward of taxpayer dollars.
        The SBA's 2008 budget requests $464 million in new budget
    authority. This is a 5-percent increase over the enacted level
    in 2006--that's including disaster and congressional
    initiatives. The budget also requests the use of $329 million
    in carryover balances to fund disaster assistance, funds that
    SBA has on hand from the $1.7 billion in supplemental funding
    from fiscal year 2006. Finally, it includes $21 million in
    reimbursable expenses for E-Gov, Business Gateway and SDB
    certifications as well as lender oversight. All told, that is
    $814 million in overall budget authority.
        The budget will allow the SBA to carry out its core
    functions and begin a number of reforms and improvements. These
    resources will support a total of up to $28 billion in small
    business financing through the 7(a), 504, and SBIC Venture
    programs. For the 7(a) program, we're asking for $17.5 billion
    in lending authority. For the 504, $7.5 billion and then for
    the SBIC Venture Capital, the Debenture program, $3 billion.
        Because of the strength of our portfolios, I'm pleased to
    request fee decreases for the 7(a), 504 and SBIC Venture
    programs. In this budget, the 7(a) annual fee will go down 5.6
    basis points, from 55 to 49.4 basis points. The 50 basis point
    up-front fee for the 504 program is totally eliminated and the
    SBIC Venture annual fee decreases 18.9 basis points. These fee
    reductions are significant. They reflect the success of the
    zero subsidy program in all of our loans. As you can see from
    the fee history table that we provided, the 7(a) upfront loan
    fees for 2005 and 2006 are consistent with those throughout the
    past decade except for the 2003/2004 timeframe. In a reaction
    to the economic impact of 9/11, Congress cut the fees for that
    period of time.
        Unfortunately, the result of cutting the fees was to
    increase the rate at which the SBA subsidy was used, which
    ultimately shut down the program and required additional
    appropriation. Zero subsidy has avoided those types of shut
    downs while the 7(a) program has continued to flourish.
        For disaster loans, our proposed 2008 budget supports a
    loan volume of $1.064 billion. That funding comes from carry
    over from our current disaster funds.
        For counseling and training to small business through SBA's
    network of resource partners, in small business development
    centers, SCORE, and women's business centers, we're asking for
    a total of $104 million.
        In terms of our workforce, the budget will support an
    increase to 2,123 FTEs through the salary and expenses budget.
    That would include 86 new positions to be added in 2007 and
    2008. These additional resources are, in part, replacements for
    attrition at the agency in recent years but they will also
    support other things like stronger loan processing and lender
    oversight, greater support of small business in our Government
    contracting operations, better employee training and career
    support, as well as a greater focus on automation and outreach.
        SBA has a growing responsibility as a financial manager.
    Our portfolio has increased 56 percent over the past 5 years
    and we now have almost $78 billion in financing to oversee. To
    meet that responsibility, our budget has requested funding for
    human capital and information technology.
        The budget includes $4.1 million for investment in the loan
    operations system upgrade, to provide implementation of a
    system to replace our current loan information system for both
    regular loan programs and the disaster servicing program. This
    major agencywide undertaking began in 2006 and is on track to
    be completed by 2012.
        It also includes expanded SBIC oversight with $1.5 million
    to support evaluation contracts, liquidation planning, and an
    examination contract. This investment will help maximize
    recoveries and minimize losses.
        We also continue to improve our lender oversight process,
    which enables us to be more effective in managing credit risk.
        Federal contracting dollars are projected to increase by 64
    percent over 2001 and as I mentioned before, small businesses
    share is expected to grow. We expect that to be $84 billion in
    2008. Our responsibility is to ensure that small businesses
    have fair access to procurement opportunities. What I like to
    tell people is it's not just a matter of fairness, it's also a
    matter of competitiveness. Small businesses perform well as
    suppliers of goods and services. Their size makes them
    flexible, innovative, and often cheaper than large companies.
    It does, however, take a bit more effort to find the right
    small business to fit the bill.
        So in our 2008 budget, we are requesting about $500,000 to
    help improve our service to the 8(a) HUBZones, STB, as well as
    women's and veteran's communities. We're proposing to add nine
    new procurement center representatives in 2007 and 2008, which
    is an expansion of 16 percent. In addition, we're working to
    reform the contract goaling and reporting processes and we're
    redoubling our efforts to ensure that Federal agencies provide
    accurate data on small business procurements.
        For 2008, we are also requesting an increase of $500,000 to
    expand our veteran's outreach. With the Nation's current
    engagement in Iraq and our presence in Afghanistan, the number
    of veterans returning from active duty is going to continue to
    increase. Our Office of Veteran's Affairs plans to increase its
    efforts to educate and provide programs and services to
    veterans and active duty personnel in three major areas: access
    to capital, management and technical assistance, and
    procurement assistance.
        Even though we've already made many reforms in our disaster
    assistance program, we're committed to lasting reforms geared
    toward future disasters, whatever their scale might be. We're
    developing organizational tools and a detailed documented
    escalation plan, which we think will improve our response.
    These plans will include models to rapidly forecast loan volume
    resource requirements and coordination requirements to position
    the agency to respond effectively to large-scale disasters.
        We are also working to implement an Internet-based
    electronic application tool to enable borrowers to submit
    information electronically, quickly and accurately, to
    accelerate our ability to access their loan eligibility.
        The agency is also evaluating options to access the private
    sector skills and resources when dealing with catastrophic
    disaster events.
        Finally, one of my highest priorities as the Administrator
    is to improve the work that we are doing to reach underserved
    areas of our country. In areas where we see high unemployment
    and lower wage rates, like many rural and inner-city areas of
    our country providing effective support to new and growing
    small businesses can provide much-needed jobs, economic
    activity and rejuvenation in places in our country that need it
    the most. In order to reach these markets, SBA has included the
    following proposals in our budget: broadening lender
    involvement in the Community Express Pilot Program so we can
    expand this program, which reaches into many of our underserved
    markets and provides borrowers with a double benefit of capital
    and counseling; expanding the Urban Entrepreneur Partnership to
    additional cities so aspiring urban and small business owners
    have better access to capital and services that will make them
    successful; establishing seven more alternative work sites,
    which allows the agency to make itself more accessible to rural
    customers; and expanding the potential reach of the microloan
    program by moving the program to zero subsidy.
        As I said before, I think this is a sound budget. It gives
    the SBA the funds necessary to oversee and operate our core
    financial programs more effectively, to re-engineer and improve
    our Government contracting programs and to continue our work
    with counseling and training partners. It will also enable us
    to provide more effective outreach, be easier for our customers
    and partners to work with through better automation, and fill
    key staff positions in areas that are clearly lacking in
    necessary manpower.

                               PREPARED STATEMENT

        So thank you for your consideration and I look forward to
    answering any questions you might have.
        [The statement follows:]
                      Prepared Statement of Steven Preston
        Chairman Durbin, Ranking Member Brownback, distinguished members of
    the Committee, thank you for inviting me here today to discuss the
    President's fiscal year 2008 budget request for the U.S. Small Business
    Administration (SBA).
        First, I would like to thank you all for assisting us in obtaining
    the additional funding for disaster and other agency administrative
    needs for fiscal year 2007. The added general agency administrative
    funding will allow us to appropriately address our staffing and other
    administrative priorities for the remainder of fiscal year 2007. The
    disaster administrative funding should ensure that the Agency will be
    able to effectively operate the disaster loan program until late July,
    barring any unforeseen major disasters. We look forward to working with
    you to obtain the remaining $26 million needed for fiscal year 2007
    disaster administration in the upcoming supplemental appropriations
    bill. We appreciate your commitment and understanding of the vital role
    small business plays in the American economy.
        President Bush has been an unwavering supporter of America's small
    businesses, and his leadership has ensured that they have played a
    vital role in our economic growth. There have been more than 7.4
    million new jobs created since August 2003. We know that the majority
    of those jobs were created by employers in the small business
    community. In fact, analysis by the Bureau of Labor Statistics shows
    that small businesses generated 65 percent of the net employment growth
    between September 1992 and March 2005. This growth has helped reduce
    the unemployment rate to 4.5 percent, the lowest rate of the past four
    decades. By reducing the tax rates small business owners pay and
    increasing expensing tax provisions on investments, small businesses
    have more capital available to hire new workers and expand their
    businesses.
        The President is also committed to helping small business owners
    provide health insurance to their employees by supporting association
    health plans, allowing small businesses to get the same discounts on
    health insurance as big businesses. Further, the Administration is
    working tirelessly to ensure that small businesses are able to grow,
    and expand opportunities for their workers, by providing regulatory
    relief and opening markets abroad to ensure that America's trading
    partners play by the rules and make it possible for our small
    businesses to export their products.
        SBA's fiscal year 2008 budget request reflects the President's
    commitment to America's small businesses and the vital role they play
    in our economy. Enactment of this request will enable SBA to continue
    serving the small business community while ensuring stewardship of
    taxpayer dollars. The fiscal year 2008 budget request provides
    resources will total an estimated $814 million. This amount includes
    $464 million in new Budget Authority, $329 million in spending from
    carry-over balances for the Disaster Loan program, and $21 million in
    reimbursable services.
        This budget request reflects both the vision of the Agency's new
    leadership team and the progress the Agency has made over the past five
    years in delivering its programs more efficiently. Since 2001, SBA has
    achieved major growth in nearly all of its programs while
    simultaneously streamlining processes and developing more cost-
    effective budget strategies. Fees for all of the Agency's non-disaster
    loan products have been lowered and for the first time ever the
    borrower fee for 504 loans has been completely eliminated while
    continuing to operate the program with no loan subsidy from the
    taxpayer.
        The new management team will continue to pursue this expansion in
    services to the small business community while aggressively pursuing a
    Reform Agenda to ensure the Agency's programs are customer-focused,
    outcome-driven and fiscally responsible and sound. In addition, further
    enabling our employees to fulfill SBA's mission is an essential element
    in achieving our objectives in this budget.
                                 reform agenda
        I am pleased to be heading the new SBA management team that
    includes Deputy Administrator Jovita Carranza, who was just confirmed
    in December. SBA's agenda is grounded in the belief that the Agency can
    improve the effectiveness and impact of its programs and activities
    markedly, by employing important management principles. These
    principles will seek to ensure that the Agency is driven by clear
    outcomes, is focused on serving its customers effectively, enables its
    employees, and operates a compliant and accountable organization.
        The Agency also has a renewed focus on ensuring that its products
    and services are accessible to entrepreneurs in the nation's most
    underserved markets--those with higher rates of unemployment and
    poverty and lower rates of economic progress. This budget request
    highlights SBA's progress to date and describes the Agency's plans for
    achieving the vision of the new management team in fiscal year 2008.
        In 2001, SBA began a drive to deliver more value to the Nation's
    small businesses while lowering costs to the taxpayer. By restructuring
    key Agency operations and reengineering its largest loan programs, SBA
    has achieved record program growth of 56 percent in the loan portfolio,
    while reducing its total cost by 31 percent since 2001 through
    increased operational efficiencies and core program improvements. The
    most important factor in this cost savings has been the 7(a) loan
    program's operation at zero subsidy. With Congress' support we were
    able to change the 7(a) program in fiscal year 2005, saving the
    taxpayers approximately $100 million in subsidy and allowing the
    program to operate without interruption. In years past the program had
    run out of available subsidy funds which shut the program down until a
    new appropriation could be approved. With the zero subsidy operation in
    place the program has been able to expand without the threat of a shut
    down. Zero subsidy is good stewardship of taxpayers' money while
    creating a more stable loan program for small businesses.
        Through its ongoing restructuring and business process
    reengineering, SBA has improved and will continue to improve the
    effectiveness of the taxpayers' dollars supporting small business
    development. Because of these improvements, SBA will be able to serve
    record numbers of small businesses in fiscal year 2008 with this budget
    request.
        The principles of SBA's Reform Agenda have already resulted in a
    dramatic improvement in the Agency's Disaster Loan program. The 2005
    Gulf Coast hurricanes resulted in SBA's largest disaster response in
    its 53-year history. More than 420,000 loan applications from
    Hurricanes Katrina, Rita, and Wilma (three times the level for the
    second largest disaster, the Northridge earthquake of 1994) left the
    Agency struggling to meet its loan processing standards and frustrated
    many.
        Almost immediately after being sworn in as SBA Administrator in
    July, 2006, I spearheaded a fundamental reengineering of the disaster
    loan processing operation that has dramatically shortened response
    times, improved quality, and increased borrower support. Backlogs were
    virtually eliminated and feedback on the new approach has been
    overwhelmingly positive. We, however, are not finished with the long-
    term redesign of the disaster process, and are working aggressively to
    do so in the coming months.
        SBA is bringing the same principles used in disaster assistance
    reform to administering its business guaranty programs as well.
    Reengineering of the loan servicing process is underway and will result
    in better customer service and less operational redundancy. Building
    upon its success in consolidating 7(a) loan liquidation functions from
    almost 70 district offices to a single location, SBA is also finalizing
    plans to consolidate 7(a) loan processing, 504 loan liquidation, and
    Disaster loan liquidation. These changes ensure that loans are managed
    more consistently and efficiently. In the case of 7(a) loan
    liquidation, considerable budgetary savings were also realized.
        Modernizing agency operations is challenging, but it is essential.
    The Nation's taxpayers expect SBA to operate using the techniques and
    practices of sound fiscal and operational management. Through its
    proactive efforts to improve productivity and performance, while
    reducing cost, the SBA has demonstrated its commitment to deliver ever
    better products while improving efficiencies.
        With a guaranteed and direct loan portfolio of over $78 billion,
    SBA has a critical role as a steward of taxpayer dollars. While the
    portfolio has grown at a record pace in recent years, during that time,
    SBA has been implementing a rigorous, state-of-the-art risk management
    program. By using industry data and technology, the Agency is replacing
    the old, primarily manual processes for reviewing lender performance
    with automated, quantitative risk-based methods to identify problems
    earlier and more effectively. This approach is improving oversight
    while there continues to be a period of strong growth in the loan
    portfolio.
                        highlights of the budget request
        SBA's budget request represents an increase of 5 percent for fiscal
    year 2008 above our enacted level in fiscal year 2006 (excluding the
    Disaster program and earmarks). The overall request is for $814 million
    in proposed Budget Authority. This includes $464 million in new Budget
    Authority and $329 million funded out of carryover balances from the
    $1.7 billion in supplemental funding received in fiscal year 2006 for
    the Disaster Program. Some critics have misinterpreted this request by
    dismissing the $329 million to be carried over from overages in the
    disaster loan subsidy account. The creation of State grant and loan
    programs, the influx of insurance payments previously thought to be
    uncollectible and other factors have shifted the needs of Hurricane
    victims. The result is that they need less loan authority than
    estimated in 2006 but the constant changes and delays in rebuilding
    require more administrative and staffing needs until the borrowers can
    actually rebuild. Currently, there is sufficient carryover balance in
    the disaster loan subsidy account to cover the additional Katrina
    related administrative costs as well as those for a normal disaster
    year in 2008. Therefore we have asked for transfer authority from the
    overage in disaster subsidy to cover administrative costs.
        These resources will support a total of $28 billion in lending
    authority for small business financing, which represents a potential 40
    percent increase over business lending for fiscal year 2006, through
    the 7(a), 504, and SBIC debentures programs. For its flagship 7(a)
    program, SBA requests authority for $17.5 billion--a 27 percent
    increase over the fiscal year 2006 lending level. SBA also requests
    authority for $7.5 billion for the 504 program, a 32 percent increase
    over loans made in fiscal year 2006--a record year for 504 lending.
    Finally, SBA requests an SBIC Debenture program of $3 billion.
        In addition, this budget will support the following:
      --A disaster loan volume of $1.064 billion (the Agency's ten-year
            average based upon fiscal year 1996-2005 average activity,
            excluding the WTC disaster, adjusted for inflation).
      --Counseling and training to small business people through SBA's
            network of resources partners in Small Business Development
            Centers (SBDC), Service Corps of Retired Executives (SCORE),
            and Women's Business Centers.
      --Assist federal agencies targeting a total of $84 billion in prime
            federal contracting dollars to be awarded to small businesses
            in fiscal year 2008.
      --Investing in the Agency's human capital through job skills
            training, mentoring programs, succession planning, proactive
            recruitment of highly qualified staff, and implementation of an
            automated personnel records system.
      --Maintaining employee security through continued implementation of
            Presidential Homeland Security Directive #12 and support of
            major security improvements in the headquarters building.
      --Continuing the process of implementing a loan operations system to
            replace the current outdated system in order to better track
            payments as well as increase the Agency's loan portfolio
            oversight.
      --Enhancing SBIC oversight and recoveries.
      --Providing a cost effective microloan program.
      --Continuing efforts to make it easier and faster for small
            businesses to comply with government regulations.
      --Improving SBA products, services and delivery.
        SBA's budget request will support 2,123 FTE through the Salaries
    and Expenses budget. This staffing level is an increase over both the
    fiscal year 2006 actual level and the fiscal year 2007 requested level.
    SBA has been able to reduce its budgetary requirements and staffing
    levels over recent years, but these increases are necessary to support
    critical oversight and portfolio management functions. Nevertheless,
    SBA has managed significant administrative savings while increasing
    financing, counseling, and government contracting opportunities for
    small businesses. SBA has been streamlining its operations and
    eliminating costly and inefficient programs, including the following
    examples:
      --The Agency centralized its financial processing operations. As a
            result, 7(a) loan liquidations cost approximately $18 million
            less in fiscal year 2006 than fiscal year 2003.
      --The Agency created an alternative to the LowDoc program for 7(a). A
            part of our SBAExpress program, Community Express is 20 times
            less expensive than LowDoc ($4,771 per loan approved for LowDoc
            vs. $227 for SBAExpress). Lenders still have access to the
            higher 85 percent guarantee for smaller loans formerly
            available through LowDoc but benefit from the improved process
            under other 7(a) products, such as Community Express.
      --SBA continues to seek opportunities to reduce rented space. The
            initiatives we have implemented from fiscal year 2004-2006
            resulted in $3.8 million in annual rent savings.
                                    disaster
        In the summer of 2006, we initiated the Accelerated Disaster
    Response Initiative to identify and implement process improvements to
    help the Agency respond more rapidly in assisting small businesses and
    homeowners seeking financial assistance after a disaster. As a result,
    the Agency fundamentally reengineered its disaster loan processing
    operation to shorten response times, improve quality, and provide
    greater borrower support. Based on customer feedback, the Agency rolled
    out an ``integrated team'' model. Each team comprises 15-18 employees
    with legal, financial, and other required competencies to ensure
    timely, coordinated loan processing. Customers are assigned to a case
    manager on the integrated team so they have a single point of contact
    that is responsible for guiding them through the loan process and
    ensuring that SBA is responsive to their timing and other requirements.
        Under the new model, case managers now proactively contact
    applicants to determine what impediments exist to closing loans and
    making disbursements. In addition, in order to complement SBA's
    reengineered process, the Agency has implemented numerous metrics to
    track application status and performance of employees. All applications
    are categorized by processing status and type of outstanding issue.
    This provides management with the necessary information to identify
    problem areas and implement corrective actions. Further, productivity
    is monitored to identify areas that require management intervention.
    These strategies are the foundation for improved responsiveness to
    borrower needs. For example, the time needed for loan modifications
    that averaged more than 2 months in July, 2006, now averages 8 days,
    and continues to decline. In addition, the backlog of loans for
    modification has declined over 90 percent since July.
        Additional organizational planning measures to improve SBA's
    disaster response include development of models to rapidly forecast
    loan volume and resource requirements (financial, human capital, and
    logistics) to better position the Agency to respond to large scale
    disasters when they strike. Moreover, SBA is nearing completion of a
    protocol to leverage its field network to improve local coordination
    and communication with citizens and other local authorities.
        By 2008, SBA expects to implement an internet-based electronic loan
    application process to ensure that borrowers' required information is
    provided to assess loan eligibility. This complements SBA's investment
    in the disaster computer system that has been tested to support a four-
    fold increase in concurrent user capacity to 8,000 users. The agency is
    also evaluating options to access the private sector's skills and
    resources when dealing with catastrophic disaster events.
                     compliant and accountable organization
        Listed below are the actions SBA has initiated and planned along
    with specific funding requests regarding its loan and investment
    portfolio:
      --Investment in technology for the loan operations system upgrade of
            $4.1 million in S&E (to be complemented by about $4.2 million
            in disaster funding) for project management support, and to
            acquire and begin implementation of a system to replace our
            current loan information system for both regular loan programs
            and disaster loan servicing. Currently, the Agency's business
            loan operation runs on a Cobol-based system which limits
            technological advancement opportunities and security. The older
            system is also significantly more costly to maintain. SBA is
            making good progress on this major Agency-wide undertaking,
            which began in fiscal year 2006, and is on track to be
            completed by 2012. Requested funds for fiscal year 2008 will
            enable SBA to finalize the business vision, develop the project
            management plan, and finalize technical and functional
            requirements.
      --Expanded SBIC Oversight with $1.5 million in S&E to continue the
            valuation contract, develop a liquidation plan, and implement
            an examination contract. This investment will help maximize
            recoveries on the $1.5 billion in the Office of Liquidation,
            and minimize losses on the currently $10.3 billion in
            outstanding leverage and commitments in the Office of
            Operations.
      --Loan and Lender Monitoring System and Lender Reviews--SBA's Office
            of Lender Oversight (OLO) has a state of the art loan and
            lender monitoring system that incorporates credit history
            metrics for portfolio management. The credit information,
            combined with SBA lenders' current and historical performance,
            allows the Agency to assign risk ratings to lenders. Such
            ratings provide both an assessment and a monitoring tool for
            the most active SBA lenders, and are the primary basis by which
            lower volume lenders are evaluated. High risk lenders are under
            direct oversight of OLO rather than the program office. In
            addition, OLO is responsible for conducting on site lender
            reviews and examinations. Through fiscal year 2006, the Agency
            has not had resources to conduct as many reviews as we believe
            are necessary. However, because the Agency recently received
            authority for reimbursement for the cost of these reviews, SBA
            plans to conduct additional reviews in fiscal year 2008.
      --Portfolio Analysis Committee--Senior Capital Access and CFO
            Managers meet monthly to review and assess portfolio trends and
            identify opportunities for program improvements. This committee
            is an important component of SBA's risk management program. The
            committee assesses the risk of the 7(a) and 504 loan programs
            and performance trends. Based on analysis and management
            direction resulting from these meetings, program changes,
            operational initiatives, and other actions are generated. For
            example, in addition to providing support for the elimination
            of the LowDoc program, the committee's review efforts resulted
            in the initiative to reduce the backlog in liquidations and
            charge-offs in our 7(a) portfolio.
      --Lender Oversight Committee--Senior managers meet bi-monthly to
            review lender trends and review corrective actions for poor
            performing lenders. As mentioned, Lender Oversight has
            introduced risk ratings to monitor and evaluate SBA lenders.
            The committee is also provided results and performance metrics
            on lender oversight activities such as examination reports, and
            corrective action plans for lenders under OLO's direct
            oversight. SBA has placed several lenders under corrective
            action plans and continues close monitoring to improve
            performance.
      --Lender Portal--Lenders now have access to their risk ratings and
            performance metrics through our lender portal, making it
            transparent to lenders what they are rated on and how they
            compare with their peers. It allows lenders to address data
            quality issues to improve their risk ratings, which the Agency
            believes will ultimately result in significant improvements in
            data quality. The information is also available to SBA's
            district offices to help identify training opportunities for
            lenders.
      --SBIC Liquidations--SBA currently oversees approximately $1.5
            billion in SBIC leverage in its Office of Liquidation and $10.3
            billion in leverage and commitments in its Office of
            Operations. Collecting on the large amount of leverage
            outstanding in the Office of Liquidation continues to be of
            great concern. The staff has developed a comprehensive strategy
            for liquidating this portfolio of investments. As part of this
            strategy, several pilot initiatives for liquidating SBIC assets
            are being pursued to ascertain the most cost efficient means of
            disposing of this significant portfolio. With $2.4 billion in
            estimated losses in the Participating Securities (PS) program,
            oversight on the $10.3 billion in outstanding leverage and
            commitments for those SBICs (of which almost $7.2 billion
            pertains to the PS program) remains of high importance.
        In addition, SBA is taking the lead, along with the Office of
    Management and Budget's Office of Federal Procurement Policy, to work
    with the contracting agencies to ensure accuracy and transparency of
    the data in the Federal Procurement Data System-Next Generation (FPDS-
    NG). The agencies are in the process of validating their fiscal year
    2005 data to identify the reasons for coding discrepancies and to
    correct any errors that occurred.
        In fiscal year 2007 we expect that all agencies' subcontracting
    information will be available in the Electronic Subcontracting
    Reporting System.
                               customer-oriented
        The following are highlights of SBA's plans to focus its products
    and services on underserved markets:
      --Expansion of the Community Express pilot.--This pilot was designed
            to reach underserved markets and combines both capital and
            technical assistance to increase the viability of the
            businesses it serves. The Agency is working to broaden lender
            participation in the product and will seek involvement from its
            counseling and training partners: SBDCs, SCORE, and Women's
            Business Centers.
      --Expansion of the Urban Entrepreneur Partnership.--The Urban
            Entrepreneurial Partnership (UEP) initiative is a community-
            based referral program located in an urban setting. The Agency
            has been working to expand the initiative to additional cities
            that will create a local network of small business resource
            providers serving urban and inner-city communities
            (UEPNetwork), as initially outlined by the President in a
            presentation to the National Urban League in 2004.
      --Expansion of Alternative Work Sites.--One way the Agency has made
            itself more accessible to small business is to locate certain
            district office staff away from single urban centers to
            locations closer to our customers. Currently, there are 22 such
            alternative work sites in operation. Another 2 are planned by
            the end of fiscal year 2007. SBA is seeking $100,000 to set up
            7 additional sites in fiscal year 2008.
      --Business Process Reengineering for the Office of Government
            Contracting and Business Development (GCBD).--SBA's request
            includes $500,000 to examine how to best serve the 8(a),
            HUBZone, and Small Disadvantaged Business communities as well
            as women and veterans. We recognize the Agency can improve the
            management of these programs, particularly the 8(a) program,
            and will use these resources to determine how to best serve
            them--whether through staff realignment and training, or
            technology improvements.
      --New Markets Tax Credit Pilot.--In October, the Agency launched the
            New Markets Tax Credit Pilot Loan Program to provide financial
            assistance to small businesses in economically distressed urban
            and rural areas, or ``New Markets.'' The pilot program allows
            certain Community Development Entities (CDE) to purchase up to
            90 percent of the gross loan amount of SBAExpress or Community
            Express 7(a) loans up to $150,000 made to NMTC ``qualified''
            businesses in low-income communities. Administered by the
            Treasury Department's Community Development Financial
            Institutions Fund, the New Markets Tax Credit program permits
            investors to receive credits on their federal taxes of up to 39
            percent of investments made in investment institutions called
            Community Development Entities.
          The SBA pilot program, which is only available to 7(a) lenders
            making new loans through advance-purchase commitments with
            CDEs, waives a regulation that limits an SBA lender's ability
            to sell any portion of an SBA guaranteed loan to anyone other
            than another SBA lender. The waiver allows CDEs with New
            Markets Tax Credit allocations to purchase up to 90 percent of
            SBA Express or CommunityExpress 7(a) loans up to $150,000 made
            to NMTC ``qualified'' businesses in low-income communities. The
            New Markets Tax Credit Program is expected to spur
            approximately $16 billion in investments into CDE investment
            institutions.
          These new loans are guaranteed by the SBA. By leveraging the
            SBA's resources with the Treasury's NMTC program, the pilot
            will provide additional access to loans and technical
            assistance to both start-up and existing small businesses in
            New Markets. Under the program, Community Express lenders will
            assist CDEs to provide small business borrowers with a package
            of services including mentoring, coaching and counseling.
      --Zero Subsidy Microloan Program.--Small business loans under $35,000
            provide a critical level of capital to certain sectors in our
            economy, many of which are in underserved communities. Our
            regular 7(a) program reaches many members of this community. In
            fiscal year 2006, 42,730 loans, representing 44 percent of all
            7(a) loans, were made at the microloan funding level ($35,000
            or less). However, additional businesses in target markets can
            be reached through non-bank micro lenders.
          The Microloan program as currently structured is costly to the
            taxpayer. In fiscal year 2006 it cost approximately 85 cents to
            the government for each dollar loaned to a Microloan
            intermediary. Therefore, the Agency is proposing a zero subsidy
            microloan program. By raising the very preferential rate at
            which intermediaries borrow from 3.77 percent (below the
            government's cost of funds) in fiscal year 2008 to 5.99 percent
            (SBA's all-in cost), the Agency can eliminate the subsidy cost
            of this program and greatly expand funding for microloan
            intermediaries. Intermediaries will continue to receive a
            better than market rate of interest on loans and SBA will be
            able to offer loans to any eligible intermediary.
          Furthermore, SBA is proposing that rather than asking for
            Microloan Technical Assistance funding, SBA should leverage the
            skills of technical assistance resource partners, including the
            Small Business Development Centers and Women's Business Centers
            located throughout the country, to train and counsel micro
            borrowers. This has the potential of tripling the number of
            outlets providing training to micro-entrepreneurs for micro
            enterprise training and will save almost $13 million in fiscal
            year 2008.
      --Expanding the Veterans' Outreach Program.--The SBA requests an
            additional $500,000 for the Office of Veterans' Business
            Development (OVBD) in fiscal year 2008. With the Nation's
            current engagement in Iraq and its presence in Afghanistan, the
            number of veterans returning from active duty will continue to
            increase. SBA's Office of Veterans Business Development (OVBD)
            plans to increase its efforts to educate and provide programs
            and services to veterans and active duty personnel in three
            major areas: access to capital, management and technical
            assistance, and procurement assistance programs through SBA,
            other government agencies, and the private sector. The Agency
            will accomplish this through existing loan programs, the
            disabled-veteran-owned business government contracting program,
            a redesigned website populated with a broad range of programs
            and services available to veterans, the development of training
            and mentoring programs for veterans by veterans, and funding
            District Offices to grow veteran-owned business capacity.
        Other customer-focused plans include:
      --Helping businesses with compliance through the 24/7 anywhere
            accessible Business Gateway. SBA requests $4.8 million in
            reimbursable budget authority for the E-Gov initiative for
            which SBA is the managing partner and $425,000 in S&E for the
            project management office (SBA's contribution as managing
            partner). Business Gateway will provide the Nation's businesses
            with a single, internet-based access point to government
            services. It will simplify and improve businesses' ability to
            locate and submit government forms and reduce the time and
            effort needed to comply with government regulations. Each year,
            Business Gateway will increase the time saved by business
            accessing information and forms by 50,000 hours over fiscal
            year 2006.
      --Increase access to Federal procurement opportunities by adding 9
            new Procurement Center Representatives in 2007 and 2008. With
            total Federal contract dollars projected to increase by 56
            percent over fiscal year 2001, the small business share is
            expected to increase to a total of $85 billion. SBA's
            responsibility is to ensure small business retains access to
            these opportunities.
          SBA will also continue the development of the Electronic
            Procurement Center Representative System. During fiscal year
            2006, SBA began working on an Electronic Procurement Center
            Representative (EPCR) System to allow PCRs more timely
            information about contracting opportunities for small business.
            It also worked with the Department of Defense to integrate EPCR
            functional requirements with the DOD's capture of additional
            pre-solicitation information, and explored possible expansion
            of existing shared systems in the Integrated Acquisition
            Environment (IAE). The Agency will prepare a business case and
            will pursue systems design and development in fiscal year 2008.
            SBA has put into production automated systems for 8(a), Small
            Disadvantaged Businesses, and HUBZone applications, and will
            soon finalize the electronic review and certification
            processes.
      --Expanding the reach to the eTran system, which provides a web-based
            portal for loans guaranteed through the flagship 7(a) loan
            program. Seventy percent of our 7(a) loans come in through this
            portal. Expanding the functionality of eTran will further
            automate lender interactions. In addition, SBA is working with
            lenders to identify and address other cumbersome processes,
            which can deter lenders from marketing certain of SBA's
            products. The Agency is currently developing a web-based system
            expected to be used by both surety bonding companies and the
            small businesses seeking bonding.
      --Enhancing its Entrepreneurial Development Management Information
            System (EDMIS), used by its technical assistance partners, to
            simplify the system's use and capture better information.
                                employee enabled
        The following are actions to keep our employees safe and able to
    fulfill the Agency's mission:
      --Professional guard services.--$1.1 million in S&E to support
            professional guard services, operation of a magnetometer for
            the building, and training for the guards, in order for the
            Agency to increase security to the level recommended by the
            Federal Protective Service.
      --Implementation of government-wide biometric security cards.--
            $600,000 in S&E (complemented by about $600,000 in Disaster
            funding) for the full implementation of Presidential Homeland
            Security Directive #12, which requires the development and
            implementation of a government-wide standard for a secure and
            reliable new identification card issued to Federal employees
            and contractors. The overall goal of HSPD-12 is to achieve
            appropriate security assurance by verifying the identity of
            individuals seeking physical access to Federally controlled
            government facilities and electronic access to government
            information systems.
      --Centralized training efforts.--$550,000 (similar level to fiscal
            year 2006) for a skills gap assessment for mission critical
            occupations; an electronic learning tool; learning management
            systems; management and leadership development training; a
            mentoring program; succession planning; and a program to help
            staff balance the demands of their professional and personal
            lives.
      --Training for Risk-Related Activities.--$140,000 to keep procurement
            and business development staff current on complex changes;
            $235,000 for training of Regional and District administrative
            officers authorized to commit funds on behalf of SBA; and
            $90,000 for training of staff involved in acquisition
            activities, which are inherently high-risk, Agency-wide.
      --Proactive recruitment.--$123,000 to attract the necessary skilled
            personnel needed for succession planning. By 2009, 34 percent
            of SBA's workforce will be eligible to retire.
      --District Office program oversight staff.--$100,000 to ensure
            continued monitoring and oversight of SBDC grant and policy
            issues, adherence to procedures and knowledge of the program
            announcement.
      --Enterprise human resources integration system.--$800,000 to
            integrate SBA's personnel record keeping into this government-
            wide record keeping system covering the entire life cycle of
            Federal employees to replace the current Official Personnel
            Folder.
                                outcomes driven
        To fulfill its mission, it is critical that the SBA understand how
    to drive outcomes aligned with that mission. SBA is proud of its work
    on budget and performance integration which has allowed the Agency to
    maintain a green rating in both status and progress since fiscal year
    2004.
        The Agency recognizes it still has work to do, particularly in
    defining our programs' outcomes. As such, SBA has contracted with the
    Urban Institute to analyze our business loan programs with results due
    in fiscal year 2007. In addition, the Agency is analyzing penetration
    of its lending products into various place-based and people-based
    groups to understand their impact more fully.
        In Spring fiscal year 2007, the Agency will complete a major review
    of its Strategic Plan. The review will incorporate information from
    SBA's financial assistance programs' evaluation, as well as the new SBA
    leadership team's vision. In addition, reporting, measurement, and goal
    attainment is being designed to align the most critical outcomes the
    Agency is working to achieve.
                                   conclusion
        In closing, this is a good budget for America's small businesses
    and America's taxpayers. I look forward to working with you to enact
    this budget and to help entrepreneurs start, build and grow their small
    businesses. Again, thank you for inviting me here today and I will be
    glad to answer any questions.

        Senator Durbin. Thank you very much. I stated at the
    beginning of this hearing that we have a rollcall, which begins
    at 9:30. I'm going to ask a few minutes of questions and then
    turn to my colleagues, Senator Bond and Senator Allard and
    then, after they've asked those, we will recess until after the
    rollcall votes when I will return with a longer list of
    questions, probably around 10:15. I apologize for the
    interruption but this is beyond our control at this point.

                       SMALL BUSINESS DEVELOPMENT CENTERS

        So let me just say first that I'm concerned, Mr. Preston,
    about the small business development centers and the amount of
    money that is being requested in this budget, if this turns out
    to be a pretty good investment for Federal taxpayers. We spend
    about $87 million nationwide and according to SBA statistics,
    we create small businesses that generate five times that amount
    in Federal tax revenues. So for every dollar that we invest in
    these centers, businesses are created employing Americans and
    generating tax revenues at a rate of 5 to 1. That's a pretty
    good investment.
        And yet, there are suggestions here that we are going to
    cut back on the small business development centers. I'd like
    for you to address this in terms of whether we are, in fact,
    going to squander an opportunity here to help a lot of people
    who need help at the expense of business creation. Also, from a
    minority perspective, we're very concerned about the creation
    of minority businesses. According to studies commissioned by
    the SBA, small businesses are the greatest source of net new
    employment in inner cities comprising more than 99 percent of
    establishments and 80 percent of the employment in inner
    cities. However, the 4-year survival rates of minority-owned
    businesses are lower than the survival rates of non-minority
    owned businesses. More than one-third of the people who come in
    to these development centers are minorities. As we cut back, it
    reduces opportunities for minority expansion for cities and as
    I mentioned earlier, it reduces the opportunity for businesses
    to be created, generating tax revenues.
        Do you think this is a good choice of expenditures at the
    Federal level?
        Mr. Preston. Well, let me just start out by saying two
    things. Number one, they are a very important part for us. In
    fact, the small business development centers as well as the
    women's business centers and our SCORE network are really the
    cornerstone of our business training and counseling effort at
    the SBA. And I also acknowledge the criticality of certain
    minority businesses; in fact, a lot of what we're focusing on
    strategically right now is how to reach deeper and more
    effectively into that community because driving small business
    ownership in the inner city as well as in some of the rural
    markets where we see difficulty, we think can be an absolute
    game-changer. So I appreciate the question.
        The SBDCs--we are not the primary source of funding for
    them. We are a core tier of funding that gives them the
    stability to run a core level of operation, provide overhead,
    provide hiring to a certain degree but then they also have
    external fundraising efforts and we encourage them to do that.
    We are working, in fact, right now with women's business
    centers on a trial basis to help them become more effective in
    external fundraising and to bring best practices to bear and we
    would like to have that type of a dialogue with the SBDCs as
    well.
        So I guess, Senator, I look at it as we are a very
    significant layer of funding to them. We enable them to go and
    do things that they might be able to do otherwise but we would
    like to work with them and encourage them to expand their
    external funding sources because we do think that expanding
    their reaches is important.
        Senator Durbin. I know that you've testified to that before
    but I think that you're overlooking the fact that that Federal
    investment is an incentive for non-Federal sources and as we
    back off of it, I hope that you're right but we may be wrong,
    at the expense of a lot of opportunities. I'm going to leave at
    this point and turn it over to Senator Bond and you'll have a
    5-minute clock and then turn it over to your colleague, Senator
    Allard and Senator Allard, if you could stay that long, if
    you'd be kind enough to recess the hearing at the end of your
    question and we'll resume at about 10:15.
        Senator Bond [presiding]. Thank you, Mr. Chairman. Senator
    Allard can run faster than I can so we will--you're younger and
    in better shape.
        Congratulations, Mr. Preston, to you and Ms. Carranza, on
    the successes. I'm hearing very good things about the SBA under
    your leadership and the revitalization.
        Mr. Preston. Thank you.

                       SMALL BUSINESS INNOVATIVE RESEARCH

        Senator Bond. But there are a couple of areas I want to
    highlight very quickly with respect to procurement. The
    performance budget states there will be a review of the small
    business innovative research, SBIR, and the small business
    technology transfer, STTR programs. Based on these reviews, SBA
    will recommend legislation and propose regulatory changes. It
    goes on to state the SBA will continue to improve oversight and
    evaluation of SBIR and STTR. As we all know, they function more
    than simply as procurement. SBIR was created in the 1980s, to
    provide new contracting opportunities for small companies and
    to foster innovation and commercialization of innovative
    products by small companies.
        The National Institutes of Health SBIR program, for
    example, helps small medical device, biotech, and diagnostic
    firms access critical early-stage capital to get the product
    off the drawing board and I continue to be concerned that SBA
    is stifling innovation in biotechnology and other industries
    relying heavily on venture capital. Biotech industry is heavily
    dependent upon capital expenditures, 10 to 15 years, $800
    million for a company to bring just one product to market.
        For 20 years until 2004, your agency was a catalyst for
    developing America's most successful companies, helping to fund
    startup and development. But then SBA decided that small
    businesses was relying heavily on venture capital no longer
    qualified for SBIR and that inequitably penalized biotech firms
    and has delayed, maybe even prevented life-saving drugs and
    life-enhancing medical innovations and I believe in certain
    circumstances, has driven them abroad.
        Last year, I offered legislation to correct it. It was
    included in the SBA reauthorization, which fell victim, like
    everything else, to the delays and filibusters at the end of
    the session. I might also note, I'm equally concerned about
    this administration's continuing lack of enthusiasm for the
    HUBZone program. Ten years ago as chairman of the authorizing
    committee, I wrote the legislation authorizing the historically
    under-utilized Business Zones or HUBZones, to provide
    incentives for companies to locate and provide jobs in the
    Nation's inner cities and depressed areas by giving them a
    Government contracting preference. As you yourself have just
    said, there is still a great need for good jobs in the
    distressed areas of big cities and small towns and I'll look
    forward to working on that with you.
        But one point I want to make. I have this chart that came
    from NIH and it shows the base application rates for the SBIR
    program and the RO1 program. This is significant because it
    shows when the new regulations were applied to a specific
    company, Cognetixs, in 2003 but the agencies did not fully
    implement them until 2004. So it's fair to say that these 2005
    and 2006 numbers where the application rates fell off
    significantly in percentage terms, are a result of the venture
    capital rules. And the chart also includes the RO1
    applications, the largest NIH grant program for universities
    and academia. So while the SBIR program was falling off, it
    shows that applications for the RO1 grants continued to
    increase. I think this makes a very strong case to show that
    the decrease in SBIR applications is specific to the SBIR
    program and not a result of scientific trends. Would you agree
    with that?
        Mr. Preston. Well, I would certainly want to dig into the
    data further, Senator, to understand what it implies. One of
    the things we have, we are waiting right now, is a study from
    the National Academy of Science that looks at the whole SBIR
    program and the value of it, et cetera, et cetera. I do agree,
    it's a critical program for getting capital to companies that
    are involved in the commercialization stage that are small.
    Venture capitalists can own up to 49 percent. I think your
    point is based on the need of the funding. It may need to go
    over that.
        What we're trying to do here is balance the need to get
    money to small businesses that are viable and have great ideas
    with ensuring that we get the kind of value out of the program
    that you're talking about.
        Senator Bond. I look forward to discussing that with you
    further and I'll leave my further questions for the record and
    turn you over to the tender mercies of the Senator from
    Colorado.
        Mr. Preston. Thank you.
        Senator Allard [presiding]. Thank you, Senator Bond. I
    appreciate it. I ask unanimous consent that my full statement
    be a part of the record.
        Senator Bond. Without objection.
        [The statement follows:]
                   Prepared Statement of Senator Wayne Allard
        I would like to thank Chairman Durbin for holding the first hearing
    of the new Subcommittee on Financial Services and General Government. I
    was fortunate to work with him as my Ranking Member on the Legislative
    Branch Subcommittee during the previous Congress, and I look forward to
    continuing to work with him in this new capacity.
        I am pleased to be a member of this new subcommittee. These
    agencies are of a particular interest to me, as I am ranking member of
    the authorizing subcommittee with similar jurisdiction. I appreciate
    this opportunity to become more involved in their budgetary matters as
    well.
        Coming from an agricultural state like Colorado, I have a keen
    interest in the Commodities Futures Trading Commission. I will be eager
    to hear how the CFTC is changing with the financial markets.
        I hope Chairman Jeffery will also be making a few comments on the
    topic of competitiveness. Following the release of the Paulson report
    and the Schumer/Bloomberg report, competitiveness of the capital
    markets has become the primary topic of discussions in the financial
    markets. While most of the discussion focuses on more traditional
    securities, I am curious to hear more about how futures, options, and
    the CFTC fit into the picture.
        I also hope that Chairman Jeffery will discuss the proposed new
    transaction fees. This would be a major shift, and I believe it is
    important to fully understand all aspects of the proposal.
        I also look forward to hearing from Administrator Preston of the
    Small Business Administration. I started and owned a small business, so
    I am well aware of the challenges faced by small businesses. Once an
    entrepreneur is able to overcome the hurdle of raising the necessary
    start up capital, the new business owner faces daunting rules and
    regulations. The SBA is an important resource for help with both.
        It is important that we continue to promote the start up and growth
    of small businesses in America, since they are a significant sector of
    the economy.
        Small firms
      --Represent 99.7 percent of all employer firms.
      --Employ half of all private sector employees.
      --Pay more than 45 percent of total U.S. private payroll.
      --Have generated 60 to 80 percent of net new jobs annually over the
            last decade.
      --Create more than 50 percent of nonfarm private gross domestic
            product (GDP).
        I would like to thank Chairman Jeffery and Administrator Preston
    for appearing before the subcommittee today. Your perspective will be
    very helpful as we move forward with your budgets, and I look forward
    to your testimony.

                                 LOAN OVERSIGHT

        Senator Allard. I have two quick questions. You have an
    inspector general report where it says the agency does not have
    sufficient controls to detect fraud and prevent unnecessary
    losses. What is your response to that critical statement?
        Mr. Preston. I think the agency does have sufficient
    resources. We've significantly increased our lender oversight.
    We've expanded that group. We've expanded the statistical tools
    that we use to analyze our lenders. We actually continue to see
    improvements in the improper payment numbers and I think we've
    got a great working relationship with our inspector general on
    these issues. So I think we continue to improve. In fact, right
    now----
        Senator Allard. Are you watching your loans on your
    businesses and being careful--being sure they don't get in some
    of these exotic loans that we're seeing in the housing market?
        Mr. Preston. Senator, our loans are set up in very specific
    programs. So there are only certain kinds of loans we can make.
        Senator Allard. They are 50 year, 30 year standard payoff
    loans.
        Mr. Preston. They generally are even shorter than that.
        Senator Allard. Okay.
        Mr. Preston. But mostly they are bank loans that have to
    fit into a particular framework.

                                      PART

        Senator Allard. Okay. Very good. The other thing, too is I
    take a lot of interest in the PART program. Do you know what
    I'm talking about? It deals with setting goals and objectives
    that are measurable and examining outcomes.
        Mr. Preston. Exactly.
        Senator Allard. There are a few programs under your purview
    that I don't think quite made the grade on that PART program,
    maybe just one or two or three. Do you want to comment on that?
        Mr. Preston. I probably prefer to work with your staff to
    find out specifically which programs you're considering but we
    do have PART goals on all of our programs, you're correct, yes.
        Senator Allard. I'm one that follows that.
        Mr. Preston. I think that's very important.
        Senator Allard. I say that just to alert you that whenever
    you show up in front of me, I'm liable to ask you about the
    PART program. If you have some programs in there that are
    lagging in that regard, you'll get some questions from me on
    that.
        Mr. Preston. Great.
        Senator Allard. So you need to be prepared because I think
    the Government Performance and Results Act has got the right
    tone that we need to bring accountability to our agencies. I'm
    one that believes in that so you'll hear some questions from me
    on that.
        Mr. Preston. That's great. I agree with you fully. Thank
    you.
        Senator Allard. Very good. You know, I'm not sure you've
    got any but it seemed like there might have been one or two
    there. But if not, don't worry about it. If there is, I'd like
    to get a response to my staff on where you are on those
    particular programs.
        Mr. Preston. Great.
        Senator Allard. I need to go down to the floor and catch
    this vote, so I'm going to put the subcommittee in recess.
        Mr. Preston. Great. Thank you.

                                   MICROLOANS

        Senator Durbin [presiding]. Sorry for the delay and I thank
    you for your patience, Mr. Preston. We got a few things done on
    the floor. I'm sorry if some of this area, some of these
    questions have been covered but I'd like to ask, if I might,
    why your budget request this year proposes that the microloan
    program be operated through higher interest rates and with zero
    subsidy. You also proposed to eliminate all technical
    assistance funding for microloans. Explain to me if you can,
    how the SBA came up with the statement that it cost 85 cents to
    make a $1 microloan and whether that calculation takes into
    account the ongoing cost of intermediaries providing technical
    assistance and support to businesses and their portfolio?
        Mr. Preston. It does, it takes into account two things. It
    takes into account the technical assistance piece, which is
    really the primary on it there. I believe the technical
    assistance piece is $13 million of the cost and then a much
    smaller portion, somewhat over $1 million, represents the
    subsidy that we currently pay on the loans that we make to the
    microlenders. So in other words, that's the degree to which the
    Government subsidizes those loans because we offer them below
    the Treasury rate.
        Senator Durbin. What is the total dollar amount the SBA
    currently has in outstanding loans to microlending
    intermediaries?
        Mr. Preston. Outstanding--I don't have that number at the
    top of my head. I know last year we made about $18 million in
    new loans. I can get that for you in a second.
        Senator Durbin. Do you know what the average amount of a
    microloan is?
        Mr. Preston. In that program, I believe it's $13,000. It
    maxes out at $35,000.
        Senator Durbin. Could you kind of describe the typical
    recipients?
        Mr. Preston. The typical recipients of ours, in many ways,
    are our target group. They are heavily represented by
    minorities. They reach into the inner cities as rural markets.
    And there is a heavy representation of women as well.
        Senator Durbin. Which, if I remember from your other
    testimony, is a high priority for the SBA.
        Mr. Preston. Exactly. Yes, it is.
        Senator Durbin. So I asked you earlier about the small
    business development centers, which we understand are used not
    exclusively but disproportionately by minorities and now we
    find the microloan program, which is being cut back. Do you
    see, from my side of the table, that it looks like you're
    stating your goal is to reach out to these people and yet your
    budget says that you won't?
        Mr. Preston. Well, I think what we're trying to do is
    expand the capital that we can get out there and try to do it
    on a cost-effective basis. We're asking for authorization of up
    to $25 million--I think last year, we put about $18 million out
    there and what we'd like to do is be able to put more money out
    there but put it out there on a most effective basis.
        Senator Durbin. I'm interested in that cost effective
    phrase that you just used. If you don't offer as much in
    microlending, is it not true that those who are seeking the
    loans will turn to the commercial side, which may be more
    expensive?
        Mr. Preston. I think by increasing our cost to the
    microlender, there will be some increased cost to the borrower.
    I also think though, there are a lot of microlenders out there
    that don't take--avail themselves of our funds and we're hoping
    that by expanding the capital available to microlenders, we'd
    actually be able to get more capital in the hands of people.
        Senator Durbin. But isn't technical assistance a critical
    part of this?
        Mr. Preston. It's absolutely critical.
        Senator Durbin. To make sure the microloans are based on a
    good business plan, executed well, monitored carefully?
        Mr. Preston. Yes, it's a necessary component. It's critical
    but we, Senator, already provide technical assistance to about
    1\1/2\ million people a year. We have 13,000 counselors in our
    network and this is 2,500 loans each year. So we're looking to
    leverage that network to provide that technical assistance to
    these people. It is a fraction of 1 percent relative to the
    volume that we already undertake.
        Senator Durbin. I understand you have many people who are
    involved in small business development centers, SCORE
    volunteers and SBA technical assistance providers, who step in
    to assist businesses that receive loans from microlending
    institutions. I'm not convinced though, that these other
    technical assistance providers can really provide the same
    intensive and personalized assistance that microlenders
    currently provide their own borrowers. Unlike a lot of the SBA
    technical assistance providers, microlending intermediaries
    reach out to their borrowers and proactively check to see if
    they need assistance and what needs they might have. The SBDCs
    and SCORE volunteers respond to businesses that contact them
    seeking help. So it's a much different relationship. It's a
    proactive relationship with the microlending intermediaries and
    one that is more passive when it comes to these other sources.
        Mr. Preston. I think that is a fair representation of the
    majority of the people they work with. I don't know that I
    would concur that a lot of these people don't reach out and
    honestly, I've spent many, many days in the field, talking to
    small businesses that have worked both with our district
    offices and with the SBDCs and other volunteers and the tight
    relationship, the consistent interaction, in many cases, is
    there.

                                 DISASTER LOANS

        Senator Durbin. Let me move to another topic, disaster
    loans. What is your estimate for disaster loan activity in the
    next fiscal year?
        Mr. Preston. We've got $1.064 billion in our budget
    request.
        Senator Durbin. And how did you arrive at that estimate?
        Mr. Preston. That is derived from a 10-year average. Ten-
    year average, accepting the outlayer years, which is, I
    believe, primarily Katrina.
        Senator Durbin. In the recently passed continuing
    resolution, we provided the SBA an additional $113 million for
    disaster loan administrative costs for 2007.
        Mr. Preston. That's right.
        Senator Durbin. How long do you project the program can
    operate with that amount of additional funding?
        Mr. Preston. Based on the estimate for a typical disaster
    year, which never actually occurs, obviously, that would take
    us well into July, which would leave us short for the last few
    months. If we would have a year where there was somewhat
    lighter disaster activities, it's conceivable we could get
    through the year and certainly if it's a heavier year, that
    would be an issue.
        Senator Durbin. So what happens if you run out of money in
    that area in July?
        Mr. Preston. If we run out of--if we purely run out of
    money in July, we don't have money to fund new disaster loans
    in the program and I just want to mention, the money that we
    have that came through the continuing resolution is less than
    what we requested in the process. I believe we requested $140
    million, which we thought would take us through the full year.
        Senator Durbin. To your knowledge, will there be an
    additional request on the supplemental?
        Mr. Preston. I know we are working with your people on the
    supplemental.
        Senator Durbin. Okay. Your budget justification talks about
    the fundamental re-engineering of the disaster loan program and
    the creation of a disaster reserve. What do you have in mind?
        Mr. Preston. Well, we've already made a tremendous amount
    of progress and I would invite you or anyone on the
    subcommittee to send staff down to our processing center and
    we'll take you through in detail what we've done. But we have
    fundamentally restructured the operational processes around how
    loans are distributed and closed and we continue to drive kind
    of a--it's a very deep re-engineering, Senator, so it's--I
    don't want to get in the weeds too much but effectively to put
    in place processes to make our people more responsive, to give
    them better customer service along the way, to get loans and
    approvals processed much more quickly. And it really gets into
    digging very, very deep into the operational processes and
    basically fixing some things that were broken.

                                AGENCY STAFFING

        Senator Durbin. I wanted to ask for a moment about agency
    staffing levels. We understand your staffing levels have
    declined significantly over the past several years, though
    you've only been there 8 months so some of this precedes your
    arrival. Can you provide us with a chart for the record,
    showing the agency staffing levels by year for the past 5
    years?
        Mr. Preston. We can do that.
        [The information follows:]

                                                   EMPLOYMENT SUMMARY
                                 [Headcount: Based on the HCM Employment Summary Report]
    ----------------------------------------------------------------------------------------------------------------
                                                                                                             Fiscal
                                                                                                              year
                                                 9/30/02   9/30/03   9/30/04   9/30/05   9/30/06  12/31/06    2008
                                                                                                             budget
    ----------------------------------------------------------------------------------------------------------------
    Headquarters:
        Executive Direction...................       239       257       249       248       230       231  ........
        Management and Administration.........        95        92        92        94        95        94  ........
        Chief Information Officer.............        53        53        53        53        48        52  ........
        Capital Access........................       159       157       137       132       129       133  ........
        Entrepreneurial Development...........        46        49        45        43        42        41  ........
        Government Contracting/Bus Dev........        91        89        74        69        73        72  ........
                                               ---------------------------------------------------------------------
          Total headquarters..................       683       697       650       639       617       623  ........
                                               =====================================================================
    Field:
        Field Support to Headquarters \1\.....       257       258       253       250       246       340  ........
        Field Servicing Centers...............        86        83       150       151       158       164  ........
        Regional Offices......................        23        26        27        32        31        29  ........
        District Offices \2\..................     1,674     1,581     1,294     1,053     1,002       899  ........
                                               ---------------------------------------------------------------------
          Total field.........................     2,040     1,948     1,724     1,486     1,437     1,432  ........
                                               =====================================================================
          Total SBA funded employees..........     2,723     2,645     2,374     2,125     2,054     2,055     2,123
                                               =====================================================================
    Inspector General.........................       108        98        97        94       102       104  ........
    Disaster Loan Making......................       854       733     1,855     2,240     4,083     3,460  ........
    Disaster Loan Servicing...................       205       159       142       115       101        98  ........
                                               ---------------------------------------------------------------------
          Total SBA employment................     3,890     3,635     4,468     4,574     6,340     5,717  ........
    ----------------------------------------------------------------------------------------------------------------
    \1\ Field Support to Headquarters includes Legal staff in District Offices, the Denver Finance Center, and
      Regional Advocates plus others. A complete listing is available upon request.
    \2\ The decrease in headcount reflects a reclassification of 91 legal staff from District Offices to Field
      Support to Headquarters.

        Senator Durbin. Are you concerned that staffing levels have
    dropped too far, where you can't meet your statutory
    obligations?
        Mr. Preston. I'm not. I want to tell you once again, we're
    particularly heartened by the work you all have done with us
    for 2007 and with the budget in 2008 because that will allow us
    to add about 86 people, which I think will be very important
    for us. We are at a tight level right now but I'm not concerned
    about our ability to meet statutory requirements.
        Senator Durbin. The Office of Personnel Management (OPM)
    Survey of Government Employees indicated that a significant
    number of SBA employees felt they didn't have sufficient
    resources to do their jobs. How will your budget request
    provide adequate resources?
        Mr. Preston. Unfortunately it showed a lot more than that,
    many of which--many of the items showed that we have a lot of
    work to do in our employee base. Our people are not trained
    well enough right now. They are not all allocated to the right
    activity and we are going through an extensive review right
    now. We're about to roll out extensive training programs. We're
    clarifying roles and responsibilities of people throughout the
    agency to make them more effective in meeting the needs of the
    agency. And all of that is very specifically responsive to the
    OPM tool as well as some surveying that we've done on the side.
    I also have personally been to many of our district offices and
    talked with our people.
        Senator Durbin. I just wanted to say--you mentioned at one
    point in your budget justification a morale problem among the
    employees.
        Mr. Preston. Pardon me?
        Senator Durbin. You mentioned a morale problem among
    employees.
        Mr. Preston. Yes. It was in the 2004 survey and it was
    validated by the 2006 survey that was completed in June. So I'm
    getting a little ahead of things here but in the coming year,
    every one of our district offices will be goaled on people
    initiatives, which will include career planning, training, GAP
    assessments, reviews--all sorts of things that I think are
    critical. The last thing you want in a service organization is
    bad morale. So this is something we have to nail and something
    frankly, I take very personally.

                              CONTINGENCY PLANNING

        Senator Durbin. I have a series of questions I'd like to
    submit to you for the record but I want to close by asking you
    about some of the concerns expressed by the inspector general's
    office. Concerns were expressed about whether the SBA has
    devoted sufficient resources to develop comprehensive
    contingency planning so that it will be able to respond in a
    quick and effective manner to large-scale disasters, similar to
    gulf hurricanes. What resources does the SBA budget request
    allocate toward large-scale disaster planning?
        Mr. Preston. Well, we are--that is an ongoing
    responsibility of the senior leadership team for the disaster
    business but right now we have a very significant team focused
    both on re-engineering the process, which I mentioned earlier
    as well as building a detailed sort of disaster search plan
    that would effectively be like a playbook that you could--that
    we would be working with to show exactly how we ramp in a major
    disaster. So I believe the budget we have in place is
    sufficient to be able to do that but clearly, if a significant
    disaster hit, we would need to come back for additional funding
    to handle the scale of the volume.
        Senator Durbin. I understand that part. Funding may be
    necessary but I guess the question is whether you have a
    contingency plan so that if you--in the Hurricane Katrina
    situation, we had some warning. Not much but some and I think
    it really put all the Federal agencies on notice if they have
    to respond to a disaster, to think large. Be prepared. Have you
    done that?
        Mr. Preston. Yes, we have and I think a lot of the capacity
    expansion has already happened. The systems capacity is
    threefold to fourfold what we used in Katrina. We're building a
    very significant reserve force, which are people that are pre-
    trained. We will be rolling out in the next couple of months, a
    training program that will go across all of our district
    offices, which currently don't exist--don't work with the
    disaster business. So a lot of the money we have in training
    and some other areas will be used to support that.

                         ADDITIONAL COMMITTEE QUESTIONS

        Senator Durbin. I thank you very much and thanks for your
    patience. I'm sorry we had to interrupt the hearing and glad
    that we got the questions in. We'll be working with you on next
    year's budget, trying to make sure that we provide you the
    resources the Small Business Administration needs. Thank you.
        [The following questions were not asked at the hearing, but
    were submitted to the agency for response subsequent to the
    hearing:]
                Questions Submitted by Senator Richard J. Durbin
        Question. Mr. Preston, as you see it today, what are the most
    significant problems currently facing the SBA?
        Answer. Since joining SBA I have spent a significant amount of time
    listening to employees, partners, and most importantly, customers. I
    have reviewed many of the Agency's programs in order to identify how to
    build on SBA's successes and address the areas needing improvement.
    When I came to the Agency, many of our most critical positions were
    vacant, and some key management processes were broken. I continue to
    work to build a team of competent leaders and managers, which will be
    essential in addressing our challenges and opportunities.
        My views are grounded in a belief that we can improve the
    effectiveness and impact of SBA's programs and activities markedly, and
    therefore our impact on Small Business, by employing important
    management principles: Focusing on the needs of the customers; Driving
    outcomes important to our country; and Operating in a compliant,
    efficient and transparent manner.
        Question. To what extent does your 2008 budget request enable you
    to address these problems?
        Answer. The fiscal year 2008 budget request provides ample funding
    to reform and refocus the Agency so that SBA is able to fulfill its
    mission to help America's entrepreneurs start, build and grow their
    small businesses. This funding will support:
      --Continued reengineering of the loan servicing process, resulting in
            better customer service and less operational redundancy.
            Further, consolidation of 7(a), 504 and Disaster loan
            liquidations will ensure that loans are managed more
            consistently and efficiently;
      --Sharpened focus on the country's most underserved communities
            through expansion of the Community Express pilot, the Urban
            Entrepreneur Partnership, business process reengineering for
            the Office of Government Contracting and Business Development
            (GCBD), expansion of Alternative Work Sites, and expanded
            veterans' outreach, among other priorities.
      --A more accountable, efficient and transparent organization through
            centralized loan operations, operational assessments, an
            improved loan liquidations process, enhanced lender oversight,
            and other important initiatives.
        Question. To what degree does SBA depend on contracts with
    information technology providers to administer its disaster loan
    program? Are you confident that your agency's oversight of these
    contractors is sufficient?
        Answer. There are two primary IT support contracts supporting the
    Office of Disaster Assistance for its mission critical IT system, the
    Disaster Credit Management System. The total contract staff represents
    approximately 50 percent of the ODA's resources performing IT functions
    at our DCMS Operations Center. SRA, International provides IT support
    and resources for maintenance of software, network, applications,
    database, help desk, and project management. IBM is under contract for
    critical system hosting services with service level agreements for
    system and network availability and security.
        Contract oversight of the service providers by SBA management is
    proactive and adequate to achieve the objectives of the mission.
    Planned improvement to system functionality and reliability are on-
    going activities. The results are consistently successful
    implementation of these enhancements within the schedule and budget
    allocated.
        Question. Legislation has been introduced in this Congress to allow
    banks to make SBA-guaranteed disaster loans. What is your agency's
    position on this legislation?
        Answer. SBA is working with banks and other entities to develop a
    role in the private disaster lending arena. While the current language
    being proposed is much improved as it gives SBA more flexibility in
    crafting a workable proposal, we are continuing our discussions with
    the banking industry. It is important to understand that this would
    require a solid plan that balances the needs of disaster victims, the
    role of the private sector and the Agency's duty to manage the risk to
    taxpayer funds.
        Question. What is the size of your current outstanding loan
    portfolios in your various programs?
        Answer. The table below reflects outstanding principal balances for
    all of SBA's large loan programs including pre-credit reform era loans
    as of September 30, 2006.

                 OUTSTANDING PRINCIPAL BALANCES AS OF 9/30/2006
    ------------------------------------------------------------------------
                                                                 Amount
    ------------------------------------------------------------------------
    7(a) Business Loans..................................    $46,137,567,613
    504 CDC..............................................     16,736,723,758
    SBIC Participating Securities........................      4,818,789,740
    SBIC Debentures......................................      1,988,225,000
    All other programs...................................      1,484,135,591
                                                          ------------------
          Total..........................................     71,165,441,702
                                                          ==================
    Disaster.............................................      6,806,142,230
    Microloan Direct.....................................         92,330,700
                                                          ------------------
          Total Portfolio................................     78,063,914,632
    ------------------------------------------------------------------------

        Question. What procedures are used to provide oversight of lenders
    and monitor loan performance for your guaranteed loan portfolio? Do you
    think these procedures and your capacity are adequate?
        Answer. In fiscal year 1999, SBA formally recognized the need for
    greater oversight and risk management of SBA's lenders and loan
    portfolios, creating SBA's Office of Lender Oversight (OLO). Since that
    time, OLO has implemented numerous procedures to provide oversight of
    7(a) Lenders and Certified Development Companies and to monitor loan
    performance of the 7(a) and 504 guaranteed loan programs. In Today, OLO
    continues to implement and improve SBA's monitoring and oversight
    processes.
        The procedures OLO has put in place have taken several forms. The
    following is a highlight of key procedures. OLO has established a
    system of risk management through the development of an off-site
    monitoring and review system for all 7(a) and 504 loans and SBA Lenders
    that has been recognized as an ``industry best practice.'' OLO has also
    strengthened on-site reviews and exams of SBA's larger SBA Lenders. OLO
    has increased interoffice coordination and communications on oversight
    of high-risk SBA Lenders, though formation of interoffice lender
    oversight and portfolio analysis continues. Finally, OLO is in the
    process of implementing other initiatives that will add to its
    oversight capabilities a more detailed discussion of SBA's Lender and
    loan oversight procedures and processes follows.
        Loan and Lender Monitoring.--System Off-site monitoring is provided
    through the OLO's Loan and Lender Monitoring System (L/LMS). OLO's L/
    LMS system was originally developed and implemented in fiscal year
    2003. L/LMS enables OLO to perform off-site monitoring of SBA Lenders
    by providing periodic credit quality and portfolio performance
    assessments of individual lender portfolios, as well as the overall
    7(a) and 504 loan portfolios. L/LMS also uses current and historical
    performance data to generate predictive measures of future performance.
    These performance data and predictive measures form the basis of OLO's
    Lender Risk Rating System.
        Risk Rating System.--The Risk Rating System is an internal tool to
    assist SBA in assessing the risk of each SBA lender's loan operations
    and loan portfolio. The Risk Rating System enables SBA to monitor SBA
    Lenders on a uniform basis and identify those institutions whose loan
    operations and portfolio require additional monitoring or other action.
        Risk-based Reviews and Examinations.--OLO has also implemented
    several measures to improve the quality of on-site SBA Lender reviews
    and examinations. On-site reviews have been expanded from purely
    compliance-based reviews into more comprehensive, risk-based reviews.
    The new risk-based approach was put into operation in fiscal year 2005-
    06. It includes a review of the SBA Lender's portfolio, its SBA
    management and operations, and an assessment of the SBA Lender's credit
    administration policies, in addition to a compliance review. Reviews
    are generally performed on larger 7(a) lenders and the largest
    Certified Development Companies (CDCs). Small Business Lending
    Companies (SBLCs) may receive a more rigorous safety and soundness
    examination, similar to those performed by federal financial
    institution regulators. These safety and soundness examinations include
    more detailed analyses of some of the same components of the risk-based
    review; however, the examinations also focus extensively on the
    financial condition of the SBLC, as measured by the institution's
    liquidity, capital and earnings strength.
        The reviews and examinations are performed by contractors with
    significant audit experience. Reviews and examinations follow SBA's On-
    Site Lender Reviews/Examinations SOP. This SOP, published in fiscal
    year 2006, details review components, procedures, and issues that may
    lead to review findings. The SOP is available to all SBA Lenders to
    enable them to understand the review process and help them comply with
    the requirements of the loan programs SBA contractors receive periodic
    training covering SBA's on-site and off-site review and monitoring
    policies and procedures contained in the SOP.
        Lender Portal.--The Lender Portal allows SBA Lenders to view their
    portfolio data online, and compare their performance to the averages of
    their peers and the overall portfolio. The Lender Portal allows SBA
    Lenders access to the same information OLO uses to measure risk, and
    enables the SBA Lenders to be proactive in addressing performance
    issues rather than reacting to problems after they are contacted. By
    becoming more proactive in correcting portfolio performance problems,
    SBA Lenders can reduce SBA's portfolio and SBA Lender risk. Having the
    Portal information available also assists SBA Lenders in managing their
    SBA operations and managing their SBA portfolio risk, and can be an
    important part of their decision to expand their presence in the SBA
    market.
        Corrective Action Plans.--OLO has implemented a corrective action
    process whereby SBA Lenders work with SBA to address problems and
    deficiencies identified by OLO through on-site reviews, off-site
    monitoring and referrals. SBA Lenders are requested to respond to the
    issues identified and to provide a corrective action plan that
    addresses the problems. If the institution fails to correct the
    problem, SBA may then pursue enforcement actions.
        Lender Oversight Committee.--Through delegations of authority
    published in fiscal year 2005, SBA created a Lender Oversight Committee
    (LOC). The LOC is composed of senior SBA management, as well as OLO
    management, and meets on a regular basis. Among other activities, the
    LOC reviews the performance of individual SBA Lenders, and will
    determine whether to impose certain enforcement actions, as necessary.
        Portfolio Analysis Committee.--OLO has also instituted monthly
    Portfolio Analysis Committee (PAC) meetings. The PAC is comprised of
    senior and mid-level managers. The PAC reviews overall 7(a) and 504
    portfolio performance, trends, and characteristics. The PAC helps
    ensure that offices throughout SBA are aware of performance activity
    and potential trends that could affect either loan program.
        Coordination with Office of Chief Financial Officer.--As part of
    the credit subsidy modeling process, the Office of the Chief Financial
    Officer (OCFO) monitors on a quarterly basis and annually updates
    purchase and recovery rates for all loan programs. The impact on
    subsidy rates from changes in purchase and recovery rates are recorded
    in an analysis of change document that is maintained for all of SBA's
    loan programs. The CFO attends the monthly PAC meetings. The CFO also
    provides an analysis of the impact of proposed program changes on the
    subsidy rates and assists in identifying ways to reduce losses and
    increase recoveries.
        In conclusion, OLO believes that all of the processes and
    procedures described in this response indicate that SBA has in place a
    comprehensive system of lender oversight and portfolio monitoring that
    will reduce the Agency's risk in the 7(a) and 504 loan programs. While
    capacity in a program of oversight involving over 5,000 SBA Lenders and
    a portfolio of over $60 billion is always a challenge, SBA is assisted
    with contract support. SBA has the statutory authority to charge 7(a)
    lenders fees to cover the cost of oversight including contractor
    support. This current fee authority along with the CDC fee authority,
    if enacted should fully support SBA's ability to conduct oversight. SBA
    has requested similar fee authority for the DCS in the 504 program to
    ensure that there are adequate resources available to oversee this
    program as well.
        Question. The 7(a) program makes loans available to borrowers who
    cannot obtain credit at reasonable terms from the private sector
    without the federal guarantee. Specifically, what borrowers are you
    trying to reach? How is this purpose affected by the presence of a zero
    subsidy for the 7(a) program? Would returning to a positive subsidy
    help you meet your policy objectives?
        Answer. The 7(a) loan program is designed for those borrowers who
    are credit-worthy (the lender's analysis concludes that the loan will
    repay in a timely manner and not default based on historical
    performance and credit histories) but that either do not meet the
    lender's collateral requirements, require a longer repayment term than
    the lender gives to non-guaranteed borrowers for the same use of
    proceeds, or are for new businesses with an unproven track record.
        When SBA under the Bush administration converted the 7(a) loan
    program to a zero subsidy loan program for fiscal year 2005, the fees
    supporting the 7(a) program were returned to their pre-September 11
    levels. (After September 11, 2001, fees for the 7(a) program were
    reduced for fiscal years 2003 and 2004 in the hopes of stimulating the
    economy that suffered from the terrorist attack.) Prior to that, the
    fees had been the same since December, 2000. Before December, 2000, the
    fees under the Clinton administration were higher. Since the 7(a)
    program became a zero subsidy program, the only fee that has been
    adjusted slightly upward has been the on-going annual fee paid by the
    lender. That fee increased by only 4.5 basis points from 0.50 percent
    to 0.545 percent during fiscal year 2006. For fiscal year 2007, the fee
    is 0.55 percent, an increase of only one-half of 1 basis point. And for
    fiscal year 2008, the fee will decrease to 0.494 percent which will
    bring the fees for 7(a) below those charged pre-11 when the 7(a)
    program was subsidized.
        SBA believes that for the 7(a) loan program, zero subsidy is still
    the best policy for the long term stability and growth of the 7(a) loan
    program. Since the 7(a) program went to zero subsidy, SBA has had two
    record-breaking years of lending.
        Volume during fiscal year 2005 (the first year that the 7(a)
    program was a zero subsidy program) was 95,900 loans--an increase of
    more than 18 percent over 2004 when the program was subsidized. Volume
    during fiscal year 2006 maintained this trend and actually increased by
    another 1,390 loans. Fiscal year 2007 YTD continues to maintain the
    strong demand by growing another 9 percent as of March 16, 2007.
        Question. What is your default rate in the basic 7(a) program?
        Answer. The default rate, as a percent of disbursements, for the
    2008 budget submission is 6.96 percent.
        Question. What is the default rate in the disaster loan program?
        Answer. The default rate, as a percent of disbursements, for the
    2008 budget submission is 24.10 percent.
        Question. On page 10 of the budget justification, you make this
    statement: ``the agency's entire business loan operation runs on a
    Cobol-based system developed in-house. Parts of this system are over 50
    years old. The system is operated on an expensive mainframe that is
    dependent on obsolete technology . . .''. What are you doing to address
    this situation?
        Answer. We have initiated the Loan Modernization Program to address
    this situation. We have formed a Steering Council and assigned a
    Program Manager. We have also submitted the business case (Exhibit 300)
    for fiscal year 2008 to OMB. The fiscal year 2008 Budget request
    includes $8 million to start acquiring the solution. Currently, we are
    in the process of developing the acquisition strategy to identify and
    implement the solution that will replace the Cobol-based legacy
    systems.
        Question. What other significant information technology (IT)
    systems are currently under development in the agency and what stage
    are they in?
        Answer.
        Loan Management and Accounting System (LMAS).--As described in
    response to the previous question, the LMAS will support FSIO (JFMIP)
    compliant loan Origination, Servicing, and Liquidation. The project
    scope includes an Integrated Financial Management System to support
    FSIO compliant Loan Accounting. LMAS is a financial management, mixed
    lifecycle system with the bulk of its development costs scheduled to
    occur in fiscal year 2008.
        Business Development Management Information System ``e-
    application''.--The BDMIS e-application will allow the Office of
    Business Development's 8(a) and Small Disadvantaged Businesses to
    submit applications for certification electronically via the WEB. This
    is an enhancement to an existing Business Development system. BD-MIS is
    mixed lifecycle system and features the e-application within its
    development segment.
        Disaster Credit Management System, E-Loan Application (ELA).--
    During fiscal year 2007-08, SBA's Office of Disaster Assistance (ODA)
    is developing an Electronic Loan Application that will integrate with
    DCMS. One of the ODA's Strategic Management Goals is to offer disaster
    victims accessible, easy-to-use and time saving services through the
    electronic filing of disaster loan applications. By using the Internet,
    ODA plans to transform loan-making into a virtual loan process that
    provides efficient and timely loan decisions to disaster victims. DCMS
    is a mixed lifecycle system; ELA represents an enhanced set of
    capabilities within the development segment of DCMS.
        E-Gov Business Gateway.--This is one of 25 E-Gov projects within
    the President's Management Agenda for E-government. The Business
    Gateway provides a government-wide one stop website for use by
    businesses and entrepreneurs. SBA and partner agencies develop tools to
    assist small businesses seeking to comply with laws and regulations,
    locate government forms and obtain relevant government information.
    Business Gateway is currently a mixed lifecycle system planned to be
    out of the development stage in fiscal year 2008.
        Contract Management System (CMS).--CMS will be an information
    system enabling SBA to perform end-to-end electronic processing of its
    internal contracts, bringing the Agency into conformance with OMB's E-
    Procurement guidance. CMS is a mixed lifecycle system planned to be out
    of the development stage in fiscal year 2008.
        Question. The Office of Inspector General's management challenge #1
    also identifies flaws in the procurement system that allow large firms
    to obtain small business awards and agencies to count contracts
    performed by large firms towards their small business goals. What
    resources is the agency committing to allow SBA to fulfill a bigger
    role in ensuring the accuracy of reporting on small business
    contracting and limiting errors by contracting personnel and fraud by
    contractors?
        Answer. The integrity of the data reported to Congress and the
    Public is crucial to provide for the confidence in the Federal
    contracting system. SBA recognizes this, and is taking the lead, along
    with the Office of Management and Budget's Federal Procurement Policy
    to work with agencies to ensure their past numbers a scrubbed and
    future numbers are accurate. The agencies are currently in the process
    of validating their fiscal year 2005 data to identify the reasons for
    coding discrepancies and to correct any errors that occurred.
        Question. The Office of Inspector General has issued a management
    challenge finding serious problems with the SBA 8(a) minority
    contracting program. What resources is the Agency committing to improve
    this program and address these problems?
        Answer. Because the 8(a) Program is a business development
    program--not a contracting program--it is intended to foster the 8(a)
    firm's growth (through various forms of technical, management,
    procurement and financial assistance) and viability during the nine
    year term. The 8(a) BD Program is for socially and economically
    disadvantaged entrepreneurs (which include non-minorities) who meet the
    eligibility criteria.
        SBA is committed to improving the 8(a) BD Program and has committed
    several resources that are aimed at refocusing the Program to emphasize
    ``business development.'' On September 30, 2006, SBA engaged a contract
    to conduct a review/assessment of the business processing functions of
    the 8(a) BD Program (i.e. those processes related to initial
    certification, continuing eligibility, management and technical
    assistance, legislative and regulatory requirements) and design a plan
    consisting of both short and long term methodologies for re-engineering
    and improving those functions.
        Specifically, this process improvement plan will:
      --Identify and define each program element and the requirement(s)
            related to the delivery of the 8(a) BD Program;
      --Identify significant issues and problems that exist;
      --Identify key issues in the 8(a) BD Program and processes and
            systems that need to be updated; and
      --Review/assess programmatic requirements to ensure relevance and
            consistency with legislative and regulatory compliance.
        In addition, the Office of Business Development conducts monthly
    training sessions (via teleconferencing) for BD field staff in SBA's
    district offices. This training (which covers various programmatic and
    regulatory issues) is designed to improve 8(a) Program delivery and
    ensure consistency and uniformity as it relates to servicing 8(a)
    firms.
        Finally, SBA is considering various other changes to the program to
    promote its integrity and efficiency, and the Agency intends to issue a
    proposed rule to amend its regulations in the near future.
        Question. In particular, one of the actions that the OIG has called
    upon SBA to take is to exert greater oversight over 8(a) contracts
    issued by procuring agencies since SBA has now delegated authority to
    those agencies to monitor compliance by 8(a) contractors with SBA
    regulations and requirements. What resources is SBA devoting towards
    conducting adequate oversight to ensure that procuring agencies are
    fulfilling their responsibilities?
        Answer. In an effort to ensure greater oversight as it relates to
    8(a) contracts issued by procuring agencies, SBA's Office of Business
    Development has revised the language in the Partnership Agreements
    (between SBA and the procuring agencies) to clarify roles and
    responsibilities. The revised Partnership Agreements specifically
    require the procuring agencies to monitor 8(a) firms' compliance with
    contract performance. In February 2007, the Office of Business
    Development began conducting training for the procuring agencies with
    regard to rules and regulations governing the 8(a) Program and the
    revised language in the Partnership Agreements. This training is
    intended to ensure that contracting officers and technical
    representatives are adequately advised of their responsibilities
    concerning 8(a) contract compliance.
        Question. The Office of Inspector General issued an Audit Report in
    May, 2005 on contract bundling. Excessive contract bundling by agencies
    limit the opportunities for small businesses to obtain government
    contracts. That report found that SBA had not reviewed 87 percent of
    the reported contract bundling by procuring agencies even though SBA
    has a statutory duty to do so, and had not developed a data base to
    track bundling activity. The report also determined that there was a
    lack of resources in that the Agency had only 43 Procurement Center
    Representatives in the entire country to monitor over 2,000 procurement
    locations for the Federal Government, and that a large percentage of
    government contracts were not being reviewed by PCRs. What resources is
    SBA devoting towards addressing these issues?
        Answer. The integrity of the data reported to Congress and the
    Public is crucial to provide for the confidence in the Federal
    contracting system. SBA recognizes this, and is taking the lead, along
    with the Office of Management and Budget's Office of Federal
    Procurement Policy to work with agencies to ensure their past numbers
    are scrubbed and future numbers are accurate. The agencies are
    currently in the process of validating their fiscal year 2005 data to
    identify the reasons for coding discrepancies and to correct any errors
    that occurred.
                                     ______

                  Questions Submitted by Senator Sam Brownback
        Question. Currently the microloan program costs $0.85 for every
    dollar loaned. Why is it so costly to administer such loans? How will
    the program change if it were shifted to zero subsidy as proposed in
    the President's fiscal year 2008 budget?
        Answer. The technical assistance component is a significant factor
    in the cost of the Microloan program. Subsidized interest rates are
    another extremely high cost. In addition to Subsidy costs, overhead
    costs are high since SBA makes direct loans to each microloan
    intermediary and must continue to process and administer the loan,
    including additional loan disbursements. The Administration's proposed
    change in the Microloan program increases the interest rate charged on
    the loan from 3.77 percent to the microlender to 1.06 percent above the
    5-year Treasury rate (estimated in OMB's economic assumption at 4.93
    percent). SBA would also eliminate the technical assistance funding for
    SBA microborrowers, but would provide technical assistance through the
    Agency's Entrepreneurial Development (ED) resources (SBDCs, SCORE, and
    WBCs)
        The Administration's proposed change in the Microloan program
    increases the interest rate charged on the loan from SBA to the
    microlender from 1.25 to 2 percent less than the 5-year Treasury rate
    (depending on the microlender's average microloan size) to 1.06 percent
    above the 5-year Treasury rate (estimated in OMB's economic assumption
    at 4.93 percent).
        Question. The fiscal year 2008 budget proposes $484 million in new
    budget authority. How would this benefit SBA programs? And
    specifically, what benefits would be passed along to the American Small
    Business owner?
        Answer. SBA's fiscal year 2008 budget request reflects the
    President's commitment to America's small businesses and the vital role
    they play in our economy. Enactment of this request will enable SBA to
    continue serving the small business community while ensuring
    stewardship of taxpayer dollars.
        These resources will support a total of $28 billion in lending
    authority for small business financing, which represents a potential 40
    percent increase over business lending for fiscal year 2006, through
    the 7(a), 504, and SBIC debentures programs. For its flagship 7(a)
    program, SBA requests authority for $17.5 billion--a 27 percent
    increase over the fiscal year 2006 lending level. SBA also requests
    authority for $7.5 billion for the 504 program, a 32 percent increase
    over loans made in fiscal year 2006--a record year for 504 lending.
    Finally, SBA requests an SBIC Debenture program of $3 billion.
        In addition, this budget will support the following:
      --A disaster loan volume of $1.064 billion (the Agency's ten-year
            average based upon fiscal year 1996-2005 average activity,
            excluding the WTC disaster, adjusted for inflation).
      --Counseling and training to small business people through SBA's
            network of resources partners in Small Business Development
            Centers (SBDC), Service Corps of Retired Executives (SCORE),
            and Women's Business Centers.
      --Assist federal agencies targeting a total of $84 billion in prime
            federal contracting dollars to be awarded to small businesses
            in fiscal year 2008.
      --Investing in the Agency's human capital through job skills
            training, mentoring programs, succession planning, proactive
            recruitment of highly qualified staff, and implementation of an
            automated personnel records system.
      --Maintaining employee security through continued implementation of
            Presidential Homeland Security Directive #12 and support of
            major security improvements in the headquarters building.
      --Continuing the process of implementing a loan operations system to
            replace the current outdated system in order to better track
            payments as well as increase the Agency's loan portfolio
            oversight.
      --Enhancing SBIC oversight and recoveries.
      --Providing a cost effective microloan program.
      --Continuing efforts to make it easier and faster for small
            businesses to comply with government regulations.
      --Improving SBA products, services and delivery.
        Question. What is the $100 million savings to taxpayers stemming
    from the 7(a) loan program being changed to zero subsidy derived from?
    Are there other benefits to the zero subsidy program?
        Answer. The $100 million savings is an estimate based on the last
    year (2004) the 7(a) program had a subsidy rate. If the 7(a) program
    had a zero subsidy rate that year it would have saved the taxpayers
    about $100 million.
        SBA believes that for the 7(a) loan program, zero subsidy is the
    best policy for the long term stability and growth of the 7(a) loan
    program. Since the 7(a) program went to zero subsidy, SBA has had two
    record-breaking years of lending--years not hampered by slowdowns as a
    result of moving beyond the projected levels prescribed by Congress
    legislatively.
        Question. What is the potential cost to the taxpayers of reducing
    or eliminating fees on 7(a)?
        Answer. Assuming a loan level of $17.5 billion the cost to the
    taxpayers would be $590 million if all 7(a) fees were eliminated. At
    the same loan level, the cost to the taxpayers would be $236 million
    only if the ongoing fee were eliminated and $354 million if only
    upfront fees were eliminated.

                                              7(A) BUSINESS LOANS FOR 2008
    ----------------------------------------------------------------------------------------------------------------
                                                                Subsidy appropriation needed if:
            Various Program Levels        --------------------------------------------------------------------------
                                            No Annual/Ongoing Fees      No Upfront Fees              No Fees
    ----------------------------------------------------------------------------------------------------------------
    $17,500,000,000                        $236,250,000...........  $353,500,000...........  $589,750,000
    $16,500,000,000                        $222,750,000...........  $333,300,000...........  $556,050,000
    $16,000,000,000                        $216,000,000...........  $323,200,000...........  $539,200,000
    $15,500,000,000                        $209,250,000...........  $313,100,000...........  $522,350,000
    $15,000,000,000                        $202,500,000...........  $303,000,000...........  $505,500,000
    ----------------------------------------------------------------------------------------------------------------

        Question. Does the success of the 7(a) change to zero subsidy have
    any bearing on the fiscal year 2008 proposal for the microloan program
    to go to zero subsidy?
        Answer. The success of the 7(a) loan program at zero subsidy has
    influenced this decision, especially since the 7(a) Community Express
    program has surpassed the Microloan program in loans of $35,000 or less
    (the definition of a microloan).
        Not only does zero subsidy save taxpayers approximately $.85 for
    every dollar lent under the current microloan program but it expands
    the opportunities to reach more microborrowers and provide them with
    more options for counseling and training.
        Question. Can you describe in more detail how the new microloan
    program would work and its benefits (cost and non-cost related)?
        Answer. SBA would amortize each microlender's loan at a rate of
    1.06 percent above the 5-year Treasury rate (estimated in OMB's
    economic assumption at 4.93 percent). SBA would also rely on the
    Agency's ED resource partners (SCORE, Women's Business Centers, Small
    Business Development Centers) to provide counseling and assistance
    instead of providing additional grant money to Microlender
    Intermediaries for technical assistance which represents a savings of
    $13 million over fiscal year 2006 while actually encouraging a wider
    variety of entrepreneurial development opportunities. Moving to a zero
    subsidy in the program would also enable SBA to reach out to a larger
    number of microborrowers across the country. Microlending
    intermediaries can still access the numerous other Federal, State and
    Local grant programs for technical assistance and more intermediaries
    will be able to leverage the more rare lending program offered by SBA.
    Currently only 172 of the total 600 microlending intermediaries are
    registered with the SBA microloan program. This proposal would allow
    SBA to offer lending opportunities to other qualified intermediaries
    and reach a wider geographic area and market.
        Question. How many microlenders are in close proximity, or co-
    located, with other small business counseling centers receiving federal
    funding?
        Answer. SBA doesn't have information on the locations of all small
    business centers receiving federal funding, but based on an analysis of
    the locations of the centers that SBA funds, almost all (about 95
    percent) of the Agency's microloan intermediaries are located within
    close proximity to an SBA ED resource partner, which include SBDCs,
    WBCs, and SCORE. In addition, SBA believes the approximately 10
    intermediaries not located in close proximity to an SBA small business
    counseling center could be served by circuit rides established by SBA's
    existing resource partners.
        Question. Do microlenders receive funds from other sources? If so,
    what are they and how much of their funding comes from government
    sources?
        Answer. SBA has not evaluated the alternative funding sources
    available to SBA's microloan intermediaries or to the microloan
    industry as a whole. However, according to 2005 information developed
    by the Association for Enterprise Opportunity, the leading trade
    association for the industry, in association with the Aspen Institute,
    there are about 18 federal sources of funding for the microloan
    industry and undoubtedly a number of state sources.
        Question. How would Senators Kerry, Snowe, Landrieu and Vitter's
    proposal for a private guaranteed lending programs for the regular 7(b)
    loan program in S. 163 affect the disaster subsidy rate and funding
    needs?
        Answer. CBO estimated that an identical proposal in S. 3778, that
    the estimated subsidy rates for the different types of business loans
    and loan guarantees offered by SBA currently range from zero for 7(a)
    and section 504 programs to about 17 percent for the NMVC program.
    Incorporating program amendments in this bill and using historical
    demand and default rates for those loan programs, CBO estimates that
    the subsidy costs for the authorized levels of guaranteed and direct
    business loans would be $23 million in 2007 and about $128 million over
    the 2007-2011 period.
        Question. How much would the Energy Emergency Loan Program in S.
    163 cost?
        Answer. Section 402, Small Business Energy Emergency Disaster Loan
    Program.--Based on the information provided, and the proposed loans are
    funded within SBA's existing Disaster Assistance direct loan program,
    it appears this proposal will not impact the subsidy rate.
        Section 403, Agricultural Producer Emergency Loans.--It appears
    USDA would provide funding for the proposal but the legislation does
    not provide sufficient information to estimate the impact on SBA's
    Disaster Assistance program subsidy rate.
        Question. How much would the Energy Emergency Loan Program in S.
    163 cost? CBO says it would cost approx. $85 million (subsidy and
    admin) 2007-2011.
        Answer. We estimate that the administrative cost would be
    approximately $50 million.
                                     ______

               Questions Submitted by Senator Christopher S. Bond
        Question. With respect to the SBIR program: As I mentioned earlier,
    I am concerned that we are shooting ourselves in the foot by limiting
    biotechnology companies' access to this program. We recently received
    this data chart from NIH. It shows that for the last 2 consecutive
    years, the number of applications to NIH's SBIR program has decreased.
    This is significant because the new SBIR rules were first applied to a
    specific company (Cognetix decision) in 2003, but the agencies (such as
    NIH) did not fully implement them until 2004. So it is fair to say that
    the 2005 and 2006 numbers represent the first 2 years that the new
    restriction on venture capital financing has been fully in effect. Look
    at the impact on applications at NIH.

        The chart also includes figures for R01 applications. I am told
    that it is the largest NIH grant program to universities and academia.
    So while applications for NIH's SBIR program fell significantly in 2005
    and 2006, applications for R01s continued to increase (albeit at a
    slower rate than previously). Would you agree this makes the case that
    the decrease in SBIR applications is specific to something going on
    with the NIH SBIR program and not a result of scientific trends or some
    other outside factor?
        Answer. The Small Business Administration is currently reviewing
    the issue of venture capital investment in firms that compete for SBIR
    awards. The National Academy of Sciences is conducting a study on the
    SBIR program and expects to issue its report in the coming months. This
    is an important issue concerning the SBIR program. As such, the Agency
    will review as it addresses this issue.
        Question. Mr. Preston, as you evaluate the SBIR program with an eye
    toward regulatory or legislative changes, I urge you to look at ways to
    ensure that the most innovative small firms--including those that raise
    private funds, such as venture capital--are able to participate in the
    program. The SBIR authorizing statute listed the raising of private
    funds by a company as a positive factor that agencies should take into
    account when awarding SBIR Phase II grants. Congress viewed raising
    private research funding as a good thing in 1982; that has not changed.
        As America's high-technology companies compete for funding in an
    increasingly global marketplace, the ability to attract and retain
    capital has become more important than ever. The SBA should not
    discriminate against good science by small entrepreneurial companies
    simply because they have been successful in raising venture capital.
        Are you willing to work with us to address this problem
    administratively, so that a legislative fix will not be necessary?
        Answer. We would be happy to discuss this issue with you prior to
    making a final determination.
        Question. With respect to the HUBZone program: Our agencies have
    never achieved the 3 percent minimum mandatory HUBZone contracting
    level, yet the fiscal year 2008 funding for the HUBZone Program has
    been reduced to $8.79 million from an fiscal year 2007 level of $9.077
    million. Why are the funds for this vital program that focuses on the
    underserved areas of our Nation continually reduced?
        Answer. The bulk of the HUBZone Program's funding request is spent
    on support provided by the SBA district office staff. The services
    these district office personnel, known as liaisons, provide is twofold.
    They conduct marketing outreach to the local community and execute the
    in-depth program examinations that ensure only qualified firms receive
    HUBZone benefits. Program examinations are executed on approximately
    five percent of the portfolio and supplement the program's alternate
    continuing eligibility tool--HUBZone recertification.
        A smaller portion of the request ($2 million) supports the
    Headquarters staff who are responsible for policy development,
    certification and eligibility, adjudication of protests as well as
    maintenance and technological advancement of the HUBZone system. What
    these funds produced most recently are two online systems dedicated to
    increasing HUBZone contracts. One system scrubs each day the contracts
    listed in FedBizOpps and, if it identifies a suitable non-HUBZone
    contract, a letter is sent to the responsible contracting officer
    asking that the contract be reclassified as a HUBZone set-aside. The
    second system, when fully deployed will allow HUBZone certified
    concerns to generate requests to contracting officials that contracts
    contemplated in the near-future be reserved for HUBZone firms. It is
    anticipated that these two internet based tools will increase
    contracting opportunities for HUBZone firms and assist agencies in
    achieving the 3 percent statutory goal.
        The HUBZone Office is continuing to enhance its multiple systems
    through the use of high-end technology. The cost savings brought about
    by the efficient application of technology is reflected in the
    Administration's ability to decrease the fiscal year 2008 budget
    request.
        Question. The SBA 2008 budget eliminates the separate line item for
    HUBZone funding. Why is this no longer a priority program for the
    Administration?
        Answer. As seen in Table 6 of SBA's fiscal year 2008 budget
    request, Note 2 states that funding for the HUBZone program is included
    in the GCBD Operating Budget. This is the same method of budgeting used
    for the 8(a) program. For HUBZones, SBA is seeking $888,000 plus a
    staff cost of $1.1 million each year. Our overall financial spending on
    the HUBZones program is approximately $9 million. SBA has proposed
    eliminating a line item that does not accurately reflect our commitment
    to the program and inhibits the agency from exercising flexibility in
    its budget. The SBA considers HUBZones a vital part of overall
    procurement effort.
                                     ______

                Question Submitted by Senator Richard C. Shelby
        Question. I know there were problems with the Small Business
    Administration conducting its normal loan business, while addressing
    loan needs stemming from the impact of Hurricane Katrina. Has this
    issue been resolved?
        Answer. The 2005 hurricanes which hit the Gulf Coast were the
    largest natural disaster in the history of the SBA. This required an
    unprecedented response from the Office of Disaster Assistance as well
    as the dedicated staff throughout the Agency. In response to the Gulf
    Coast hurricanes, SBA processed over 420,000 loan applications for
    homes and businesses.
        During the same time period, the SBA guaranteed a record number of
    loans under its two primary small business loan programs, setting
    records for both the number of loans and the dollars loaned.
        So while the Agency certainly experienced some strains and was
    stretched thin to respond to the overwhelming disaster caused by
    Hurricanes Katrina, Rita and Wilma, it is safe to say the team at SBA
    worked hard to overcome these and focus their efforts on serving our
    small business customers.

                              SUBCOMMITTEE RECESS

        Mr. Preston. Thank you very much.
        Senator Durbin. Thanks to all your people who are with you
    here today. This meeting of the subcommittee stands recessed.
        [Whereupon, at 10:35 a.m., Friday, March 9, the
    subcommittee was recessed, to reconvene subject to the call of
    the Chair.]

      FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL
                                   YEAR 2008

                                  ----------

                           WEDNESDAY, MARCH 21, 2007

                                           U.S. Senate,
               Subcommittee of the Committee on Appropriations,
                                                        Washington, DC.
        The subcommittee met at 3:20 p.m., in room SD-192, Dirksen
    Senate Office Building, Hon. Richard J. Durbin (chairman)
    presiding.
        Present: Senators Durbin and Allard.

                                 THE JUDICIARY

    STATEMENT OF HON. JULIA S. GIBBONS, JUDGE, U.S. COURT
                OF APPEALS, SIXTH CIRCUIT; CHAIR, BUDGET
                COMMITTEE, JUDICIAL CONFERENCE OF THE
                UNITED STATES

                     STATEMENT OF SENATOR RICHARD J. DURBIN

        Senator Durbin. Good afternoon. I'd like to note that this
    is the first hearing on the judiciary's budget before this
    subcommittee since 2002.
        This afternoon, we will be hearing from two distinguished
    witnesses, Judge Julia Gibbons and Director James Duff. I'm
    pleased to welcome Judge Gibbons, Chair of the Judicial
    Conference's Budget Committee, as well as Mr. Duff, Director of
    the Administrative Office of the Courts.
        And I welcome my colleague, Senator Allard, who has joined
    me today, and others who may arrive.
        For the past 3 fiscal years, the judiciary has achieved
    approximately a 5-percent budget increase, which has helped put
    the courts back on track after suffering significant cuts in
    fiscal year 2004. I'm pleased this subcommittee was able to
    increase funding for the judiciary in critically needed areas
    during this fiscal year despite operating under a continuing
    resolution.
        With these fiscal year 2007 funds, the judiciary will be
    able to make progress in dealing with the increased caseload in
    areas like the Southwest border, prevent termination of 2,500
    employees, ensure payments for constitutionally guaranteed
    criminal defense services, prevent discontinuation of civil
    jury trials prior to the end of the fiscal year, and address
    the courts' security needs, a top priority of mine.

                            FISCAL YEAR 2008 BUDGET

        For fiscal year 2008, there's a request for a 7.6-percent
    increase overall for the judiciary above last year's level. In
    addition, there's a request for an increase in the noncapital
    panel attorney rate, which would permit hourly rates to go from
    $94 to $113. The subcommittee will need to consider that
    carefully. I'm aware that in recent years the Judicial
    Conference undertook cost-containment measures, and, as a
    result, you were able to reduce some costs. I know your
    testimony discusses this, as well as additional cost-saving
    efforts underway.
        Regarding court security, I understand you've had some
    problems with the ability of the Federal Protective Service to
    adequately safeguard the exterior perimeter of all courthouses.
    I want to hear more about that.

                NATIONAL ACADEMY OF PUBLIC ADMINISTRATION REPORT

        Recently, the National Academy of Public Administration
    (NAPA) conducted a study of the judiciary's budget processes
    and how the judiciary prepares for the future. NAPA had some
    recommendations, which I will also be anxious to hear your
    response to.
        I look forward to discussing these and other issues. I note
    the subcommittee is in receipt of written testimony submitted
    by the Court of Appeals for the Federal Circuit, Court of
    International Trade, Federal Judicial Center, and the U.S.
    Sentencing Commission, which will be submitted for the entire
    record.
        I turn now to my colleague Senator Allard, if he would like
    to make an opening statement.

                       STATEMENT OF SENATOR WAYNE ALLARD

        Senator Allard. Mr. Chairman, thank you. I've enjoyed
    working with you in previous years, and I look forward to
    working with you this year.
        I share your concern with--well, first of all, I want to
    thank you for holding this hearing, and thank the witnesses for
    coming and sharing their expertise with us. I appreciate the
    opportunity to discuss the Federal judiciary's fiscal year 2008
    budget request and justification. And, as we consider the
    allocation of appropriated Federal dollars, it's important that
    we identify the needs and challenges facing our Federal
    judicial system.

                      GENERAL SERVICES ADMINISTRATION RENT

        One issue that I've worked on for a considerable amount of
    time, and what I've supported, is legislation to address major
    problems affecting the Federal judiciary, specifically
    excessive rental charges by the General Services Administration
    (GSA) for courthouses and other space occupied by the courts
    across the country. I'm hearing from my judges in Colorado on
    that issue on a frequent basis. We must work together to
    prohibit the GSA from excessively overcharging to maintain and
    operate Federal court buildings and related costs.
        Along with the chairman, I have some interest, also, in
    security issues. I have a question in that regard.
        Thank you for being here. I look forward to the testimony.
        Thank you, Mr. Chairman.
        Senator Durbin. Thank you, Senator Allard.
        Judge Gibbons, the floor is yours.

                       OPENING STATEMENT OF JUDGE GIBBONS

        Judge Gibbons. Chairman Durbin, Senator Allard, as
    indicated, I'm Judge Julia Gibbons. I'm here to testify as
    chair of the Budget Committee of the Judicial Conference of the
    United States. Appearing with me today is Jim Duff, the new
    Director of the Administrative Office of the Courts. Jim brings
    much experience and knowledge of the judiciary to his position.
        Mr. Chairman, you have been a great friend to the Federal
    judiciary through your work on the Judiciary Committee and the
    Appropriations Committee. I know that you were personally
    involved in efforts to provide $12 million in fiscal year 2006
    supplemental funding to the United States Marshals Service for
    judicial security, part of which went for installation and
    monitoring of security systems in judges' homes. I speak for
    all judges when I say we greatly appreciate Congress' continued
    concern with the safety of judges and their families.

                            FISCAL YEAR 2007 FUNDING

        On behalf of the third branch, I want to thank you, Mr.
    Chairman, Senator Brownback, and also Chairman Byrd, for making
    the judiciary a funding priority in the just completed fiscal
    year 2007 appropriations cycle. Although we were very concerned
    about the prospect of a hard freeze for the courts in 2007,
    Congress responded to those concerns and provided funding for
    the judiciary sufficient to maintain current onboard staffing
    levels in the courts, as well as to address some of our
    immigration and law enforcement workload needs. We are aware
    that many executive branch programs and agencies were funded at
    or below fiscal year 2006 levels, and we are very appreciative
    for the funding level we received. I assure you that we will
    use the resources you have given us wisely.

                            FISCAL YEAR 2008 REQUEST

        The goal of our fiscal year 2008 request is to sustain the
    staffing gains you helped us achieve in 2007. After a decade of
    steady workload growth that was not matched with similar growth
    in staffing resources, the courts' workload has finally begun
    to stabilize. With the funding you provided for 2007, clerks
    and probation offices will be able to hire more than 200 staff
    to address critical workload needs and partially close the gap
    between workload and staffing.
        We recently updated our 2008 budget request in order to
    more accurately reflect our funding needs in light of changed
    requirements due to financing assumptions and delayed enactment
    of our 2007 appropriations. Based on these changes, we have
    reduced the judiciary's 2008 appropriation requirements by $80
    million.
        Our revised 2008 appropriations requirements reflect an
    increase of $452 million over the 2007 enacted level. Of this
    amount, $390 million, or 86 percent, of the increase is for
    standard pay and nonpay inflationary adjustments and four
    adjustments to base, reflecting increases in our space,
    information technology, defender services, and court security
    programs. The remaining $62 million of our request is for
    program enhancements for courthouse security, information
    technology improvements, and for an enhancement in our defender
    services program to increase the hourly rate paid to private
    panel attorneys representing indigent defendants in Federal
    criminal cases. This need for an increase in the amount we pay
    panel attorneys is discussed in detail in my written testimony,
    and you referred to it earlier Mr. Chairman. I look forward to
    answering any questions you may have about it.
        In constructing the 2008 budget request, the judiciary made
    every effort to contain costs. In 2004, the Judicial Conference
    adopted a comprehensive strategy to reduce the rate of growth
    in the judiciary's appropriation requirements without hurting
    the administration of justice, and this strategy has produced
    results. Our rent validation initiative alone identified space
    rent overcharges by GSA that resulted in over $50 million in
    rent credits and cost avoidances. We are able to redirect these
    savings to other judiciary priorities, thus reducing our
    request for appropriated funds. Pursuing cost-containment
    initiatives throughout the judiciary is a top priority of the
    Judicial Conference.

                      FEDERAL PROTECTIVE SERVICE SECURITY

        Finally, I turn to an issue of increasing concern to the
    judiciary; that is, the expense and quality of service provided
    the courts by the Federal Protective Service (FPS). FPS
    provides, on a reimbursable basis, exterior perimeter security
    for Federal agencies. We have received reports from several
    courts that perimeter security equipment provided by the FPS
    has not been maintained or repaired, thus compromising security
    in those courthouses. Last month Director Duff heard from a
    major metropolitan court which detailed inoperative FPS-
    provided exterior cameras and the absence of cameras at key
    locations, resulting in dead zones with no camera surveillance.
    Another district reported that, after pellets were fired at the
    courthouse at night, the court learned there was no
    surveillance footage to review, because FPS cameras were not
    recording any exterior views.
        In many instances, the United States Marshals Service has
    assumed responsibility for repairing or replacing FPS-provided
    perimeter cameras. We appreciate the Marshals Service's
    proactive approach, but, unfortunately, it means that we are
    paying both the Marshals Service and FPS for identical
    services.
        The situation with FPS has become sufficiently serious that
    last week the Judicial Conference endorsed a recommendation to
    support the efforts of the Marshals Service to assume security
    functions currently performed by FPS. We look forward to
    working with the subcommittee on this important issue.

                              PREPARED STATEMENTS

        As I conclude my remarks, I ask that my entire statement,
    plus the statement of the Administrative Office and the other
    judicial entities to which you referred earlier, Mr. Chairman,
    be placed in the record. And, of course, I'll be happy to
    answer questions at the appropriate time.
        Senator Durbin. Without objection, the statements will be
    placed in the record.
        [The statements follow:]
                  Prepared Statement of Hon. Julia S. Gibbons
                                  introduction
        Chairman Durbin, Senator Brownback, and members of the
    subcommittee, I am Judge Julia Gibbons of the Sixth Circuit Court of
    Appeals. Our court sits in Cincinnati, Ohio, and my resident chambers
    are in Memphis, Tennessee. As the chair of the Judicial Conference
    Committee on the Budget, I come before you to testify on the
    Judiciary's appropriations requirements for fiscal year 2008, speaking
    on behalf of the 33,000 employees of the Judiciary judges, court staff,
    and chambers staff. I feel privileged to represent the Third Branch. In
    doing so, I will also apprise you of some of the challenges facing the
    Federal courts.
        This is my third appearance before an appropriations subcommittee
    on behalf of the Federal Judiciary and, of course, my first appearance
    before this newly created Financial Services and General Government
    panel. We look forward to a productive relationship with the
    subcommittee and its staff as we begin the fiscal year 2008 budget
    cycle.
        Mr. Chairman, you have been a great friend to the Federal Judiciary
    through your work on the Judiciary Committee and the Appropriations
    Committee. I know you were personally involved in efforts to provide
    $12 million in supplemental funding to the United States Marshals
    Service, part of which was for the installation and monitoring of
    security systems in judges' homes. I speak for all judges when I say we
    greatly appreciate Congress's continued concern with the safety of
    judges and their families.
                  administrative office director james c. duff
        Appearing with me today is James C. Duff, the new director of the
    Administrative Office of the United States Courts. He succeeds Leonidas
    Ralph Mecham who retired last year after a record 21 years leading the
    Administrative Office. Director Duff was appointed by the Chief Justice
    in April 2006 and took office in July 2006. Jim brings much experience
    and knowledge of the Judiciary to his position.
                            fiscal year 2007 funding
        Mr. Chairman and Senator Brownback, on behalf of the entire
    Judicial Branch I want to thank you and your colleagues, especially
    Chairman Byrd, for making the Judiciary a funding priority in the just
    completed fiscal year 2007 appropriations cycle. The fiscal year 2007
    process was certainly atypical in concluding with a joint resolution
    providing full year funding for the nine unfinished appropriations
    bills. Although we were very concerned about the prospect of a hard
    freeze for the courts in fiscal year 2007, Congress responded to those
    concerns and provided funding for the Judiciary sufficient to maintain
    current on-board staffing levels in the courts as well as to address
    some of our immigration-related workload needs. We are aware that
    hundreds of Executive Branch programs were funded at or below fiscal
    year 2006 levels, and we are very appreciative for the funding level we
    received. I assure you that we will use these resources wisely.
        While I will discuss the fiscal year 2008 budget request for the
    Judiciary later in my testimony, I would like to mention that, like
    some Federal agencies, we had to make certain assumptions about our
    fiscal year 2007 funding levels when we were finalizing our 2008 budget
    request several months ago. We assumed that Congress would provide the
    midpoint of the House-passed and Senate-reported appropriations bills
    from the 109th Congress, less 1 percent for a possible across-the-board
    rescission. The final enacted fiscal year 2007 appropriations level is
    $44 million below the fiscal year 2007 funding assumption we used to
    construct the fiscal year 2008 request. In order to provide you with
    our latest budget estimates, we recently updated the Judiciary's fiscal
    year 2008 request based on fiscal year 2007 enacted appropriations,
    other financing adjustments, and changes in requirements that have
    occurred since our 2008 budget was submitted. Our preliminary analysis
    indicates that the Judiciary's fiscal year 2008 appropriations
    requirements have declined by $80 million from the original request
    level. A chart identifying, by account, the revised appropriations
    request for fiscal year 2008 is provided at Appendix A. We will provide
    a complete budget re-estimate package to the subcommittee in May.
                           statements for the record
        Mr. Chairman, in addition to my statement and Director Duff's, I
    ask that the entire statements of the Federal Judicial Center, the
    Sentencing Commission, the Court of Appeals for the Federal Circuit,
    and the Court of International Trade be included in the hearing record.
                         role of the federal judiciary
        Before I detail the specifics of our 2008 budget request, I will
    review various factors that shape the Federal Judiciary's budget. First
    and foremost is the role of the courts in our system of democratic
    government. Among our three independent, co-equal branches of
    government, the Judiciary is the place where the people go to resolve
    their disputes peacefully and according to the rule of law. We are
    protectors of individual rights. Through trying those accused of crimes
    and sentencing those who are convicted, we also uphold societal values
    as expressed in the laws you pass. It may seem obvious, but it is worth
    noting that every item in our budget request relates to performing the
    functions entrusted to us under the Constitution. We have no optional
    programs; everything ultimately contributes to maintaining court
    operations and preserving the judicial system that is such a critical
    part of our democracy.
                            cost containment efforts
        The Judiciary is cognizant of the budget challenges facing our
    Nation and I want to assure the subcommittee that the Federal Judiciary
    is doing its part to contain costs. We are well aware that, with the
    conflicts in Iraq and Afghanistan and the investments being made to
    improve security here at home, non-security domestic spending has been
    flat for several years. And, looking forward, we know that the
    projected increase in mandatory entitlement spending in the coming
    years as baby boomers begin to retire will only add to Federal budget
    pressures. The Judiciary recognizes that the administration and
    Congress are rightfully concerned about overall Federal spending and
    budget deficits and that you face tough choices.
        The Judicial Conference has always sought ways to reduce costs and
    enhance productivity. In fact, the Budget Committee which I currently
    chair has, since 1993, had an Economy Subcommittee whose sole purpose
    is to make funding recommendations to the full Budget Committee based
    on its independent analysis of the efficiency and effectiveness of
    Judiciary programs. The Economy Subcommittee is in effect the Third
    Branch's counterpart to the Office of Management and Budget. In fiscal
    year 2004 we retooled and enhanced our efforts to control costs. In
    that year, the Judiciary received a significant reduction to its budget
    request, primarily due to across-the-board cuts applied during final
    conference on our appropriations bill. This funding shortfall resulted
    in staff reductions of 1,350 employees, equal to 6 percent of the
    courts' on-board workforce. Of that number, 328 employees were fired,
    358 employees accepted buyouts or early retirements, and 664 employees
    left through normal attrition and were not replaced.
        The 2004 situation made clear that the Judicial Conference had to
    take steps to contain costs in a way that would protect the judicial
    process and ensure that budget cuts would not harm the administration
    of justice. In March 2004, the late Chief Justice William H. Rehnquist
    charged the Judicial Conference's Executive Committee with leading a
    review of the policies, practices, operating procedures, and customs
    that have the greatest impact on the Judiciary's costs, and with
    developing an integrated strategy for controlling costs. After a
    rigorous 6-month review by the Judicial Conference's various program
    committees, the Executive Committee prepared, and the Judicial
    Conference endorsed, a cost-containment strategy. The strategy focused
    on the primary cost drivers of the Judiciary's budget, which included
    an examination of the number of staff working in the courts, the amount
    they are paid, and the rent we pay to the General Services
    Administration for courthouses and leased office space. To be frank,
    cost containment is not the most popular initiative in all quarters of
    the Judiciary. But the courts realize it is necessary, and we have had
    great cooperation Judiciary-wide as we have moved forward on cost
    containment initiatives. Pursuing the implementation of cost
    containment initiatives will continue to be a top priority of the
    Judicial Conference.
    Rent Validation Project
        The amount of rent we pay to GSA has been a matter of concern to
    the Judiciary for more than 15 years. Our GSA rent bill consumes about
    20 percent of the courts' operating budget, and we project the rent
    bill will exceed $1 billion in fiscal year 2008. Our relationship with
    GSA, though strained in recent years, has become more productive as
    Director Duff will discuss in more detail in his testimony. In
    addition, we remain vigilant in our efforts to control our rent costs,
    and at present GSA and the Judiciary are working cooperatively to this
    end.
        The Judiciary's rent validation project has achieved significant
    savings. This initiative originated in our New York courts where staff
    spent months scrutinizing GSA rent bills and found rent overcharges.
    The cumulative effect of this discovery was savings and cost avoidance
    over 3 fiscal years totaling $30 million. The Administrative Office
    expanded this effort nationwide by training all circuit executive
    offices to research and detect errors in GSA rent billings. Although it
    is quite time consuming, detailed reviews of GSA rent billings are now
    a standard business practice throughout the courts. Through the rent
    validation effort we recently identified additional overcharges
    totaling $22.5 million in savings and cost avoidance over 3 years. GSA
    has been very responsive to correcting billing errors that we bring to
    their attention. By identifying and correcting space rent overcharges
    we are able to re-direct these savings to other Judiciary requirements,
    thereby reducing our request for appropriated funds.
    Rent Caps
        To contain costs further, the Judiciary is establishing budget caps
    in selected program areas in the form of maximum percentage increases
    for annual program growth. For our space and facilities program, the
    Judicial Conference approved in September 2006 a cap of 4.9 percent on
    the average annual rate of growth for GSA rent requirements for fiscal
    years 2009 through 2016. By comparison, the increase in GSA rent in our
    fiscal year 2005 budget request was 6.6 percent. This cap will produce
    a GSA rent cost avoidance by limiting the annual amount of funding
    available for space rental costs, and courts will have to further
    prioritize space needs and deny some requests for additional space.
    Other Cost Containment Initiatives
        The Judiciary has adopted and is pursuing a number of measures to
    contain costs and improve efficiency throughout the Federal courts.
    These initiatives include redefining work requirements for probation
    officers, imposing tighter restrictions on appointing new magistrate
    judges, consolidating computer servers, and modifying courthouse space
    design standards. I would encourage members of the subcommittee to read
    a compendium of these initiatives in our report entitled Innovation in
    Lean Times: How Federal Court Operations Are Changing to Meet Demands.
    This report was prepared by the Administrative Office in July 2006 and
    distributed to the House and Senate Appropriations Subcommittees in the
    109th Congress. I have asked Administrative Office staff to provide the
    report to the current appropriations subcommittees as well.
                   the judiciary's role in homeland security
        The role of the Judiciary in the Nation's homeland security is
    often overlooked. Actions taken by the Department of Homeland Security
    and the Department of Justice have a direct and immediate impact on the
    Federal courts. Whether it is costly high-profile terrorist cases or
    soaring increases in immigration cases and related appeals, much of the
    workload ends up on Federal court dockets, and sufficient resources are
    required in order to respond to it. In recent years, Congress and the
    administration have significantly increased spending for homeland
    security through the annual and supplemental appropriations processes.
    Non-defense homeland security spending has more than tripled since
    2001. In sharp contrast, appropriations for the courts' operating
    budget have increased only 33 percent and on-board court staffing
    levels have declined by 5 percent. Increased spending on homeland
    security is expected to continue, as evidenced by the President's
    Fiscal Year 2008 Budget, which includes a 9.5 percent increase in
    government-wide non-defense homeland security spending. The President's
    budget includes an unprecedented $13 billion to strengthen border
    security and immigration enforcement, a component of our workload in
    which we have seen dramatic growth in recent years. In fact,
    immigration-related cases now account for 25 percent of the district
    courts' criminal caseload, up from 18 percent in 2001, and surpass all
    other offense categories except drug cases. This President's request
    includes funding for 3,000 new border patrol agents to achieve the goal
    of doubling the force by the end of 2008 (18,000+ agents) from the 2001
    level (9,100 agents). The Judiciary cannot absorb the additional
    workload generated by homeland security initiatives within current
    resource levels.
                          the judiciary's workload \1\
        I turn to a discussion of the workload facing the courts. As
    indicated in the caseload table in our fiscal year 2008 budget request,
    2007 caseload projections, which are utilized to compute fiscal year
    2008 staffing estimates, increase slightly in probation and pretrial
    services, and decline slightly in appellate, civil, and criminal
    filings. There is a steep decline in projected bankruptcy filings.
    While our caseload has begun to stabilize after a decade of steady
    growth, it nonetheless remains at near-historic levels in most
    categories. I will discuss some recent trends and caseload drivers and
    try to offer some context for these workload figures.
    ---------------------------------------------------------------------------
        \1\ Unless otherwise stated, caseload figures reflect the 12-month
    period ending in June of the year cited (i.e., 2006 workload reflects
    the 12-month period from June 30, 2005 to June 30, 2006.
    ---------------------------------------------------------------------------
    Probation and Pretrial Services
        Workload in our probation and pretrial services programs continues
    to grow. The number of people under the supervision of Federal
    probation officers hit a record 113,697 in 2006 and is expected to
    increase in 2007 to 114,600. In addition to the increased workload, the
    work of probation officers has become significantly more difficult. In
    1985, fewer than half of the offenders under supervision had served
    time in prison. By 2006, the percentage had climbed to nearly 80
    percent. As these figures indicate, probation officers no longer deal
    primarily with individuals sentenced to probation in lieu of prison.
    Offenders coming out of prison have greater financial, employment, and
    family problems than when they committed their crimes. In addition,
    offenders under supervision have more severe criminal histories than in
    the past. Between 1995 and 2005, there was a 78 percent increase in the
    number of offenders sentenced with more severe criminal backgrounds.
    Offenders re-entering the community after serving time in prison
    require close supervision by a probation officer to ensure they secure
    appropriate housing and employment. Successful re-entry improves the
    likelihood that offenders will pay fines and restitution and become
    taxpaying citizens.
        Recent legislation will also increase our probation workload. The
    Adam Walsh Child Protection and Safety Act of 2006 is expected to
    increase significantly the number of sex offenders coming into the
    Federal probation and pretrial system for supervision. Monitoring the
    behavior of sex offenders is very challenging and requires intense
    supervision on the part of probation and pretrial services officers to
    protect the community.
    Appellate Filings
        Appellate filings hit an all-time high of 68,313 in 2006 and are
    expected to decline to 67,000 filings in 2007. The recent growth in the
    appellate docket has been due to more Board of Immigration Appeals
    (BIA) decisions from the Department of Justice (DOJ) being challenged
    in the appellate courts, particularly in the Second and Ninth Circuits.
    In fiscal year 2006, 33 percent (11,911) of all BIA decisions were
    appealed to the Federal courts, up from 6 percent (1,757) in fiscal
    year 2001. These BIA appeals often turn on a credibility determination
    by a DOJ immigration judge thus requiring close judicial review of a
    factual record by the appellate courts.
        Along with the increase in BIA appeals, the courts have seen
    significant increases in criminal appeals resulting from the Supreme
    Court rulings in United States v. Booker and United States v. Fanfan in
    which the Court held judge-found sentencing factors unconstitutional in
    a mandatory sentencing scheme and made Federal sentencing guidelines
    advisory. Criminal appeals are currently 29 percent higher than they
    were prior to the decisions in those cases. The Supreme Court will
    decide two cases this term related to the appellate review of post-
    Booker sentences which may also impact the number of criminal appeals.
    Civil Filings
        Civil filings in the courts generally follow a more up and down
    filing pattern. In 2005 civil filings reached a record 282,758 filings
    followed by 244,343 filings in 2006 and 241,300 filings projected for
    2007. The record filings in 2005 were largely due to the Homegold/
    Carolina Investors fraud case in North Carolina and a spike in personal
    injury liability lawsuits.
    Criminal Filings
        Criminal filings for 2007 are projected to total 67,200, down
    slightly from the 2006 level, but still within 5 percent of the all-
    time high set in 2004 of 71,098 filings. We understand that criminal
    filings may be depressed due to significant vacancies in Assistant U.S.
    Attorney positions nationwide. As these vacancies are filled, we expect
    criminal filings to increase again.
        Although overall criminal caseload in the Federal courts has begun
    to level off, caseload in the five district courts along the southwest
    border with Mexico has soared since 2001 as a result of border and law
    enforcement initiatives undertaken by the Department of Homeland
    Security and Department of Justice. Those five districts out of a total
    94 judicial districts account for nearly one-third of all criminal
    cases nationwide. Particularly hard hit is the District of New Mexico
    where criminal filings have nearly doubled since 2001 (up 92 percent)
    and the Southern District of Texas where filings are up 40 percent.
    Bankruptcy Filings
        The sharp decline in bankruptcy filings projected for 2007 clearly
    reflects the impact of the Bankruptcy Abuse Prevention and Consumer
    Protection Act of 2005 (BAPCPA) that went into effect October 17, 2005.
    The Administrative Office projects bankruptcy filings will decline by
    more than 500,000 filings from 2006 to 2007. Although filings have
    started to rebound, no consensus exists among bankruptcy experts as to
    when, or if, filings will return to pre-BAPCPA levels. Of course, the
    root causes of bankruptcy job loss, business failure, medical bills,
    credit problems, and divorce were not affected by the legislation and
    are expected to continue to be the primary drivers of filings. The
    number of filings alone, however, should not be viewed as the sole
    indicator of overall workload. BAPCPA created new docketing, noticing,
    and hearing requirements that make addressing the petitions more
    complex and time-consuming. Preliminary information from 10 courts now
    being studied suggests that the actual per-case work required by the
    bankruptcy courts has increased significantly under the new law, at
    least partially offsetting the impact on the bankruptcy courts of lower
    filings.
                caseload and staffing: a historical perspective
        It is useful to examine Judiciary workload and staffing from a
    historical perspective. The chart below details Judiciary staffing and
    aggregate caseload for fiscal year 1984 through fiscal year 2006.
    Aggregate caseload is a composite of criminal, bankruptcy, appellate,
    and civil case filings as well as our probation and pretrial services
    programs. This chart illustrates several things. First, it shows the
    steady growth in the courts' caseload over the last 20 years. The chart
    also shows the cyclical nature of the courts' caseload when viewed in
    the aggregate: caseload peaks, declines slightly, then tends to peak
    again. Lastly, it shows that staffing resources have lagged well behind
    the increase in caseload for the last decade.
        From fiscal year 1984 to fiscal year 2006, the courts' aggregate
    caseload increased by 195 percent while total court staffing which
    includes judges, chambers staff, and staff in our clerks and probation
    and pretrial services offices increased by only 92 percent. Staffing
    levels generally kept pace with caseload growth through the mid-1990's.
    But over the last decade caseload began to outpace court staffing
    levels and, to date, the courts have not had the resources needed to
    catch up. And the gap has widened in recent years. Between fiscal years
    2001 and 2006 the courts' aggregate caseload increased by 23 percent
    while staffing resources increased by only 1 percent.
        What has been the impact of this resource gap? The Judiciary has
    sought to narrow the gap through the implementation of automation and
    technology initiatives, improved business practices, and cost-
    containment efforts, but we have not been able to close it entirely.
    Our statistics indicate that the courts are struggling to meet workload
    demands. Pending cases carried over from 1 year to the next indicate a
    lack of judge and court staff resources. From fiscal year 1996 to 2006,
    the number of criminal cases pending per filing increased 55 percent,
    appeals cases pending per filing increased 13 percent, bankruptcy cases
    pending per filing increased 13 percent, and civil cases pending per
    filing increased 4 percent. If courts do not have the judges and staff
    needed to address workload adequately, civil cases are delayed as the
    district courts must focus on the criminal docket to meet provisions of
    the Speedy Trial Act, clerks offices must reduce office hours for the
    public in order to focus on case management activities, and probation
    officers have to reduce supervision for some offenders in order to
    focus on the more dangerous supervision cases. These are just a few
    examples.

        The Judiciary uses regularly updated staffing formulas for
    determining the number of staff required in clerks and probation and
    pretrial services offices. Each formula incorporates multiple workload
    factors, but case filings are a primary determinant of the courts'
    staffing needs. Based on these staffing formulas, to be fully staffed
    we would need an additional 2,000 people in fiscal year 2008 above
    current on-board levels to address the courts' workload needs. Of
    course I am not suggesting that Congress provide the Judiciary with
    funding for such a dramatic increase in staff. But I am making the
    point that the courts are currently understaffed. With the resources
    Congress provided the Judiciary in fiscal year 2007, the courts are in
    a position to fill more than 200 new positions to address our most
    critical workload needs, particularly for immigration-related workload
    in the district and appellate courts. Because fiscal year 2007 funds
    were not made available to the courts until halfway into the fiscal
    year, all of these new staff may not be on-board until 2008. For this
    reason, and as a cost containment measure, our revised budget estimates
    for fiscal year 2008 no longer include funding for new positions in
    clerks and probation/pretrial offices. It is therefore critical that
    the courts be funded at a current services level in fiscal year 2008 in
    order to sustain the staffing gains funded in fiscal year 2007. The
    fact that the courts' caseload has stabilized after a decade of steady
    growth affords us the opportunity to begin closing the gap between our
    staffing levels and our workload. The funding provided in 2007 will
    enable the courts to begin to do so.
                           federal protective service
        An issue of increasing concern to the Judiciary is the expense and
    quality of security provided the courts by the Federal Protective
    Service (FPS). FPS provides, on a reimbursable basis, exterior
    perimeter security for Federal agencies. FPS security charges are of
    two types: the mandatory ``basic'' security charge which is a fee
    assessed to each tenant agency based solely on the space occupied; and
    a ``building-specific'' security charge that is assessed against each
    tenant agency to pay for the acquisition, maintenance and repair of
    security equipment provided by FPS. Examples of building-specific
    security include the posting of FPS contract security guards at a
    facility and perimeter cameras that view the exterior areas of federal
    buildings. Both the basic and building specific charges are paid to FPS
    out of our Court Security appropriation. The Judiciary does not have
    control over the increases charged by FPS for the mandatory basic
    security charge. According to an FPS estimate, the Judiciary will incur
    a $4 million increase for basic security charges in fiscal year 2008
    because FPS is increasing the rate by approximately 46 percent, from 39
    cents to 57 cents per square foot.
        We have received reports from several courts that perimeter
    security equipment provided by FPS has not been maintained or repaired,
    thus compromising security in those courthouses. A district judge, who
    is the chair of the court security committee at a major metropolitan
    courthouse, wrote Director Duff last month detailing his concerns
    regarding perimeter security deficiencies at his courthouse. He wrote
    of inoperative FPS-provided exterior cameras and the absence of cameras
    at key locations resulting in ``dead zones'' with no camera
    surveillance. Another district court reported that after pellets were
    fired at the courthouse one night, the court learned there was no
    surveillance footage to review because FPS cameras were not recording
    any exterior views.
        These and similar situations nationwide during fiscal year 2006
    resulted in a number of courthouses with serious security
    vulnerabilities. In order to help ensure that the courts have adequate
    security, the United States Marshals Service (USMS) assumed
    responsibility for repairing or replacing FPS-provided perimeter
    cameras at a number of courthouses where it was apparent that FPS was
    not able to do so. This resulted in the Judiciary's paying for the same
    services twice: once to FPS in the building-specific security charge
    and also to the USMS in the funding we transfer to it for systems and
    equipment for interior and perimeter courthouse security.
        FPS continues to be unable to provide the Judiciary with adequate
    cost-effective services, working equipment, detailed billings records,
    and timely cost projections. FPS has chronic financial management and
    billing problems evidenced by the $60 million funding shortfall it
    reported in November 2006 and which recent reports indicate has since
    grown to $80 million. In response to these shortcomings, the USMS has
    initiated a nationwide survey to assess the status of perimeter
    security at court facilities. The Judiciary greatly appreciates its
    proactive efforts in this area. Because of on-going FPS performance
    issues, the Judicial Conference last week endorsed a recommendation to
    support the efforts of the USMS, through legislative means if
    necessary, to assume security functions currently performed by FPS at
    court facilities (where the Judiciary is the primary tenant) and to
    receive the associated funding. The USMS has the expertise and provides
    excellent service with low administrative expenses. It takes
    responsibility for its work. FPS on the other hand has chronic funding
    problems that hamper its ability to maintain its security equipment
    adequately.
        Ensuring the safety of judges, court employees, attorneys, jurors,
    defendants, litigants, and the public in court facilities is of
    paramount importance to the Judiciary. For this reason, we support
    expansion of the USMS's current mission to include the perimeter
    security of court facilities nationwide. We look forward to working
    with the subcommittee on this very important issue.
                        fiscal year 2008 budget request
        As I mentioned earlier in my testimony, we constructed our fiscal
    year 2008 budget request based on actions in the 109th Congress on
    fiscal year 2007 appropriations bills. Specifically, we assumed for
    each Judiciary account that Congress would provide the midpoint of the
    House-passed and Senate-reported appropriations bills from the 109th
    Congress, less 1 percent for a possible across-the-board rescission.
    The final enacted fiscal year 2007 appropriations level is $44 million
    below the fiscal year 2007 funding assumption we used to construct the
    fiscal year 2008 request. Over the last several weeks, Administrative
    Office staff have been working with the various Judicial Branch
    entities to update fiscal year 2008 funding requirements for each
    account based on enacted fiscal year 2007 appropriations as well as
    other financing adjustments and changes in requirements that have
    occurred since our 2008 budget was finalized. Our preliminary analysis
    indicates that the Judiciary's fiscal year 2008 appropriations
    requirements have declined by $80 million from the request level of
    $6.51 billion, resulting in a revised appropriation requirement of
    $6.43 billion. A summary table detailing the original and revised
    fiscal year 2008 appropriations request for each Judiciary account is
    included at Appendix A. The appropriations increase the Judiciary is
    seeking for fiscal year 2008, which I will describe briefly, is
    reflective of these revised requirements. As I mentioned earlier, we
    will provide a complete budget re-estimate package to the subcommittee
    in May.
        As a result of our recent update of requirements, the Judiciary is
    requesting a 7.6 percent overall increase above fiscal year 2007
    enacted appropriations. The courts' Salaries and Expenses account
    requires a 6.7 percent increase for fiscal year 2008. We believe this
    level of funding represents the minimum amount required to meet our
    constitutional and statutory responsibilities. While this may appear
    high in relation to the overall budget request submitted by the
    administration, I would note that the Judiciary does not have the
    flexibility to eliminate or cut programs to achieve budget savings as
    the Executive Branch does. The Judiciary's funding requirements
    essentially reflect basic operating costs which are predominantly for
    personnel and space requirements. Eighty-six percent ($390 million) of
    the $452 million increase being requested for fiscal year 2008 funds
    the following base adjustments, which represent items for which little
    to no flexibility exists:
      --Standard pay and benefit increases for judges and staff. This does
            not pay for any new judges or staff but rather covers the
            annual pay adjustment and benefit increases (e.g. COLAs, health
            benefits, etc.) for currently funded Judiciary employees. The
            amount budgeted for the cost-of-living adjustment is 3.0
            percent for 2008.
      --An increase in the number of on-board active and senior Article III
            judges and the annualization of new magistrate judge positions.
      --The projected loss in non-appropriated sources of funding. In
            addition to appropriations, the Judiciary collects fees that
            can be used to offset appropriation needs. Fee collections not
            utilized during the year may be carried over to the next fiscal
            year to offset appropriations requirements. We will keep the
            subcommittee apprised of changes to fee or carryforward
            projections as we move through fiscal year 2007.
      --Space rental increases, including inflationary adjustments and new
            space delivery, court security costs associated with new space,
            and an increase for Federal Protective Service charges for
            court facilities.
      --Adjustments required to support, maintain, and continue the
            development of the Judiciary's information technology program,
            which has allowed the courts to ``do more with less'' absorbing
            workload increases while downsizing staff. Mandatory increases
            in contributions to the Judiciary trust funds that finance
            benefit payments to retired bankruptcy, magistrate, and Court
            of Federal Claims judges, and spouses and dependent children of
            deceased judicial officers. Inflationary increases for non-
            salary operating costs such as supplies, travel, and contracts.
      --Costs associated with Criminal Justice Act (CJA) representations.
            The Sixth Amendment to the Constitution guarantees that all
            criminal defendants have the right to the effective assistance
            of counsel. The CJA provides that the Federal courts shall
            appoint counsel for those persons who are financially unable to
            pay for their defense. The number of CJA representations is
            expected to increase by 8,200 in fiscal year 2008, as the
            number of defendants for whom appointed counsel is required
            increases.
        After funding these adjustments to base, the remaining $62 million
    requested is for program enhancements. Of this amount:
      --$22 million to increase the non-capital panel attorney rate from
            $96 to $113 per hour. I will discuss this requested increase in
            more detail in a moment. $11 million would provide for critical
            security-related requirements.
      --$10 million will provide for investments in new information
            technology projects and upgrades, and courtroom technology
            improvements.
      --$11 million will provide for unfunded fiscal year 2007 recurring
            court operating expenses that were not funded in fiscal year
            2007 but are necessary requirements in fiscal year 2008.
      --Of the remaining $8 million, $1 million would provide for two
            additional magistrate judges and associated staff; $1 million
            will pay for the Supreme Court's exterior landscape renovation
            project; $2 million is needed for staffing increases for the
            Supreme Court (+7 FTE), Federal Circuit (+6 FTE), and the
            Federal Judicial Center (+7 FTE). The remaining $4 million is
            for smaller requirements in other Judiciary accounts.
                  increase in non-capital panel attorney rate
        We believe that one program enhancement in our budget request
    deserves strong consideration in order to ensure effective
    representation for criminal defendants who cannot afford to retain
    their own counsel. We are requesting $22 million to increase the non-
    capital panel attorney rate to $113 per hour effective January 2008. A
    panel attorney is a private attorney who serves on a panel of attorneys
    maintained by the district or appellate court and is assigned by the
    court to represent financially-eligible defendants in Federal court.
    These attorneys are currently compensated at an hourly rate of $92 for
    non-capital cases and up to $163 for capital cases. The hourly non-
    capital rate will increase to $94 per hour effective April 1, 2007 as a
    result of the $2 per hour cost-of-living adjustment you provided in
    fiscal year 2007. We are very grateful for this modest rate adjustment.
    The Judiciary requests annual cost-of-living adjustments for panel
    attorneys similar to the annual adjustments provided to federal
    employees for two reasons. First, cost-of-living adjustments allow the
    compensation paid to panel attorneys to keep pace with inflation to
    maintain purchasing power and, in turn, enable the courts to attract
    and retain qualified attorneys to serve on their CJA panels. Second,
    regular annual adjustments eliminate the need to request large ``catch-
    up'' increases in order to account for several years with no rate
    adjustments. The subcommittee recognized the importance of annual cost-
    of-living adjustments by providing one to panel attorneys in fiscal
    year 2007. I would note that the previous subcommittee provided a cost-
    of-living adjustment in fiscal year 2006.
        Our request to increase the non-capital hourly rate to $113 amounts
    to a partial catch-up increase. The non-capital rate was increased to
    $90 in May 2002 but no adjustments were made to that rate until January
    2006, when it was raised to $92, and which will increase to $94 in a
    few weeks, on April 1, as I just mentioned. In comparison, since May
    2002, the Department of Justice has been paying $200 per hour to retain
    private attorneys with at least 5 years of experience to represent
    current or former federal employees in civil, congressional, or
    criminal proceedings. The Judiciary requested a panel attorney rate of
    $113 per hour in fiscal years 2002, 2003, and 2004. In report language
    accompanying the fiscal year 2004 appropriations bill, the subcommittee
    with jurisdiction over our funding at the time said the Judiciary was
    not presenting a strong case for the $113 rate and suggested we survey
    the courts and gather data to make a more compelling case. Thus, we did
    not request the $113 rate in fiscal years 2005 and 2006 while the
    Administrative Office conducted surveys of judges and panel attorneys
    and analyzed the responses.
        In a 2004 survey of Federal judges, over half of them indicated
    that their courts were currently experiencing difficulty identifying
    enough qualified and experienced panel attorneys to accept appointments
    in non-capital cases. In the first statistically valid, nationwide
    survey of individual CJA panel attorneys conducted in March 2005, a
    significant percentage (38 percent) of the over 600 attorneys surveyed
    reported that since the hourly compensation rate had increased to $90
    per hour in May 2002, they had nevertheless declined to accept a non-
    capital CJA appointment. Strikingly, after covering overhead costs for
    the predominantly solo and small-firm lawyers who take CJA cases, their
    net pre-tax income for non-capital CJA representations amounted to only
    about $26 per compensated hour. A large proportion (70 percent) of the
    CJA attorneys surveyed in March 2005 reported that an increase to the
    $90 hourly rate is needed for them to accept more non-capital cases.\2\
    ---------------------------------------------------------------------------
        \2\ Although rates have been raised to $92 per hour since the
    survey was taken, this $2 per hour increase would not have materially
    affected the survey responses.
    ---------------------------------------------------------------------------
        The requested increase to $113 per hour reflects the minimum amount
    the Judicial Conference believes is needed to attract qualified panel
    attorneys to provide the legal representation guaranteed by the Sixth
    Amendment. Indeed, $113 is the level that the Judiciary was seeking in
    2002 when Congress increased the rate to $90. Recognizing fiscal
    realities, the $113 rate request is well below the $133 rate authorized
    by the CJA. I urge you to give this rate increase strong consideration.
                   contributions of the administrative office
        Year in and year out, the Administrative Office (AO) of the United
    States Courts serves and provides critical support to the courts. The
    more the courts have to do, and the fewer resources with which they
    have to do it, the more challenging the job of the AO becomes. With
    only a fraction (1.6 percent) of the resources that the courts have,
    the AO does a superb job of supporting our needs.
        The AO has key responsibilities for Judicial administration, policy
    implementation, program management, and oversight. It performs
    important administrative functions, but also provides a broad range of
    legal, financial, program management, and information technology
    services to the courts. None of these responsibilities has gone away
    and new ones are continually added, yet the AO staffing level has been
    essentially frozen for 10 years.
        The AO played a central role in assisting the courts to implement
    the bankruptcy reform legislation, as well as in helping those courts
    affected by Hurricanes Katrina and Rita and the myriad of space,
    travel, technology, and personnel issues that had to be addressed.
        In my role as Chair of the Judicial Conference Committee on the
    Budget, I have the opportunity to work with many staff throughout the
    AO. They are dedicated, hard working, and care deeply about their role
    in supporting this country's system of justice.
        The fiscal year 2008 budget request for the Administrative Office
    is $78.5 million, representing an increase of $6.2 million. All of the
    requested increase is necessary to support adjustments to base, mainly
    standard pay and general inflationary increases, as well as funding to
    replace the anticipated lower level of fee revenue and carryover
    amounts with appropriated funds in fiscal year 2008.
        I urge the subcommittee to fund fully the Administrative Office's
    budget request. The increase in funding will ensure that the
    Administrative Office continues to provide program leadership and
    administrative support to the courts, and lead the efforts for them to
    operate more efficiently. Director Duff discusses the AO's role and
    budget request in more detail in his testimony.
                  contributions of the federal judicial center
        I also urge the subcommittee to approve full funding for the
    Federal Judicial Center's request of $24.5 million for fiscal year
    2008.
        The Center's director, Judge Barbara Rothstein, has laid out in
    greater detail the Center's needs in her written statement. I simply
    add that the Center plays a vital role in providing research and
    education to the courts. The Judicial Conference and its committees
    request and regularly rely on research projects by the Center. These
    provide solid empirical information on which judges, the Judiciary, and
    Congress and the public, depend on in reaching important decisions
    relating to litigation and court operations. Likewise, the Center's
    educational programs for judges and court staff are vital in preparing
    new judges and court employees to do their jobs and in keeping them
    current so that they can better deal with changes in the law, and in
    tools like technology that courts rely on to do their work efficiently.
        The Center has made good use of its limited budget. It has made
    effective use of emerging technologies to deliver information and
    education to more people more quickly. The relatively small investment
    you make in the Center each year (less than one-half of one percent of
    the Judiciary's budget) pays big dividends in terms of the effective,
    efficient fulfillment of the courts' mission.
                                   conclusion
        Mr. Chairman, I hope that my testimony today provides you with a
    better appreciation of the challenges facing the Federal courts. I
    realize that fiscal year 2008 is going to be another tight budget year
    as increased mandatory and security-related spending will result in
    further constrained domestic discretionary spending. The budget request
    before you recognizes the fiscal constraints you are facing. Through
    our cost-containment efforts we have significantly reduced the
    Judiciary's appropriations requirements without adversely impacting the
    administration of justice. I know that you agree that a strong,
    independent Judiciary is critical to our Nation. I urge you to fund
    this request fully in order to enable us to maintain the high standards
    of the United States Judiciary. A funding shortfall for the Federal
    courts could result in a significant loss of existing staff, dramatic
    cutbacks in the levels of services provided, and a diminution in the
    administration of justice.
        Thank you for your continued support of the Federal Judiciary. I
    would be happy to answer any questions the subcommittee may have.

                                                          APPENDIX A.--JUDICIARY APPROPRIATION FUNDING
                                                                     [Dollars in thousands]
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                          Fiscal Year 2007                                           Fiscal Year 2008
                                        --------------------------------------------------------------------------------------------------------------------
                                                                                                                                                  Percent
                                                             Enacted Level                                   Revised Budget  Change: Revised  Change: Fiscal
           Appropriation Account              Assumed         Public Law    Change: Enacted    President's      Estimates     Estimates vs.      Year 2008
                                         Appropriation \1\     110-5 \2\      vs. Assumed     Budget (Feb.     (March 21,       President       Revised vs.
                                          (Oct. 15, 2006)      (Feb. 15,                        5, 2007)          2007)           Budget        Fiscal Year
                                                                 2007)                                                                         2007 Enacted
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    U.S. Supreme Court:
        Salaries and Expenses..........           $62,792          $62,576           ($216)         $66,526         $66,526  ...............            $6.3
        Care of Building and Grounds...            12,829           11,427          (1,402)          12,201          12,201  ...............             6.8
                                        --------------------------------------------------------------------------------------------------------------------
          Total........................            75,621           74,003          (1,618)          78,727          78,727  ...............             6.4
                                        ====================================================================================================================
    U. S. Court of Appeals for the                 25,407           25,311             (96)          28,538          28,442            ($96)            12.4
     Federal Circuit...................
    U.S. Court of International Trade..            16,037           15,825            (212)          16,727          16,632             (95)             5.1
                                        ====================================================================================================================
    Courts of Appeals, District Courts
     and Other Judicial Services:
        Salaries and Expenses:
            Direct.....................         4,527,194        4,476,550         (50,644)       4,854,455       4,774,757         (79,698)             6.7
            Vaccine Injury Trust Fund..             3,971            3,971  ...............           4,099           4,099  ...............             3.2
                                        --------------------------------------------------------------------------------------------------------------------
              Total....................         4,531,165        4,480,521         (50,644)       4,858,554       4,778,856         (79,698)             6.7
                                        ====================================================================================================================
    Defender Services..................           747,987          776,283          28,296          859,834         859,834  ...............            10.8
    Fees of Jurors and Commissioners...            62,448           60,945          (1,503)          62,350          63,081             731              3.5
    Court Security.....................           395,045          378,663         (16,382)         421,789         421,789  ...............            11.4
                                        --------------------------------------------------------------------------------------------------------------------
        Subtotal.......................         5,736,645        5,696,412         (40,233)       6,202,527       6,123,560         (78,967)             7.5
                                        --------------------------------------------------------------------------------------------------------------------
    Administrative Office of the U.S.              73,326           72,377            (949)          78,536               7           8,536             08.5
     Courts............................
    Federal Judicial Center............            23,211           22,874            (337)          24,835          24,475            (360)             7.0
    Judiciary Retirement Funds.........            58,300           58,300  ...............          65,400          65,400  ...............            12.2
    U.S. Sentencing Commission.........            15,266           14,601            (665)          16,191          15,477            (714)             6.0
                                        ====================================================================================================================
    Direct.............................         6,019,842        5,975,732         (44,110)       6,507,382       6,427,150         (80,232)  ..............
    Vaccine Injury Trust Fund..........             3,971            3,971  ...............           4,099           4,099  ...............  ..............
                                        --------------------------------------------------------------------------------------------------------------------
        Total..........................         6,023,813        5,979,703         (44,110)       6,511,481       6,431,249         (80,232)            7.6
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    \1\ Reflects the assumed fiscal year 2007 appropriation level that was used in developing the fiscal year 2008 President's Budget. It was based on the
      House/Senate midpoint less 1 percent for an assumed across-the-board rescission.
    \2\ The bottom line total is consistent with the fiscal year 2007 amount appropriated to the Judiciary in H.J. Res. 20 (Public Law 110-5).

                                     ______

    Prepared Statement of Paul R. Michel, Chief Judge, United States Court
                       of Appeals for the Federal Circuit
        Mr. Chairman, thank you for allowing me to submit my statement
    supporting the United States Court of Appeals for the Federal Circuit's
    fiscal year 2008 budget request.
        Our request totals $28,442,000, an increase of $3,131,000 (12
    percent) over the fiscal year 2007 appropriation of $25,311,000.
        Fifty-six percent of that increase, $1,761,000, is for
    congressionally- and contractually-mandated adjustments to base (such
    as COLAs and escalation in rent and contracts), as well as one
    adjustment to the base appropriation for lease of judges' workspace.
        This lease increase, a request for $496,000, will allow us to
    provide the work space necessary for four judges (and their staff) now
    eligible to take senior status and an additional three judges who
    become eligible to take senior status in fiscal year 2009. Even now our
    courthouse simply does not have space for the judge who took senior
    status during the past year, much less offer chambers to seven other
    judges eligible to take senior status in this fiscal year and the next.
        The retention of judges through senior status is what has allowed
    this court to remain current. Since this court's inception in 1982, the
    number of active judges on our court has remained the same, even though
    our caseload has nearly doubled and the technology of our patent
    caseload has become increasingly complex. Clearly, the provision of
    adequate work space for judges willing to take senior status (as
    opposed to leaving the court through retirement) is critical to our
    being able to retain these highly valuable contributors to our court's
    output. If adequate work space cannot be provided, it is likely that
    some judges may simply retire, or remain active resulting in a very
    significant loss of judicial capacity.
        Funding for off-site leased space was not provided in our fiscal
    year 2007 appropriation even though requested. Nevertheless the
    Administrative Office of the United States Courts (AO) has authorized
    GSA to seek suitable off-site space and negotiate a lease for senior
    judges, in accordance with Judicial Conference policy. The search is
    on-going. We are told, and know from past experience, that securing a
    lease and preparing chambers will take 6 to 12 months, making it
    necessary for us to have the funding available in fiscal year 2008.
        Forty-four percent, $1,370,000, of the requested increase over the
    fiscal year 2007 approved appropriation is to fund programmatic
    increases for: (1) additional law clerk positions; (2) upgrades to six
    of the court's automated systems; and (3) two-way video and audio
    transmission capability between the court and remote sites around the
    country.
        Additional Law Clerk.--$732,000 of the amount requested covers the
    cost of hiring an additional law clerk for each of the court's active
    judges for 6 months of fiscal year 2008. The increased workload now
    requires funding a fourth law clerk. The court presently has funding
    for only three law clerks for each judge and one secretary. This added
    funding would provide a fourth law clerk or assistant for each active
    judge. Indeed, Article III judges serving in the other 12 circuits of
    the Federal Judiciary have had funding for a fourth law clerk for
    years.
        The Federal Circuit did not previously need parity, but I now ask
    for this funding for new positions because they are necessary in order
    to keep up with the sharp increase in the number of appeals filed.
    After years of steady increases in filings, case filings in fiscal year
    2006 alone increased by 14 percent from fiscal year 2005. In addition,
    we face a sharp rise in the complexity of cases, many involving
    advanced and emerging technologies of great economic importance for
    American businesses.
        Upgrade to Automated Systems.--$388,000 of the amount requested
    under program increases is necessary to provide new and improved
    electronic information technology services to the court, namely (a)
    improved automated case tracking and management; (b) automated e-filing
    of briefs by attorneys; (c) e-voting and commenting by judges; (d)
    automated conflict screening; (e) improved public Web site with posting
    of all briefs and opinions; and (f) off-site continuity of operations
    set-up, configuration and support for a back-up computer system at the
    administrative office site in Missouri.
        The court is developing an improved electronic case tracking
    system, as well as electronic filing, voting, and conflict screening
    systems. All of these systems are recommended or required by the
    Judicial Conference. Their development requires hiring contractors,
    purchasing new equipment, and training court information technology
    staff. These new systems provide better, more accessible, and faster
    services for litigating lawyers, judges and judges' staffs, as well as
    making available to judges and court staff a more efficient method for
    tracking cases. The automated conflict screening system reduces the
    risk of judges inadvertently participating in cases despite a financial
    conflict, and thus assists in assuring compliance with ethics
    requirements. It also is required by Judicial Conference policy. The
    Web site is our primary contact system with attorneys, academics, and
    the interested public.
        Funding is included in this amount for off-site back-up computer
    equipment necessary to support the continuing operations of the court
    if a disaster disables our courthouse in Washington, D.C., which is
    located very near to the White House--a primary target for terrorists.
        Remote Video Conferencing.--The remaining $250,000 of the requested
    amount covers the cost to provide remote video conferencing in one of
    our three courtrooms, in accordance with Judicial Conference and
    administrative office policy on funding such capability. Recently, the
    Judiciary adopted information technology initiatives for reducing the
    reliance on paper, achieving economy in its business processes, and
    providing better service to citizens at locations around the country.
    These initiatives are especially critical to our court because with our
    nationwide jurisdiction, our lawyers and their clients are scattered
    all across the country. The request is based on recommendations from
    the Judicial Conference and the Administrative Office of the United
    States Courts to provide two-way video and audio transmission between
    courtrooms and remote sites. With this beneficial technology attorneys
    can present oral arguments from anywhere in the country and avoid the
    cost in time and money of traveling to Washington, D.C., and staying
    here overnight. In addition, the court and citizens benefit greatly
    from hearing oral arguments which might otherwise not be presented to
    the court.
        I would be pleased, Mr. Chairman, to answer any questions the
    committee may have or to meet with the committee members or staff about
    our budget request.
        Thank you.
                                     ______

    Prepared Statement of Jane A. Restani, Chief Judge, United States Court
                             of International Trade
        Mr. Chairman, members of the committee: I would like to again thank
    you for providing me the opportunity to submit this statement on behalf
    of the United States Court of International Trade, a court established
    under Article III of the Constitution with exclusive nationwide
    jurisdiction over civil actions pertaining to matters arising out of
    the administration and enforcement of the customs and international
    trade laws of the United States.
        The Court's fiscal year 2008 original budget request of $16,727,000
    represented an overall increase of $690,000 or 4.3 percent over the
    fiscal year 2007 assumed appropriation of $16,037,000. This assumed
    appropriation included an across the board cut of 1 percent. In
    February, the Court received an appropriation of $15,825,000. Based on
    this enacted appropriation, and after a detailed and careful review,
    the Court's fiscal year 2008 budget request has been reduced to
    $16,632,000. This represents an overall increase of 5.1 percent over
    the enacted fiscal year 2007 appropriation. Despite the reduction, we
    anticipate that this request will enable the Court to maintain current
    services and provide for mandatory increases in pay, benefits and other
    inflationary adjustments to base, including increases in costs paid to
    GSA for rent and to the Federal Protective Service for building basic
    and building-specific security surcharges. These security surcharges
    provide for the Court's pro-rata share of installing, operating and
    maintaining systems for the critical and necessary security of the
    Federal Complex in lower Manhattan.
        As it has done in the past, the Court continues to budget and
    expend funds in a conservative and cost effective manner, and will
    continue to do so to manage within the reduced request. Through the use
    of its annual appropriation and the Judiciary Information Technology
    Fund (JITF), the Court continues to promote and implement the
    objectives set forth in its long range plan for providing access to the
    Court through the effective and efficient delivery of information to
    litigants, bar, public, judges and staff. This access is of particular
    importance in realizing the Court's mission to resolve disputes by:
    Providing cost effective, courteous and timely service by those
    affected by the judicial process; providing independent, consistent,
    fair and impartial interpretation and application of the customs and
    international trade laws; and fostering improvements in customs and
    international trade law and practice and improvements in the
    administration of justice.
        The Court continues to make substantial progress in implementing
    its information technology and cyclical maintenance programs. In fiscal
    year 2006, the Court: Purchased a new server for a public access
    terminal that will allow access to the Court's customized version of
    the Federal Judiciary's Case Management/Electronic Case Files (CM/ECF)
    System; purchased an additional server for storing utility files and
    desktop images; purchased a high speed digital networked copier with
    scanning and faxing capabilities; cyclically upgraded laptops and
    purchased desktop computers, monitors and printers for a new judge;
    upgraded vital existing software applications, continued maintenance
    agreements for computer hardware and software applications; implemented
    the on-line system (pay.gov) for the payment of filing fees and the
    electronic application of CM/ECF for filing appeals and opening cases;
    upgraded to a new version of CM/ECF; and provided training in the new
    electronic case opening and filing of appeals applications to
    attorneys, staff and the public. Additionally, in fiscal year 2006, the
    Court continued its cyclical maintenance program by refurbishing
    chambers for a new judge, and offices for a new clerk of court,
    replacing aging furniture/chairs and upgrading public access corridors.
        In fiscal year 2007, the Court has planned to: Purchase new
    courtroom and conference room technology systems, including an upgraded
    video conferencing system; replace the Court's Internet server and the
    server for the Court's library on-line cataloguing and acquisition
    system; replace desktop computer systems, laptops and printers in
    accordance with the Judiciary's cyclical replacement program; upgrade
    and support existing software applications; purchase new software
    applications to ensure the continued operational efficiency of the
    Court; support Court equipment by the purchase of yearly maintenance
    agreements; and upgrade copier machines in chambers and clerks'
    offices. The Court also will expand its developmental and educational
    programs for staff in the areas of job-related skills and technology.
        In fiscal year 2008, the Court remains committed to using its
    carryforward balances in the Judiciary Information Technology Fund to
    continue its information technology initiatives and to support the
    Court's short-term and long-term information technology needs.
        Additionally, the Court will continue its commitment to its
    cyclical replacement and maintenance program for equipment and
    furniture and for the courthouse. This program not only ensures the
    integrity of equipment and furnishings, but maximizes the use and
    functionality of the internal space of the courthouse. Moreover, the
    fiscal year 2008 request includes funds for the support and maintenance
    of the security systems upgraded by the Court in fiscal years 1999
    through 2005, and the Court's COOP. Lastly, the Court will continue its
    efforts to address the educational needs of the bar and Court staff.
        As I have stated in previous years, the Court remains committed to
    maintaining its security systems to ensure the protection of those who
    work in and visit the courthouse. In July, 2005, GSA received Senate
    approval for fiscal year 2006 funding for the design and construction
    of a security pavilion for entry into the building. In fiscal year
    2006, the Court worked closely with GSA in the design and construction
    of this entrance pavilion. To that end, the Court, in fiscal year 2006,
    entered into a Reimburseable Work Authorization with GSA for a non-
    prospectus security project for the purchase and installation of
    additional security equipment, including cameras and for the upgrade of
    the Court's security infrastructure. The design phase was completed in
    fiscal year 2006 and construction began in fiscal year 2007. The Court
    will continue in fiscal year 2008 to work in full partnership with GSA
    during the last phases of construction in order to ensure the total
    success of this project. GSA projects a completion date in fiscal year
    2008.
        I would like to again emphasize that the Court remains committed to
    an approach of conservatively managing its financial resources through
    sound fiscal, procurement and personnel practices. As a matter of
    internal operating principles, the Court routinely engages in cost
    containment strategies in keeping with the overall administrative
    policies and practices of the Judicial Conference, particularly
    regarding rent, security costs, equipment costs, technology,
    contractual obligations and personnel. I can assure you that this
    management approach with respect to the Court's financial affairs is
    on-going.
        Lastly, I would like to personally extend my deepest thanks and
    appreciation to Congress for recognizing the needs of the courts by
    providing, in fiscal year 2007, adequate funding to maintain current
    services so that the courts can remain committed to the administration
    of justice for all.
        The Court's ``General Statement and Information'' and
    ``Justification of Changes,'' which provide more detailed descriptions
    of each line item adjustment, were submitted previously. If the
    committee requires any additional information, we will be pleased to
    submit it.
                                     ______

    Prepared Statement of Barbara J. Rothstein, Director, Federal Judicial
                                     Center
                                  introduction
        Mr. Chairman and members of the subcommittee: My name is Barbara J.
    Rothstein. I have been a U.S. district judge since 1980 and Director of
    the Federal Judicial Center since September 2003. The Center is the
    Federal courts' agency whose statutory mandate is to provide continuing
    education of judges, education of court employees, and research and
    analysis of Federal judicial processes and procedures.
        I appreciate the opportunity to provide you this statement in
    support of our 2008 appropriations request. Because the Center, like
    the other judiciary accounts, is new to the subcommittee. I am taking
    this opportunity to provide a detailed description of our work.
        I must stress at the outset that while the Center continues to
    perform its basic statutory duties, the combination of budget
    shortfalls and the staff reductions which the shortfalls have
    necessitated is colliding with an increase in new requirements. In
    recent years we have been asked by the Judicial Conference to undertake
    several large research projects, most of which have been to enable the
    Conference to respond to proposals and inquiries from Congress. For
    example, in response to a congressional request that the Federal
    judiciary ``document how often courtrooms are actually in use,'' we are
    conducting a national study of how courtrooms are scheduled and
    actually used by Federal district and magistrate judges. In response to
    recent congressional proposals to streamline the processing of habeas
    corpus appeals of State capital convictions, the Center was asked by
    six committees of the Judicial Conference to conduct an extensive
    empirical study of all State prisoner capital habeas corpus petitions
    pending in the Federal courts. We are also in the midst of a multi-year
    study of the impact of the Class Action Fairness Act of 2005 (CAFA) on
    the resources of the Federal courts. The Center was asked to conduct
    this study by the Advisory Committee on Civil Rules as it considers
    whether rules changes may be needed in response to CAFA. In education,
    last year we were asked to provide enhanced training for judges and
    staff on new ethics-related guidance and on immigration cases in the
    circuit courts of appeals. Along with all of these tasks is the need to
    provide continuing education and study in connection with the changes
    brought about by the passage of a new bankruptcy statute.
        Our ability to meet specific requests like these and, at the same
    time, continue our regular education and research programs will be
    jeopardized without at least a small increase in our staff.
                                  2008 request
        Our 2008 request is for $24,475,000, a 7 percent increase:
    $1,066,000 for standard adjustments to base to cover increases in
    compensation and benefits and inflationary increases in operating
    costs, and $535,000 for additional staff (7 FTE) to support the
    services the Center provides to the Judicial Branch.
        The Center's Board, which the Chief Justice chairs, considered our
    proposed request at its November 2006 meeting and approved it for
    submission to Congress. I am confident that you will find it
    responsible and well grounded.
        Our 2008 request seeks what is essentially a ``current services''
    budget. The Center has been struggling with having received only one
    full current services increase since the early 1990s. Over these years,
    to compensate for appropriations that did not provide full adjustments
    to base, we reduced our staff 20 percent from 158 to 125. Even as our
    staff declined, the courts' need for our services has continued to
    grow. For this reason we are requesting funds to restore 10 (7 FTE) of
    the most critically needed of the 23 positions we have lost since 2003.
    Our budget submission provides greater detail on why these positions
    are needed and the services they will help provide.
        The Center is proud of its work to promote improved judicial
    administration in the courts of the United States, even as its
    resources have declined. To make the most of our limited resources, we
    have made great use of educational technologies that reduce the need
    for travel, and we have carried out rigorous cost controls, internal
    staff and operational adjustments and reallocations, and personnel
    cuts. We have reached the point where such measures are no longer
    viable without impacting the quality of the services we provide. I
    respectfully urge you to find a way to provide the Center with the
    modest 7 percent increase it needs in 2008 to continue to provide the
    educational and analytical services for which judges and their staffs
    look to the Center.
                       about the federal judicial center
        Below I highlight Center activities in 2006, focusing primarily on
    our education for Federal judges and the staffs of the courts and our
    research on court and case management. Much of this work involves
    coordination, cooperation, and consultation with committees of the
    Judicial Conference of the United States, with the Administrative
    Office, and with the U.S. Sentencing Commission.
        The Center provides orientation programs on substantive legal
    issues, ethics, and trial and case-management techniques to groups of
    newly appointed judges.
        The Center provides timely information and continuing instruction
    to help Federal judges and court staff comply with new legislation,
    Judicial Conference policies, and Supreme Court decisions. We also help
    courts apply effective leadership and management principles and engage
    in strategic planning for their near-term and future needs. Examples in
    this report include expanded ethics training for judges and staff,
    resources and programs on effective case management, an annual review
    of cases decided by the Supreme Court, programs for court units on
    strategic workforce planning, and a courtroom use study, conducted at
    the behest of the Judicial Conference in response to a congressional
    request that the Federal judiciary ``document how often courtrooms are
    actually in use.''
                             education and training
        More than 2,000 Federal judge participants, 10,000 court staff
    participants, 40 circuit mediators, and 1,100 Federal defenders and
    their staff attended Center educational programs in 2006. Those
    programs included orientation and continuing education programs
    delivered by a variety of methods. Programs for judges, circuit
    mediators, Federal defenders, and court unit executives are
    traditionally in-person presentations, affording interaction on court-
    management and case-management issues, as well as on substantive and
    procedural matters. Court staff programs, designed for larger
    audiences, are typically not travel-based and include audio, video, and
    online conferences, as well as local training programs that are taught
    in the court units by Center-trained court staff or individuals with
    training experience using Center curriculum materials. We provided
    additional education through satellite broadcasts, streaming audio and
    video programs, web-based training programs, monographs and manuals,
    and videocassettes and audiocassettes. Advisory committees of court of
    appeals, district, magistrate, and bankruptcy judges, as well as court
    unit executives and staff, help in planning and producing Center
    education programs and publications.
        education programs and materials for judges and for legal staff

         SEMINARS AND WORKSHOPS FOR JUDGES, JANUARY 1-DECEMBER 31, 2006
    ------------------------------------------------------------------------
                                                    Number of     Number of
                                                     Programs   Participants
    ------------------------------------------------------------------------
    Orientations for newly appointed district                3            31
     judges......................................
    Orientations for newly appointed bankruptcy              3            73
     judges......................................
    Orientations for newly appointed magistrate              3            54
     judges......................................
    Conference for chief district judges.........            1            94
    Conference for chief bankruptcy judges.......            1            69
    Workshops for district and circuit judges....            2            90
    National workshops for district judges.......            3           377
    National workshops for bankruptcy judges.....            2           262
    National workshops for magistrate judges.....            2           368
    National sentencing policy institute.........            1            72
    Special-focus workshops......................           17           416
    In-court seminars............................           15           199
                                                  --------------------------
        TOTAL....................................           53         2,105
    ------------------------------------------------------------------------

        The Center also held six programs for 1,107 Federal defenders and
    staff and one program for 43 circuit mediators.
        Continuing education programs in 2006 included these national
    workshops:
      --Three for district judges on judicial ethics and the Code of
            Conduct for U.S. Judges, recent developments in Federal
            jurisdiction, a review of pertinent decisions from the 2005-
            2006 Supreme Court term, prosecution of terrorists in Federal
            courts, 42 U.S.C.  1983 qualified immunity, management and
            trial of patent cases, information technology for judges,
            sentencing post-Booker, complex criminal case management, the
            science of drug addiction, an update on the Federal Rules of
            Evidence, and an update on employment discrimination law;
      --two for bankruptcy judges that discussed the Code of Conduct; model
            rules and practice under the Bankruptcy Abuse Prevention and
            Consumer Protection Act of 2005 (BAPCPA), judicial security,
            issues involving U.S. trustees under the new BAPCPA, judicial
            independence and accountability, recent developments in Chapter
            7, 11, and 13 cases, U.S. Judicial Conference privacy policy,
            the dynamics of small business Chapter 11, Chapter 15 issues;
      --two for magistrate judges on judicial ethics and the Code of
            Conduct, electronic discovery, legal and management issues in
            patent cases, media and the law, IT issues, cell site
            information and electronic surveillance law, electronic filing,
            privacy and protective orders, the science of drug addiction,
            and updates on the Federal Rules of Evidence, habeas corpus
            issues, Social Security law issues, and 42 U.S.C.  1983 case
            law.
        Seminars for small groups of judges on particular topics covered
    case management, intellectual property, international law and
    litigation, employment law, emerging issues in neuroscience, law and
    terrorism, advanced mediation strategy, law and genetics, managing
    capital construction projects, environmental law, immigration law, law
    and society, and law and science. We conduct many of these programs in
    collaboration with law schools or other educational institutions, which
    helps us leverage our funds.
        Our conferences for chief district judges and chief bankruptcy
    judges focused on the roles and responsibilities of the chief judge in
    financial management and strategic resource planning, judicial
    security, the courtroom usage study, public attitudes towards the
    courts, and a program for new chief judges. We conducted both
    conferences in cooperation with the Administrative Office.
        Programs for defender personnel included a national seminar and an
    appellate writing workshop for Federal defenders, a seminar for Federal
    defender investigators and paralegals, and a law and technology
    workshop for Federal defender staff.
        The Federal Judicial Television Network (FJTN) is a satellite
    broadcast network that reaches over 300 court locations. In 2006, we
    produced:
      --Supreme Court: The Term in Review (2005-2006), which analyzed cases
            likely to affect Federal court dockets;
      --Implementing the Bankruptcy Abuse Prevention and Consumer
            Protection Act of 2005: Early Experience;
      --A New Mandate: Use of Conflicts Screening Software;
      --The Sentencing Guidelines Statement of Reasons Form (with the U.S.
            Sentencing Commission);
      --reviews of key bankruptcy decisions in 2005 in the Fourth, Eighth,
            and Ninth Circuits;
      --The Fundamentals of Criminal Pretrial Practice in the Federal
            Courts; and
      --an orientation series for new law clerks, including a program on
            the basics of employment discrimination law.
        Web-based resource pages are available to judges on a variety of
    topics, such as:
      --Managing habeas corpus review of capital convictions, including
            case-law summaries, case-management procedures, and sample
            case-management plans, orders, and forms (a similar resource
            page on federal death penalty cases has been available for
            several years);
      --electronic discovery and evidence, including materials from Center
            workshops, relevant local rules and sample orders, and a
            bibliography of case law and articles;
      --courtroom technology, including our manual on Effective Use of
            Courtroom Technology, and our research on videoconferencing in
            criminal proceedings and animation, simulations, and immersive
            virtual environmental technology;
      --safeguarding personal information in electronic transcripts;
      --selected appellate decisions on sentencing post-Booker;
      --the Bankruptcy Abuse Prevention and Consumer Protection Act of
            2005, with materials and streaming video and audio formats of
            our television broadcasts and audio conferences on the act;
      --non-prisoner civil pro se litigation, a collection of information
            from district courts regarding their practices with pro se
            litigants; and
      --streaming videos of recent FJTN broadcasts.
        We also have a Web-based resource page of materials to help law
    clerks learn about their duties and the ethical responsibilities of
    their position. This includes a new e-learning tutorial.
        We released or had in production the following judicial and legal
    education publications in 2006: The Bail Reform Act of 1984, Third
    Edition; Copyright Law, Second Edition; The Elements of Case
    Management: A Pocket Guide for Judges, Second Edition; Managing
    Discovery of Electronic Information: A Pocket Guide for Judges;
    Mediation & Conference Programs in the Federal Courts of Appeals: A
    Sourcebook for Judges and Lawyers, Second Edition; Patent Law and
    Practice, Fifth Edition; Post-Booker Sentencing--Selected Issues from
    Appellate Case Law (online only); and The Use of Visiting Judges in the
    Federal District Courts: A Guide for Judges and Court Personnel
    (updated 2006)(on line only).
                 education programs for judges and court staff
        In 2006 we offered several programs that judges and court staff
    attend together, including:
      --A policy institute for district judges, probation and pretrial
            services officers, and prosecutors and defenders, held in
            cooperation with the Judicial Conference's Criminal Law
            Committee, the Sentencing Commission, and the Administrative
            Office, which included discussions on sentencing policies with
            representatives of the legislative, executive, and judicial
            branches;
      --our Program for Consultations in Dispute Resolution, which provides
            on-site assistance to courts that wish to begin or revise
            alternative dispute resolution programs;
      --a 2-day executive team-building program for new chief judges and
            their clerks of court in conjunction with the Center's national
            conferences for chief district and bankruptcy judges;
      --four strategic planning workshops to help courts develop policy and
            operational plans specific to their courts;
      --an executive leadership seminar for chief judges and their court
            unit executives;
      --a workshop produced in collaboration with the Administrative Office
            and the General Services Administration to help court teams
            plan for capital construction projects; and
      --at the request of a circuit court, Using Technology to Serve the
            Appellate Process, an in-court program developed with the
            Administrative Office, for judges, court unit executives and
            their staff, Federal defenders, and members of the bar.
                education programs and materials for court staff
        The table below summarizes our programs for the staff of the
    courts.

    EDUCATION AND TRAINING PROGRAMS FOR COURT STAFF, JANUARY 1-DECEMBERR 31,
                                      2006
    ------------------------------------------------------------------------
                                                    Number of     Number of
                                                     Programs   Participants
    ------------------------------------------------------------------------
    Seminars and Workshops (national and
     regional):
        Clerks of court, clerk's office                      7           893
         personnel, circuit executives,
         bankruptcy administrators, senior staff
         attorneys, court librarians.............
        Probation and pretrial services officers            11           508
         and personnel...........................
        Personnel in several categories \1\......           15           598
                                                  --------------------------
            TOTAL................................           33         1,999
                                                  ==========================
    In-Court Programs (programs using curriculum
     packages, training guides, and computer-
     assisted instructional programs):
        Clerks of court, clerk's office                     76         1,876
         personnel, circuit executives,
         bankruptcy administrators, senior staff
         attorneys, court librarians.............
        Probation and pretrial services officers           100         2,967
         and personnel...........................
        Personnel in several categories..........           90         1,205
                                                  --------------------------
            TOTAL................................          266         6,048
                                                  ==========================
    Technology-based Programs (videoconferences,
     audio conferences, online conferences, but
     not including FJTN broadcasts):
        Clerks of court, clerk's office                      6         1,881
         personnel, circuit executives,
         bankruptcy administrators, senior staff
         attorneys, court librarians.............
        Probation and pretrial services officers.            8           186
        Personnel in several categories..........            1            33
                                                  --------------------------
            TOTAL................................           15         2,100
                                                  --------------------------
            GRAND TOTAL..........................          314        10,147
    ------------------------------------------------------------------------
    \1\ Includes team management workshops for judges and court unit
      executives.

        2006 programs for clerks of court and their staffs included:
      --A biennial National Conference for District Court Clerks and Chief
            Deputy Clerks, which emphasized strategic planning, succession
            planning, implementing new Judicial Conference policies,
            management issues, and electronic case filing;
      --two management training workshops for supervisors and managers in
            appellate, district, and bankruptcy courts--a program for those
            new to the position discussed such topics as performance
            management, while the program for those with 3 or more years of
            experience examined staff development and leadership during a
            crisis;
      --several programs with the Administrative Office on Case Management/
            Electronic Case Filing were facilitated with our staff: three
            forums--one for district court staff and two for bankruptcy
            court staff--as well as two web-audio conferences and two audio
            conferences for bankruptcy courts; and
      --an online conference conducted over several months for jury
            administrators on customer communications and a web-audio
            conference on best practices.
        Conferences and workshops for probation and pretrial services
    offices included:
      --A biennial National Conference for Chief Probation and Pretrial
            Services Officers on succession planning, management issues,
            optimizing efficiency through technology, offender supervision
            methods, and coping with limited budgets;
      --an executive team workshop for chief probation and pretrial
            services officers and their chief deputies that helps leaders
            analyze district operations and create a strategic plan;
      --five regional symposia for experienced supervising officers that
            dealt with supervision skills, staff motivation, change
            management and other topics; and
      --two in-person workshops for new supervising officers participating
            in a 2-year supervisors development program that also comprises
            completion of a 40-hour self-study course and attendance at
            several web-audio conferences.
        New FJTN programs in 2006 for officers included Cyber Crime
    Investigation and Supervision and Substance Abuse: Methamphetamine, the
    fourteenth program in a series. The cyber crime program and a
    rebroadcast of our Financial Investigation series were supplemented
    with five web-audio conferences.
        The Center offers extensive leadership and management education
    through its Professional Education Institute (PEI). PEI includes
    courses, programs, web-based resources, and self-development tools to
    aid leaders and managers at all levels.
        The Center has a variety of curriculum packages that Center-trained
    court staff or staff with training experience use to conduct training
    in local courthouses. Recent packages for managers in all court units
    include Planning for Fiscal Management, Planning for Strategic
    Workforce Management, and Developing a Strategic Court Web Site. A new
    training guide, Mentoring in the Courts, was published electronically
    on the Center's intranet site.
        New FJTN programs for all court personnel included a program on
    challenges and possibilities facing the courts, an orientation video on
    the Center's Federal Court Leadership Program, and a program on
    mentoring relationships. Four editions of the Court to Court video
    magazine spotlighting innovative court practices aired in 2006.
                                    research
        The Center conducts empirical and evaluative research on Federal
    judicial administration and case management, mostly at the request of
    committees of the Judicial Conference. The results of most of our
    research are available in print, on our web sites, or in both formats.
    In 2006, we completed 10 major research projects and continued work on
    33 others. This research included:
      --Developing and implementing a research design and training
            protocols for a major study of courtroom use in the district
            courts as requested by a committee of the Judicial Conference
            in response to a request from the chair of the Subcommittee on
            Economic Development, Public Buildings and Emergency Management
            of the House Committee on Transportation and Infrastructure.
            This extensive study of how Federal courtrooms are scheduled
            and actually used is scheduled to be completed in June 2008.
            The study focuses on courtroom use in a random sample of 24
            districts during two 3-month time periods in 2007. Three
            additional districts are included in the study because they
            face unusual circumstances involving their courtrooms;
      --producing a handbook to assist judges in managing class actions
            under the Class Action Fairness Act of 2005 (CAFA). Managing
            Class Action Litigation: A Pocket Guide for Judges concisely
            describes the most important and relevant practices for
            managing class action litigation as set out in the Center's
            Manual for Complex Litigation, Fourth. The handbook is a
            product of the Center's multi-year study of the impact of CAFA
            on Federal judiciary resources as requested by the Advisory
            Committee on Civil Rules;
      --examining a sample of class action activity, including appeals,
            before and after CAFA went into effect, with the goal of
            measuring its impact on various stages of litigation, including
            remand, ruling on pretrial motions, ruling on class
            certification, trial, settlement, and appeals;
      --conducting research and interviews with Federal judges who have
            recently been assigned terrorism cases in order to develop
            educational materials to for judges related to managing
            terrorism cases;
      --assisting the Advisory Committee on Civil Rules as it considers a
            number of possible amendments to the rules of civil procedure;
      --conducting a survey of a sample of district court judges and
            attorneys involved with recently terminated patent cases to
            identify the case management techniques that judges employed to
            strengthen the claim construction process;
      --following up on research to our 2003 study of eleven courts'
            experiences as pilots in providing remote public access to
            electronic criminal case records. The follow-up research
            included an assessment of remote public access to criminal,
            civil, and bankruptcy electronic records in the district
            courts. The research focused on related issues such as
            redacting prohibited information in documents that are filed in
            the federal courts;
      --examining a sample of over 700 capital habeas appeals of State
            convictions in response to perceived delay and backlog issues
            in the processing of these cases;
      --developing and publishing a pocket guide to help Federal judges
            manage the discovery of electronically stored information:
            Managing Discovery of Electronic Information: A Pocket Guide
            for Judges;
      --conducting on-going research to support the Judicial Conference's
            use of the recently developed statistical case weights for the
            district courts to assess judgeship needs, including major
            research to develop new statistical case weights for the
            bankruptcy courts; and
      --supporting the Judicial Conduct and Disability Act Study Committee,
            appointed by Chief Justice Rehnquist and chaired by Justice
            Breyer, as it prepared its final report. Earlier work for the
            committee included reviewing a stratified national sample of
            complaints filed under 28 U.S.C.  351.
        We also responded to more than 50 informational requests for
    research-related assistance from the courts, Judicial Conference
    committees, State and Federal agencies, individuals from academic
    institutions and associations, and others.
                    programs for foreign judicial officials
        In 1992, the Center's implementing legislation was amended to
    include a mandate to support the U.S. Government's efforts with
    promoting the rule of law abroad by providing information about
    judicial administration and education to the courts of other countries
    and also to obtain information from foreign judiciaries that might
    assist U.S. judges manage transnational litigation. To that end, in
    2006, the Center conducted 43 briefings for more than 226 foreign
    judges, court officials, scholars, and students from over 68 different
    countries; hosted visiting foreign judicial fellows from Brazil and
    Russia, who studied case management, intellectual property and treaty
    law, and judicial independence; and provided technical assistance
    abroad, including conference presentations, in Argentina, Jordan,
    Kazakhstan, Kosovo, Russia, and Serbia.
        No funding for these projects came from the Center's appropriation;
    they were supported with funds from U.S. Government agencies and host
    countries (or organizations within them). The Center's two-person
    International Judicial Relations Office coordinates this activity. The
    Center also held a conference on international law and litigation for
    U.S. judges, in collaboration with the American Society of
    International Law.
                            federal judicial history
        Congress has told us to conduct, coordinate, and encourage programs
    related to the history of the Federal judicial branch. Our 3-person
    Federal judicial history office does so by making available the results
    of our own historical research, helping judges and the courts with
    court history projects, and encouraging research and education projects
    about the judiciary. We have completed six units in our project to
    develop web-based curriculum materials to help educators teach about
    the history of the Federal courts, and we have conducted summer
    institutes that bring together teachers, judges, and scholars to study
    judicial history. We continue to update and expand the widely used
    History of the Federal Judiciary website, including the Federal Judges
    Biographical Directory.
                                  publications
        Most Center publications are available in print and electronically.
    In addition to the judicial and legal education publications listed
    above, the Center also released the following research reports: The
    Impact of the Class Action Fairness Act of 2005: Second Interim Report
    to the Judicial Conference Advisory Committee on Civil Rules (on line
    only); Interim Progress Report on Class Action Fairness Act Study (on
    line only); Research on Appeals of Attorney-Fee and Merits Decisions
    (Fed. R. Civ. P. 58(c)(2)) As Presented to the Advisory Committee on
    Civil Rules in May 2006 (on line only); and Roundtable on the Use of
    Technology to Facilitate Appearances in Bankruptcy Proceedings.
                      federal judicial television network
        The Center operates the Federal Judicial Television Network (FJTN),
    a satellite broadcast network with viewing sites in more than 300
    Federal court locations, making it the second largest nonmilitary
    television network in the Federal Government. It transmits Center
    educational programs as well as those of the Administrative Office and
    the U.S. Sentencing Commission. In 2006, the FJTN broadcast 98
    programs, including 8 live programs. The Center produced 62 of these
    programs, 4 of which were live. The online FJTN Bulletin is a bimonthly
    program guide with broadcast schedules, program descriptions, and other
    news about the network. The Center is also streaming videos to enable
    judges and court staff to easily access information on their computers.
                                 media library
        The Center's media library contains some 4,000 audio and video
    programs, including Center programs and almost 800 commercially
    produced video programs. In 2006, the media library loaned more than
    600 programs to Federal judges and judicial branch personnel and sent
    some 2,000 media programs directly to the courts for them to keep and
    use in local education and training programs.
                              information services
        The Center serves as a national clearinghouse for information on
    Federal judicial administration. In 2006, Information Services Office
    staff answered hundreds of requests for information from judges and
    court staff, congressional staff, other government agencies, academics,
    researchers, the media, and the public.
                       federal judicial center foundation
        Congress created the Foundation to receive gifts to support Center
    work in certain specialized areas. Its 7-person board is appointed by
    the Chief Justice, the President Pro Tempore of the Senate, and the
    Speaker of the House of Representatives. In 2006, Foundation funds
    helped support our project on alternative dispute resolution and
    programs for judges on advanced mediation strategy, environmental and
    natural resources law, emerging issues in neuroscience, law and
    science, and humanities and science.
                                   conclusion
        Again, I appreciate the opportunity to submit this statement and
    stand ready to answer any questions you may have.
                                     ______

         Prepared Statement of the United States Sentencing Commission
        Chairman Durbin, Ranking Member Brownback, members of the
    subcommittee, the United States Sentencing Commission thanks you for
    the opportunity to submit this statement in support of the Commission's
    appropriation request for fiscal year 2008.
        For the past 3 fiscal years, the Commission has detailed for its
    appropriators the significant impact the Supreme Court's decisions in
    Blakely v. Washington \1\ and United States v. Booker \2\ have had not
    only on the Commission but the entire criminal justice community.
    Despite changes in case law governing federal sentencing policy, the
    Commission has continued to fulfill its statutory mission as set forth
    in the Sentencing Reform Act of 1984. Full funding of its fiscal year
    2008 request will ensure that the Commission can continue to fulfill
    its statutory responsibilities.
    ---------------------------------------------------------------------------
        \1\ 542 U.S. 296 (2004).
        \2\ 543 U.S. 220 (2005).
    ---------------------------------------------------------------------------
                              resources requested
        The Commission is requesting $15,477,000 for fiscal year 2008,
    representing a 6 percent increase over allotted funding for fiscal year
    2007. The Commission recognizes that Congress sent a strong message in
    passing the fiscal year 2007 continuing funding resolution that
    agencies should use allotted resources carefully. The Commission
    accordingly has tailored its request for funding to reflect the
    Commission's intent to be fiscally conservative while maintaining the
    resources it needs to meet its statutory mission.
            justification for the commission's appropriation request
        The statutory duties of the Commission include, but are not limited
    to: developing appropriate guideline penalties for new and existing
    crimes; collecting, analyzing, and reporting federal sentencing
    statistics and trends; conducting research on sentencing issues in its
    capacity as the clearinghouse of federal sentencing data; and providing
    training on sentencing issues to federal judges, probation officers,
    law clerks, staff attorneys, defense attorneys, prosecutors, and others
    in the criminal justice community.
        The Supreme Court's decisions in Blakely and Booker did not alter
    these core missions. In fact, the Supreme Court in Booker reaffirmed
    these statutory obligations by explaining that the Commission's post-
    Booker mission remained ``writing guidelines, collecting information
    about district court sentencing decisions, undertaking research, and
    revising the guidelines accordingly.'' \3\ The Supreme Court explained
    further that the ``Commission will continue to collect and study
    appellate court decisionmaking. It will continue to modify its
    guidelines in light of what it learns, thereby encouraging what it
    finds to be better sentencing practices.'' \4\
    ---------------------------------------------------------------------------
        \3\ 543 U.S. at 264.
        \4\ 543 U.S. at 263.
    ---------------------------------------------------------------------------
        Over the past 3 fiscal years, the Commission has worked diligently
    to maximize resources overall and appreciates the funding and support
    it has received from Congress. The Commission, therefore, has tailored
    its fiscal year 2008 funding request to reflect its continued
    commitment to efficiently yet effectively meet its core mission.
            sentencing policy development and guideline promulgation
        The Commission promulgated a number of amendments to the guidelines
    in several substantive areas of criminal law, including immigration,
    steroids, terrorism, firearms, and intellectual property, that became
    effective in 2006. For the amendment cycle ending on May 1, 2007, the
    Commission also is considering a number of guideline amendments,
    including recommendations for penalty modifications for transportation,
    sex, terrorism, and drug offenses, and the fraudulent acquisition or
    unauthorized disclosure of phone records. These proposed amendments
    reflect the Commission's response to the USA Patriot Improvement and
    Reauthorization Act of 2005, the Safe, Accountable, Flexible, Efficient
    Transportation Equity Act: A Legacy for Users, the Adam Walsh Child
    Protection and Safety Act of 2006, the Stop Counterfeiting in
    Manufactured Goods Act, the Telephone Records and Privacy Protection
    Act of 2006, and a number of directives and changes to the criminal law
    made by the 109th Congress, as well as input received from the criminal
    justice community, the resolution of circuit conflicts on sentencing
    application issues, and other policy priorities of the Commission.
        Consistent with the requirements of the Sentencing Reform Act of
    1984, the Commission's process for sentencing policy development and
    guideline promulgation continues to include significant outreach to,
    and input from, criminal justice stakeholders, as well as the review of
    pertinent literature, data, and case law. The following examples of the
    Commission's work during the current amendment cycle illustrate this
    process.
        As part of its ongoing study of the criminal history guidelines and
    its consideration of how the guidelines might be simplified overall,
    the Commission held 2 days of meetings to discuss these topics with
    over 40 individuals, including federal judges, probation officers,
    defense attorneys, Department of Justice personnel, and academics. In
    addition, as part of its review of the guidelines with respect to
    cocaine offenses, the Commission held a day-long hearing to elicit
    testimony from representatives of the criminal justice community,
    including law enforcement, medical and treatment experts, academics,
    and community groups among others. The hearing provided a record for
    the criminal justice community to use as it debates the future of
    federal cocaine sentencing policy. The Commission also invited
    representatives of the Department of Justice, the defense bar, and
    industry groups to provide input on topics such as immigration
    penalties, sex offenses, and intellectual property offenses during a
    public meeting of the Commission.
        As the foregoing examples illustrate, the federal sentencing
    guidelines are a product of a collaborative and comprehensive process
    as required by the Sentencing Reform Act of 1984, including
    consideration of factors set forth in 18 U.S.C.  3553(a). Full funding
    of its fiscal year 2008 request will ensure that the Commission can
    continue to meet requirements of the Sentencing Reform Act of 1984 with
    respect to sentencing policy development and guideline promulgation.
              collecting, analyzing and reporting sentencing data
        The Supreme Court's recent jurisprudence has had a significant
    impact on the Commission's data collection, analysis, and reporting
    efforts. For over 70,000 federal felony and Class A misdemeanor
    criminal cases annually, the Commission extracts information from five
    documents that the courts are required to send to the Commission
    pursuant to 28 U.S.C.  994(w).\5\
    ---------------------------------------------------------------------------
        \5\ Section 994(w) of title 28, United States Code, requires the
    chief judge of each district court, within 30 days of entry of
    judgment, to provide the Commission with: The charging document; the
    written plea agreement (if any); the Presentence Report; the judgment
    and commitment order; and the statement of reasons form.
    ---------------------------------------------------------------------------
        Immediately after the 2004 Blakely decision, the Commission
    recognized that one of the most critical functions it could perform was
    reporting the most timely and accurate sentencing data available. The
    Commission therefore began to refine its efforts in this area so that
    it could produce data beyond its statutorily required annual reports.
    By the time the Supreme Court issued its Booker decision in January
    2005, the Commission had revised its data collection and reporting
    process so that it could provide ``real-time'' data about the effects
    of the Booker decision on national sentencing practices.
        The Commission further refined its data collection, analysis and
    reporting efforts throughout fiscal year 2006 to maximize the
    information it provides to the criminal justice community. It now
    provides detailed quarterly national sentencing data similar to the
    format and types of data produced in the Commission's year-end annual
    reports. Moreover, in February 2007, the Commission published on its
    website its Fiscal Year 2006 Annual Report and Sourcebook. These
    materials reflect the Commission's analysis of over 72,000 cases. This
    represents approximately 24,000 more cases than the Commission
    processed in fiscal year 1997, showing a 50-percent increase in
    caseload over a 10-year period. The Commission's fiscal year 2008
    funding request is designed to maintain personnel and other resources
    in the key areas of data collection, data analysis, and research. This
    funding also will ensure that the Commission can keep pace with
    increased demands made of its data collection and analysis efforts.
    Information Technology Issues Associated with Data Collection,
            Analysis, and Reporting
        The Commission has developed and implemented an electronic document
    submission system that enables sentencing courts to submit
    electronically the five statutorily required sentencing documents
    directly to the Commission. This has greatly alleviated the need to
    spend court resources on copying, bundling, and mailing hard copies.
    Currently, 80 of the 94 judicial districts are using the system, with
    another 11 slated to come on-line within the coming months. The
    Commission is hopeful that all 94 districts will be using the system by
    the end of fiscal year 2007.
        The electronic document submission system has enabled the
    Commission to take significant steps toward automating data collection
    and analysis. Increased automation contributes significantly to the
    success of the Commission's statutory missions and offers significant
    benefits to the entire criminal justice community. Automation better
    allows the Commission to provide the independent and objective analysis
    and reporting of federal sentencing practices contemplated by the
    Sentencing Reform Act. Automated data collection and analysis enable
    the Commission to provide even more detailed and accurate data on
    national sentencing trends to the criminal justice community. An
    automated system allows the Commission to work closely with other
    entities in the criminal justice community in creating an unparalleled
    system of document receipt and data reporting that promotes best
    practices throughout the system. By increasing internal efficiencies,
    the Commission is able to dedicate more resources to research-oriented
    tasks.
        The Commission is pleased that Congress has funded its efforts to
    become fully automated. During fiscal year 2008, the Commission intends
    to evaluate the technological base it has built and, working with other
    entities in the criminal justice community, determine the next steps
    for moving forward technologically. Full funding of its fiscal year
    2008 request will ensure that the Commission's automation systems work
    efficiently and effectively and allow the Commission to further develop
    its automation resources.
    Increased Demands for Commission Work Product from Congress
        In addition to the new demands for national data placed on the
    Commission by the Supreme Court's recent decisions, the Commission also
    continues to experience increased demand for its work product from
    Congress. In addition to providing its quarterly and annual data
    reports on national sentencing practices, the Commission is required to
    assist Congress in assessing the impact proposed criminal legislation
    will have on the federal prison population. These assessments often are
    complex, time-sensitive, and require highly specialized Commission
    resources. Throughout the past 3 fiscal years, the Commission also has
    experienced an increase in more general requests for information from
    Congress on issues such as drugs, gangs, immigration, and sex offenses.
    The Commission anticipates an even higher volume of such requests
    throughout fiscal year 2008 and looks forward to fulfilling these
    requests in a timely and thorough manner.
                              conducting research
        Research is a critical component of the Commission's overall
    mission. Congress directed the Commission to establish a research
    agenda as part of its role as the clearinghouse on federal sentencing
    statistics and policy. As such, the Commission has undertaken a number
    of important research projects. In response to the recent Supreme Court
    decisions and as a result of the Commission's success with increasing
    its data collection and analysis efficiencies, the Commission has
    accelerated its research agenda. In fiscal years 2006 and 2007, the
    Commission undertook a number of internal and external reports that
    provide detailed examinations of key policy areas such as immigration,
    drugs, and firearms offenses. Also in fiscal year 2006, the Commission
    released a comprehensive report on the impact of Booker on federal
    sentencing.
        In fiscal year 2007, the Commission also anticipates reviewing and
    releasing reports on federal cocaine policy and various components of
    offender criminal history, along with review of other reports drafted
    to support the Commission's guideline amendment work. These reports are
    crucial to the Commission's overall objective of promulgating reasoned
    and well-informed guideline and policy statement amendments.
        In fiscal year 2008, the Commission expects that its research
    agenda will include additional reports associated with its policy work
    and the continuation of its comprehensive review of criminal history,
    including more reports based on its nationally recognized recidivism
    database. The Commission also anticipates undertaking several research
    and data analysis projects of interest to the criminal justice
    community. Full funding of its fiscal year 2008 request will allow the
    Commission to pursue its commitments to providing the criminal justice
    community with the most comprehensive and thorough reports on federal
    sentencing practices.
                             training and outreach
        The Commission is dedicated to providing specialized guideline
    training and technical assistance to federal judges, probation
    officers, law clerks, staff attorneys, prosecutors, and defense
    attorneys by providing educational programs throughout the year. The
    Commission continues to expand its training and outreach programs to
    ensure the criminal justice community has the tools necessary to
    operate in a post-Booker sentencing world. Throughout the remainder of
    fiscal year 2007, the Commission anticipates holding training programs
    in all 12 circuits and a majority of the judicial districts. The
    Commission will co-host an annual training program for several hundred
    participants in May 2007 in Salt Lake City, Utah, and in May 2008 in
    Florida. Full funding of its fiscal year 2008 request will allow the
    Commission to continue its expanded training program in all 12 circuits
    and its attendance at numerous academic and judicial programs and
    symposia on federal sentencing.
                                    summary
        The Commission is uniquely positioned to assist all three branches
    of government in ensuring sound and just federal sentencing policy. An
    independent agency housed in the Judicial branch, the Commission is an
    expert bipartisan body of federal judges, individuals with varied
    experience in the federal criminal justice system, and ex-officio
    representatives of the Executive Branch whose work on sentencing policy
    must be reviewed by Congress. In short, the Commission is at the
    crossroads of where the three branches of government intersect to
    determine federal sentencing policy.
        The Commission has worked hard and performed well with the
    resources available, and it appreciates the funding it has received
    from Congress to meet its increasing needs. Full funding of the
    Commission's fiscal year 2008 request will ensure that the Commission
    continues to fulfill its statutory missions to develop appropriate
    guideline penalties, collect, analyze, and report federal sentencing
    statistics and trends, conduct research on sentencing issues, and
    provide training to the federal criminal justice community. The
    Commission respectfully requests that Congress support fully the
    Commission's fiscal year 2008 appropriation request of $15,477,000 so
    that it can continue its role as a leader in federal sentencing policy.

        Senator Durbin. Mr. Duff.
    STATEMENT OF JAMES C. DUFF, DIRECTOR, ADMINISTRATIVE
                OFFICE OF THE U.S. COURTS
        Mr. Duff. Good afternoon, Chairman Durbin and Senator
    Allard. I'm very pleased to present the budget request for the
    Administrative Office of the U.S. Courts today.

                            FISCAL YEAR 2007 FUNDING

        I'd like to join Judge Gibbons in thanking you for the
    additional funding for 2007 that you gave to the judiciary
    above a hard freeze. We certainly appreciate the priority shown
    to the judiciary.
        This funding will support current onboard staffing levels
    and base operating requirements, and also allow some staffing
    increases in courts where workload is heavily impacted by
    immigration and other law enforcement initiatives.
        Although I have appeared at several budget hearings before,
    when I was administrative assistant to Chief Justice Rehnquist,
    this is the first time I've been permitted to speak at one of
    these hearings, and I hope you don't conclude that there was a
    good reason for that.
        I'm honored to be here on behalf of the Administrative
    Office of the U.S. Courts and the court system. I did work
    closely with this subcommittee's predecessor, the Commerce,
    Justice, State, Judiciary Subcommittee, and I look forward to
    working with you in the newly formed Financial Services and
    General Government Subcommittee.

                       ROLE OF THE ADMINISTRATIVE OFFICE

        This past July, Chief Justice Roberts appointed me to be
    the seventh Director of the Administrative Office of the U.S.
    Courts. The AO was created by Congress in 1939, and its mission
    is to assist Federal courts in fulfilling the mission to
    provide equal justice under the law.
        The AO is a unique entity in the Federal Government. It's
    not the sole headquarters for the courts. The Federal courts
    are, to some degree, decentralized. But the AO does provide
    administrative, legal, financial management, program, security,
    information technology, and other support services, to all
    Federal courts. It also provides support and staff counsel to
    the Judicial Conference of the United States and its 25
    committees. And it helps implement Judicial Conference
    policies, as well as applicable Federal statutes and
    regulations.
        The AO has matured over the years to meet the changing
    needs of the judicial branch, but service to the courts has
    been, and remains, our basic mission at the AO.
        This year being a transition year at the AO, it's a natural
    time to ensure that the structure and services provided by the
    Administrative Office are cost effective and that they address
    the needs of the courts. But even if this period of transition
    were not a convenient time to take a look at our services and
    our structure, it's likely that budget constraints would have
    required us to do so.
        I am assembling a small advisory group of judges and
    leaders from court personnel and within the AO to assist me in
    an internal review of the Administrative Office of the Courts
    to ensure that we are structured properly and efficiently to
    meet the needs of the courts and to determine if any internal
    adjustments are needed to become more efficient.

                                COST CONTAINMENT

        Cost containment within the AO is also an important
    priority. And when I came onboard last July, one of the things
    we did was to put in place a hiring freeze within the AO which
    continues. We have not sought to replace vacancies from outside
    the organization. We've tried to backfill within the
    organization, and, I think, have obtained substantial savings
    as a result of that effort. There have been exceptions to it,
    but they are the exception and not the rule.

               RELATIONSHIP WITH GENERAL SERVICES ADMINISTRATION

        On another front--Senator Allard, you referred to this--I
    think it's fair to say that relations between the courts and
    the GSA have been strained over the past few years. I'm very
    pleased to report some progress with GSA. We've had a number of
    meetings and discussions with the new Administrator at GSA. We
    are getting to the bottom of these rent overcharges that have
    occurred. What I'm most pleased about is that the nature of the
    dialogue and the tone of the dialogue have improved. We're
    sitting across the table from each other and working through
    some of these problems. We've exposed a number of the rent
    overcharges and have been given credit for them. The total
    amount of these is over $50 million.
        Another thing we're doing with GSA is trying to devise a
    new formula for going forward on our rent. The current basis
    for determining rent is based on a fair market value, and
    there's been a lot of room for play in that. And that's where
    we have identified some of these overcharges.
        We're working with them on a new formula for making rent
    calculations, going forward, more attuned to a return-on-
    investment formula, which gives us some predictability, which
    is great for us, with regard to planning--budget planning, and,
    as I say, takes some of the play out of the rent calculations
    that have been troublesome to us.
        The goal, frankly, is to come to you in the future with a
    solution to these problems, rather than to put into your lap a
    significant problem that requires your intervention for a
    solution. We're very grateful, however, having said that, for
    your intervention and the pressure you've helped bring to bear
    on a very significant problem within the judiciary. It's been
    extremely helpful and we appreciate it, Senator Allard.

                            FISCAL YEAR 2008 REQUEST

        My written testimony, which I ask be included in the
    hearing record, provides several examples of the wide array of
    services and support that the AO provides to the Federal
    judiciary. I'm going to limit the remainder of my remarks this
    afternoon to the specific budget request, the fiscal year 2008
    budget request for the AO.
        The fiscal year 2008 appropriations request for the
    Administrative Office of the U.S. Courts is $78,536,000. This
    is an increase of $6.2 million over the 2007 enacted level.
    And, while the increase we're seeking may appear to be
    significant, it actually represents a no-growth current-
    services budget. Mr. Chairman, the AO's appropriation comprises
    less than 2 percent of the judiciary's total budget.
        In addition to the appropriation provided by this
    subcommittee, the AO receives nonappropriated funds from fee
    collections and carryover balances, as well as reimbursements
    from other judiciary accounts for information technology
    development and support services that are in direct support of
    the courts, and the court security and defender services
    programs. The principal reason for the increase in appropriated
    funds requested for the AO is to replace nonappropriated funds
    that were used to finance the fiscal year 2007 financial plan,
    but which are expected to decline in fiscal year 2008. And
    mostly, there, we're talking about reductions in bankruptcy
    filings. The filing fees from bankruptcy filings funded
    significantly our nonappropriated funds in the past. And,
    because of the anticipated drop off in those nonappropriated
    funds, we are seeking more in the way of appropriated funds.
        I would emphasize that we are requesting no program
    increases in our budget request. I would also emphasize that of
    course we're going to keep you apprised and work closely with
    your staff if our projections of fee collections and carryover
    estimates change. If we experience and obtain additional fee
    collections from those which we've projected, we'll certainly
    inform you right away of that fact, so adjustments to the AO's
    budget request can be made accordingly.

                               PREPARED STATEMENT

        Chairman Durbin and members of the subcommittee, I
    recognize that fiscal year 2008 will be another difficult year
    for you and your colleagues as you struggle to meet the funding
    needs of agencies and programs that are under your review. I
    pledge to you that we will work very closely with you, and we
    treat, as seriously as you do, cost-containment efforts and
    initiatives. And we look forward to working with you and your
    staff.
        Thank you very much.
        [The statement follows:]
                      Prepared Statement of James C. Duff
                                  introduction
        Chairman Durbin, Senator Brownback, and members of the
    subcommittee, I am pleased to appear before you this afternoon to
    present the fiscal year 2008 budget request for the Administrative
    Office of the United States Courts (AO) and to support the overall
    request for the entire Judicial Branch.
        Before I begin, I would like to join Judge Gibbons in thanking you
    and your committee for the support you provided the Judiciary in H.J.
    Res. 20, the final 2007 Continuing Resolution. We deeply appreciate the
    additional funding above a hard freeze provided the Judiciary. It will
    support current on-board staffing levels and base operating
    requirements, and allow some staffing increases in courts whose
    workload has been heavily impacted by immigration and other law
    enforcement initiatives.
        While this is my first official appearance before Congress, from
    1996 to 2000 I served Chief Justice Rehnquist as his administrative
    assistant and chief of staff and supported Justices Souter and Kennedy
    in their appearances before then-Chairman Gregg and the Commerce,
    Justice, State, and the Judiciary Appropriations Subcommittee. I look
    forward to working with you under the newly formed Financial Services
    and General Government Appropriations Subcommittee, to answer any
    questions you might have, and to represent as clearly as I can the
    important needs of the Federal Judiciary.
                       role of the administrative office
        In July 2006, I accepted the appointment of Chief Justice Roberts
    to become the 7th Director of the Administrative Office of the U.S.
    Courts. Created by Congress in 1939 to assist the Federal courts in
    fulfilling their mission to provide equal justice under law, the AO is
    a unique entity in government. Neither the Executive Branch nor the
    Legislative Branch has any one comparable organization that provides
    the broad range of services and functions that the AO does for the
    Judicial Branch.
        Unlike most Executive Branch agencies in Washington, the AO is not
    the sole headquarters for the courts. The Federal court system is
    decentralized, although the AO provides administrative, legal,
    financial, management, program, security, information technology and
    other support services to all Federal courts. It provides support and
    staff counsel to the Judicial Conference of the United States and its
    25 committees, and it helps implement Judicial Conference policies as
    well as applicable Federal statutes and regulations. The AO also
    coordinates Judiciary-wide efforts to improve communications,
    information technology, program leadership, and administration of the
    courts. Our administrators, accountants, systems engineers, analysts,
    architects, lawyers, statisticians, and other staff provide
    professional services to meet the needs of judges and staff working in
    the Federal courts nationwide. The AO staff also responds to
    congressional inquiries, provides information on pending legislation,
    and prepares congressionally mandated reports.
        The AO has evolved and matured over the years to meet the changing
    needs of the judicial branch. Service to the courts, however, has been
    and remains our basic mission. As its new director, I want to ensure
    that the structure and services provided by the AO are appropriate and
    cost-effective and that they address the needs of the courts. I am
    assembling a small advisory group of judges and leaders from court
    personnel to assist me and our new deputy director--Jill Sayenga--in a
    review of our structure. Ms. Sayenga brings with her 18 years of
    experience in the Federal court system and will be a great asset to the
    AO. We are currently engaged in an examination of our core mission as
    defined by statutes and directives from the Judicial Conference to
    determine if internal adjustments are needed within the AO to improve
    efficiency and responsiveness to the courts.
                   working with our executive branch partners
        Relations between the General Services Administration (GSA) and the
    AO in recent years have been strained. During the past 8 months I have
    served as director, I have met many times with Ms. Lurita Doan, the new
    GSA administrator, and the new commissioner of the Public Buildings
    Service, David Winstead, to work on solutions to the issues confronting
    our organizations and identify our mutual goals and responsibilities. I
    am pleased to report significant progress in the relationship between
    the AO and GSA. We are working together on our extensive nationwide
    effort to validate GSA space assignment and classification records, and
    to reconcile them with actual rent bills. In addition, we are currently
    working on significant changes in how GSA determines or calculates
    courthouse rents. We both recognize the important responsibility our
    agencies have in being good stewards of limited federal funds. Our
    negotiations reflect the partnership that is being forged and my firm
    belief that developing cooperative relationships and maintaining open
    lines of communication with our Executive Branch partners is crucial to
    our ability to solve problems as they arise. It is our mutual goal to
    present solutions to Congress to the issues facing us, and not
    delivering problems to you.
    Judicial Security
        Another important Executive Branch partnership we have is with the
    United States Marshals Service (USMS). By statute, and under a
    Memorandum of Agreement with the Attorney General, the Congress
    appropriates funds to the Judiciary to provide security inside Federal
    courthouses, and these funds are administered by the USMS for the
    Judiciary through its judicial security program. A close working
    relationship between the AO and the USMS is essential to ensure the
    protection of the judicial process, including litigants, judges, and
    the public. In addition, it is critical that the administration
    support, and Congress provide, the resources necessary for the USMS to
    fulfill adequately its statutory mission.
        John Clark, a career U.S. Marshal, and relatively new director of
    the USMS, has been very accessible to the AO and we are building a
    stronger working relationship with the USMS. Director Clark has
    attended each of the meetings of the Judicial Conference's Judicial
    Security Committee since it was created in January 2006 and has
    encouraged his senior staff to meet regularly with AO staff to discuss
    issues and implement policies regarding judicial security. This
    improved relationship with the USMS will enhance the security of the
    Judiciary.
        Following the murders of two members of U.S. District Court Judge
    Joan Lefkow's family in their Chicago home, the Administrative Office
    worked with Director Clark and the Appropriations Committees--
    especially you Chairman Durbin--to obtain supplemental funding for the
    USMS to enhance the off-site security of Federal judges. Part of the
    supplemental funding was used by the USMS to establish a home-intrusion
    detection systems program for all Federal judges. The AO and the USMS
    worked together to develop a program to provide home alarm systems to
    Federal judges who wanted one. To date, nearly 1,600 systems have been
    installed or are scheduled for installation in judges( homes by a USMS
    national security vendor.
               the administrative office--in service and support
        Each day, as judges and court employees across the country work to
    provide citizens with due consideration and equal justice under the
    law, the Administrative Office supports that commitment by designing
    and carrying out programs and initiatives in a manner that reflects
    good stewardship of public funds. From the implementation of cost-
    containment initiatives to carrying out congressional mandates, AO
    staff collaborate with the courts to design and implement smart
    business practices. I would like to highlight just a few.
    Judiciary Internal Oversight and Review
        The Administrative Office plays a vital role in the Judiciary's
    system of oversight and review to promote the stewardship of resources,
    effective program management, and the integrity of operations within
    the Third Branch. The AO has been conducting financial audits since
    Congress first authorized this function in 1975.
        The AO's comprehensive audit program complies with generally
    accepted government audit standards. In 2006, the AO conducted 105
    financial and administrative audits of Judiciary funds, financial
    activities, operations and systems. Financial audits covering all court
    units are conducted by an independent certified public accounting firm
    under contract with and the direction of the Office of Audit on a 4-
    year cycle for most courts, and on a 2\1/2\ year cycle for larger
    courts. Other audits cover funds such as the Court Registry Investment
    System, Judiciary Retirement Trust Funds, Chapter 7 trustees, Criminal
    Justice Act (CJA) grantees, contracts and financial systems, and
    special audits such as when there is a change of court unit executive.
        In addition, on-site programmatic reviews are conducted in the
    courts. These specific reviews may focus on things such as program
    operations and management, human resources management, procurement,
    information technology operations, security, continuity of operations
    planning and disaster preparedness, as well as jury management and
    court reporting in district courts. During fiscal year 2006, on-site
    reviews covering program and technical operations were conducted in
    three appellate courts, seven district courts, four bankruptcy courts,
    14 Federal defender organizations, and 12 probation and pretrial
    services offices.
        The AO provides investigatory services for addressing allegations
    of waste, fraud, or abuse. This program was approved by the Judicial
    Conference in 1988, and the Judicial Conference's Committee on the AO
    oversees the AO's performance of this function. In addition, the AO has
    a liaison with the Department of Justice's Criminal Division, the
    Government Accountability Office's FraudNet operation, and others for
    the referral and appropriate resolution of allegations of impropriety.
    Ethics Compliance
        The Judiciary also has mechanisms in place to address allegations
    of judicial misconduct or disability. Like Congress, the Judiciary
    addresses conduct and ethical matters with self-regulating policies and
    through committees of Federal judges. Accountability is a core value of
    the Judiciary, and the Judiciary's self-imposed standards of conduct
    are stringent.
        Last September, the Judicial Conference adopted two policies to aid
    judges in complying with established ethical obligations. The first
    requires all Federal courts to use conflict-checking software to assist
    judges in identifying cases in which they could have a financial
    conflict of interest and should therefore recuse themselves. While
    automated screening is not foolproof, it is an efficient and effective
    supplement to a judicial officer's individualized review. The second
    outlines new disclosure requirements for those who provide privately-
    funded educational programs for judges and the judges who attend such
    programs. The policy requires seminar sponsors to disclose sources of
    funding, topics, and names of speakers. Judges are barred from
    accepting reimbursements unless the program providers have made the
    required disclosures. Judges must report their attendance within 30
    days after the program. Disclosures already are available on the
    Internet. The Administrative Office is actively engaged in the
    implementation of these policies. Working closely with the relevant
    Judicial Conference committees, AO staff drafted guidelines, developed
    training programs, and created automated reporting systems to support
    these new Conference policy initiatives.
    Remote Access for Officers Working in the Community
        Through its Office of Probation and Pretrial Services, the AO
    continues to provide probation and pretrial services officers with
    various wireless technologies to enhance their productivity while in
    the community interacting with defendants and offenders. Officers now
    have all critical information about persons under their supervision at
    their fingertips via ``smart phones'' and wireless hand-held devices
    and laptops. Not only do officers working in the community have access
    to all of the information that is available in their offices, they also
    are able to transmit information from remote locations back to the
    office. These technologies save travel time and expenses and make it
    possible for officers to spend more time in the community supervising
    offenders. Using remote technology was imperative to our success in
    tracking offenders in the aftermath of the Gulf Coast hurricanes.
    Case Budgeting
        Recently issued Judiciary guidelines encourage courts to utilize
    case budgeting for high-cost Criminal Justice Act (CJA) panel attorney
    representations. These high-cost representations total less than 3
    percent of the caseload but account for about one-third of the panel
    attorney expenses. To assist in this effort the Second, Sixth, and
    Ninth circuits were selected to participate in a pilot project and each
    will receive one position to support the case-budgeting process in
    courts within these circuits for up to 3 years. The AO has contracted
    with two expert litigators who have substantial case-budgeting
    experience to assist judges in assessing whether Criminal Justice Act
    case budget estimates are reasonable. The Defender Services
    appropriation is one of the fastest growing accounts within the
    Judiciary and we are hopeful that case budgeting will be helpful in
    controlling expenditures in high-cost--usually capital case-
    representations.
    Report on the Impact of the Supreme Court Booker Case on the
            Judiciary's Workload
        The Supreme Court, in Blakely v. Washington, 542 U.S. 296 (2004)
    (Blakely), invalidated a sentence imposed by a State court under the
    State's sentencing guidelines system. In doing so, it raised questions
    about the constitutionality of the Federal sentencing guidelines
    system. The Supreme Court decision in United States v. Booker 543 U.S.
    220 (2005) (Booker), issued a year later, rendered the Federal
    sentencing guidelines advisory in nature, rather than mandatory.
        In a June 2006 report requested by the House and Senate
    Appropriations Committees, the AO documented that the Supreme Court
    decisions in Blakely and Booker, had significantly impacted the
    workload of the Federal courts, as thousands of convicted defendants
    filed appeals or habeas corpus petitions contesting the legality of
    their sentences and thousands of cases already on appeal were remanded
    back to the trial courts for resentencing. This detailed analysis of
    the impact the Blakely/Booker decisions have had on the workload of the
    appeals and district courts, Federal defenders, and probation officers
    has been extremely helpful in determining resource needs and the
    allocation of appropriated funds.
    Increased Productivity Through Information Technology Systems
        Another key AO responsibility is to lead and manage the
    development, implementation, and support of new information technology
    systems that will enhance the management and processing of information
    and the performance of court business functions. By the end of 2006,
    the Federal courts' Case Management Electronic Case Files (CM/ECF)
    system was operating in all bankruptcy courts, and 92 of 94 district
    courts, as well as the Federal Court of Claims and the U.S. Court of
    International Trade. The appellate courts' new case management system
    is scheduled to be fully deployed in nearly all regional courts of
    appeals by the end of this year.
        The prototype system for what is now CM/ECF was launched in 1995
    when a team from the AO helped the U.S. District Court in the Northern
    District of Ohio manage more than 5,000 document-intensive maritime
    asbestos cases. That court faced up to 10,000 new pleadings a week--a
    workload that quickly became unmanageable. Together, the team developed
    a system that allowed attorneys to file and retrieve documents and
    receive official notices electronically. A year later, the Bankruptcy
    Court in the Southern District of New York began live operations with a
    similar system that the AO had tailored for bankruptcy court needs.
    That court faced some of the early mega-bankruptcies, and was inundated
    with paper. Those early prototype efforts led to the system that now
    provides information on 28 million Federal court cases and serves
    hundreds of thousands of attorneys and litigants nationwide. Through
    the Judiciary's Public Access to Court Electronic Records (PACER)
    program most, if not all, appellate, district, and bankruptcy courts'
    websites contained the material now required by the E-Government Act of
    2002 long before its enactment.
        The implementation of CM/ECF is the largest system development and
    implementation effort ever undertaken in the Judiciary and is clearly
    one of our greatest success stories. More than 415,000 attorneys have
    registered and been trained in CM/ECF and on average, nearly 200,000
    docket entries are made each workday. However, during one extraordinary
    period--the first weeks of October 2005--that volume more than doubled.
    And through the PACER system, CM/ECF answers more than 1,000,000
    queries per workday. The system provides lawyers, the media, and any
    interested party with access to important case documents from anywhere,
    at any time, and replaces what had previously been a burdensome, labor-
    and paper-intensive responsibility. Attorneys have praised the systems,
    noting that they are easy to use, reduce their service and copying
    expenses, and provide quick notice of actions. It is clear that a
    robust information technology program makes the Federal Judiciary more
    accessible and efficient.
    Veterans' Court of Appeals
        Recognizing the success of the Judiciary's Case Management/
    Electronic Case Filing System and looking for the cost efficiency of
    adapting our new appeals court system to one that could serve their
    needs, the U.S. Court of Appeals for Veterans Claims approached the AO
    for assistance. After ensuring that our system could be adapted for
    their use without compromising our own security, and with the approval
    of the Judicial Conference, the AO entered into a Memorandum of
    Understanding to train and support the court in its examination and
    implementation of the product. The Military Construction Appropriations
    Subcommittees and the Veterans Affairs Committees in the House and
    Senate were very supportive of this agreement and the savings this
    partnership can bring to the Federal Government.
    IT Cost Containment Initiatives
        During 2006, the AO also continued its efforts to assist the
    Judicial Conference Committees in developing and implementing cost
    containment strategies that will hold down costs while maintaining the
    quality of judicial services. Our efforts in the area of Information
    Technology are one example where we have been focusing on ways to
    leverage limited funds to deliver useful technologies while reducing
    operating costs.
        The Information Technology Committee was asked by the Executive
    Committee of the Judicial Conference to examine how we deploy computer
    servers for running and backing up national applications--such as our
    accounting, probation case management, electronic case filing, e-mail,
    and jury management systems. Our model had been to put servers in each
    court headquarters for each of those national applications. From a
    technical standpoint, such a server deployment model was not always
    necessary.
        So, under the direction of the IT Committee, the AO undertook a
    comprehensive study--working together with many program offices, a
    group of court unit executives, IT professionals and a judge--to
    determine how best to consolidate and share the thousands of servers
    deployed throughout our court system. The AO is now in the process of
    implementing some of their recommendations.
        In the probation/pretrial services area, we are in the process of
    consolidating 95 servers into two locations, which is projected to save
    $2 to $3 million over 4 years in equipment, staff support, and
    maintenance costs. In jury management, the working group recommended
    eliminating separate servers for each court by consolidating jury
    management onto the courts' CM/ECF servers. This is projected to save
    about $4 million over 5 years. We have also saved significant dollars
    in the courts by obtaining enterprise-wide licenses for such software
    as Adobe Acrobat Professional, instead of each court purchasing its
    own.
                     administrative office cost containment
        Cost containment is also an important priority within the
    Administrative Office. When I became director in July, in an effort to
    control staffing costs, I restricted recruitment actions for filling
    vacant positions to internal AO sources. Any exceptions for external
    recruitment are scrutinized carefully by an executive review committee
    and require my approval. And, as part of the larger comprehensive
    review of the AO now ongoing, we will also be looking at AO spending,
    staffing, and operations to ensure that the agency is carrying out the
    business of the Judiciary in the most efficient and effective manner.
        In addition to tight staffing restrictions, during 2006 the AO
    implemented a number of other internal cost-containment initiatives
    such as: Shifting many publications to electronic format whenever
    possible; reducing library materials in favor of electronic resources;
    and replacing desktop automation equipment based on necessity rather
    than on a cyclical basis.
                      administrative office budget request
        The fiscal year 2008 appropriations request for the Administrative
    Office of the U.S. Courts is $78,536,000, representing an increase of
    $6,159,000, or 8.5 percent, over fiscal year 2007 available
    appropriations. While the percentage increase in appropriations we are
    seeking may appear significant, overall it represents a no-growth,
    current services budget request.
        The AO's appropriation comprises less than 2 percent of the
    Judiciary's total budget. In addition to the appropriation provided by
    this committee, the AO receives non-appropriated funds from sources
    such as fee collections and carryover balances to offset appropriation
    requirements. The AO also receives reimbursements from other Judiciary
    accounts for information technology development and support services
    that are in direct support of the courts, the court security programs,
    and defender services.
        The principal reason for the large increase in appropriated funds
    requested for the AO in fiscal year 2008 is to replace non-appropriated
    funds (fee/carryover) that were used to finance the fiscal year 2007
    financial plan, but which are expected to decline in fiscal year 2008
    mostly because of reductions in bankruptcy filings. Specifically, the
    AO requires $6.2 million in base adjustments to maintain current
    services. This includes inflationary adjustments and increased costs
    for recurring requirements, such as communications, service agreements,
    and supplies. The AO requests no program increases, and during fiscal
    year 2007, I expect our hiring freeze will result in the reduction of
    10 FTE's below fiscal year 2006 staffing. We will keep you apprised of
    actual fee collections and carryover estimates as the year progresses.
    If collections surpass our estimates, the amount we are requesting
    could be reduced. However, if declining fee and carryover projections
    materialize, and they are not replaced with direct appropriated funds,
    we will be forced to reduce current on-board staffing. These staffing
    losses would come on top of the 10 FTE's reduced in the hiring freeze
    this year. This would, in turn, adversely affect our ability to carry
    out the AO's statutory responsibilities and serve the courts.
                                   conclusion
        Chairman Durbin, Senator Brownback, members of the subcommittee, in
    the interest of time, I have shared with you only a few examples of the
    wide array of services and support the Administrative Office provides
    the Federal Judiciary, but I hope you will understand more about the
    function and responsibilities of our agency during the coming months.
    In addition to our service to the courts, the AO works closely with the
    Congress, in particular, the Appropriations Committee and its staff, to
    provide accurate and responsive information about the Federal
    Judiciary. I recognize that fiscal year 2008 will be another difficult
    year for you and your colleagues as you struggle to meet the funding
    needs of the agencies and programs under your purview. I urge you,
    however, to consider the significant role the AO plays in supporting
    the courts and the mission of the Judiciary. Our budget request is one
    that does not seek new resources for additional staff or programs. I
    hope you will support it.
        Thank you again for the opportunity to be here today.
        I would be pleased to answer your questions.

        Senator Durbin. Mr. Duff, thank you very much. And, Judge
    Gibbons, thank you for joining us.
        I've got a host of topics here, and I'll have 5 minutes, so
    I'll start with them, and then Senator Allard will have an
    opportunity, and then I'll come back.

                      FEDERAL PROTECTIVE SERVICE SECURITY

        The first thing I want to talk about is the Federal
    Protective Service. I really didn't know this was the situation
    until I prepared for this hearing. We kind of joke, around
    Washington, about the fact that, when it comes to food safety,
    we have an agency responsible for cheese pizza and another
    agency responsible for pepperoni pizza. And I'm not kidding.
    But this comes as a surprise to me, that the perimeter of your
    buildings is under the jurisdiction of the Federal Protective
    Service, an agency within the Department of Homeland Security.
    The Federal Protective Service money comes through the
    appropriation to the Department of Homeland Security, and, of
    course, the U.S. Marshals Service through your appropriation
    directly to them. And that is kind of curious, in and of
    itself. And then I read that the Federal Protective Service has
    had a series of problems and difficulties here. This doesn't
    appear to be a new problem; this appears to be a recurring
    problem. Would you like to comment on just how bad this is?
        Judge Gibbons. Well, obviously it's of sufficient concern
    to us that it was included in my written testimony. The
    language we used is straightforward. It's important enough that
    the Judicial Conference felt compelled to take a position on it
    and to seek a change in our situation with respect to
    responsibility for our exterior perimeter security. So, it is
    an important issue to us.
        Obviously, we all have much more heightened awareness today
    than we did a number of years ago of the need for such
    security, and we are reluctant to let these things go once we
    find out about them and realize that we are not having
    difficulties that are of an isolated nature.
        Senator Durbin. I take this very seriously. We had a
    situation in Chicago, a few years back, involving a judge whom
    I appointed to the bench, a tragedy that befell her family
    because of lack of security.
        Judge Gibbons. Of course, that touched all of us very much.
        Senator Durbin. And I've really tried to work with Senator
    Obama to not only address our situation in Illinois, but
    nationally, as well.
        Here's what I'd like to propose. I'm going to ask that the
    Federal Protective Service, or if it's the Department of
    Homeland Security, whatever, that some representative of that
    agency meet with me, as well as with the U.S. Marshals Service,
    and Mr. Duff, if you're available----
        Mr. Duff. Yes, sir.
        Senator Durbin [continuing]. I'm going to invite Senator
    Byrd, who is chair of that Subcommittee on Homeland Security,
    and the ranking members of this committee and that, as well, to
    come to my office and have a conversation about the situation.
    I am inclined, at this point, to try to devise a way to
    transfer the money out of the Federal Protective Service into
    the Marshals Service and be done with it, but I want to hear
    their side of the story and see if there is something which can
    be done or something in transition which makes sense.

                               SECURITY OF JUDGES

        If I could ask one other question on security, one of the
    things we've tried to do is make the homes of the members of
    the judiciary safer as a result of our continued concerns. Can
    either of you comment on whether or not that effort has shown
    any results?
        Judge Gibbons. Over 1,400 security systems have been
    installed in judges' homes and there are 200 security systems
    left to be installed. Money is available to continue to monitor
    those systems and to install systems for new judges who are
    appointed. The remainder of the judges, either for one reason
    or another, did not want systems, or many of them, doubtless,
    had previously purchased their own.
        Senator Durbin. There was also a concern about financial
    disclosure statements.
        Mr. Duff. Yes.
        Senator Durbin. About information that judges were required
    to disclose which may compromise their safety.
        Mr. Duff. Yes, sir.
        Senator Durbin. And we have been in the midst of that
    battle. And I don't think it's been resolved in Congress, as it
    should have been, as of today. Could you comment on that?
        Mr. Duff. Yes, Mr. Chairman. And first let me thank you
    personally for your leadership on these security issues. It's
    very much appreciated, and we're grateful for the support
    you've given.
        On the financial disclosure redaction authority, the
    authority to redact information on financial disclosure reports
    had a life cycle, if you will, and it expired. And so, we need
    an extension of that authority from Congress, which, frankly,
    we had hoped would have been done in the last Congress, but did
    not get completed. And so, we're working very hard with both
    the Senate and the House to----
        Senator Durbin. I promise you, we'll return to that. That's
    something that should have been done, there shouldn't have been
    a question.
        Senator Allard.
        Senator Allard. Thank you, Mr. Chairman.
        We had--I want to follow up on your security question a
    little bit. A USA Today article--and it's a recent article--
    reported about a U.S. Marshals Service official who allegedly
    misspent $4.3 million meant for courthouse security and witness
    protection, to pay for fitness centers and firing ranges at
    Federal buildings. My question is, were these funds that had
    been appropriated to the judiciary through the court security
    appropriation and transferred to the Marshals Service?
        Judge Gibbons. Our information is that they were not funds
    appropriated to the judiciary.
        Senator Allard. I see.
        Judge Gibbons. The funding in question was appropriated
    directly to the Department of Justice.

                      FEDERAL PROTECTIVE SERVICE SECURITY

        Senator Allard Okay. And, on the FPS issue, the chairman
    suggested moving those duties over to the Marshals Service. I
    hope that you would also look at the possibility of privatizing
    this. Private security firms already guard a vast majority of
    Federal buildings and--to improve efficiency without
    sacrificing security--and I'd like to hear some of your
    thoughts on privatizing security of the Federal courthouses.
        Judge Gibbons. Well, statutorily, the Marshals Service, has
    responsibility for the security at Federal courthouses. They do
    contract, to a limited extent, for the services of court
    security officers. And I don't know what firm is currently
    being used, but there is a private firm being used.
        The court security officers perform functions where it's
    deemed appropriate for a lesser degree of security. Many of
    them are retired law enforcement. They man the equipment at the
    doors of the Federal buildings. They patrol the interior
    hallways. They provide in-courtroom security when the case is
    considered low security enough not to require the services of a
    marshal. The marshals do continue to handle all of the
    transporting of prisoners and defendants being held in custody.
    The Marshals Service also contracts for the housing of the
    prisoners, in some cases, in private facilities.
        Senator Allard. But, no matter what--I mean, if we were to
    change the agency or decide to do more privatization, there's
    going to be--have to require a change in the law, is that it?
        Judge Gibbons. Well, I think--you know, I----
        Senator Allard. Potentially. We just have to look at that.
    You can put it that way.
        Judge Gibbons. We'd have to look at it. I think so, but I
    did not look at the statute in preparation for this hearing.
        Senator Allard. Okay. Well, we might have a little
    different perspective on that. But at least I think we need to
    look at all options on that.
        [The information follows:]

        The Administrative Office of the U.S. Courts believes that a
    statutory change would be the best course of action in order for the
    U.S. Marshals Service to assume security functions at court facilities
    that are currently being performed by the Federal Protective Service.

                WORKING WITH THE GENERAL SERVICES ADMINISTRATION

        Senator Allard. Also, in your testimony, I was pleased to
    hear that you're working together with the GSA. And there's
    some questions. Has this affected judges to the point where
    there's--you had to cut staff and resources with this issue
    because they were taking so much for rent?
        Judge Gibbons. From time to time we have had real concerns
    about maintaining staff to pay the rent. And at times we have
    had to cut staff because we did have to pay the rent and other
    must pay expenses. That particularly happened to us in fiscal
    year 2004, largely as a result of an across-the-board cut.
    Since that time, we have worked really hard on containing our
    rent costs, and we have a lot going on in that area. We are
    very hopeful that we will not have to compromise staffing again
    to pay the rent.
        Senator Allard. And a follow-up, there's--I assume it's had
    some impact on whether you construct new Federal courthouses.
        Judge Gibbons. Well, yes. The Judicial Conference adopted a
    cap on rent of an average of 4.9 percent increase per year, and
    the effect that that has on the building of Federal courthouses
    is that we now must take into account the fact that we're going
    to have to pay rent for these facilities in the future. So,
    that is a much greater part of our planning process than it was
    previously.
        Senator Allard. So, how's your dollars going to go further?
    I mean, some agencies saying that it's better to rent, contract
    out, some say it's better to just go build your own facility.
    So, from what point of view are you looking at this, or are you
    looking at sort of a mixed view?
        Judge Gibbons. I think a mixed view. Jim may want to
    address that further.
        Mr. Duff. It is a mixed view. But I would emphasize--re-
    emphasize that the judiciary is taking very seriously cost
    containment and projections of rent, going forward. And
    imposing these rent caps on ourselves internally, on our own,
    is, we hope, a demonstration of our good-faith efforts to hold
    down, as best we can, our rent costs. And that does have an
    impact on courthouse construction. It keeps us on a reasonable
    pace for rent increases.
        I, frankly, had a hard time understanding the whole concept
    of rent when I became Director of the AO. It just seemed very
    odd to me that we would be paying rent for our own buildings.
    But I think that is--it's a reality that we work with GSA on.
    And we have a long way to go with GSA, but, as I said earlier,
    I'm very pleased with the tone of the dialogue, and we're going
    to work hard together to try to come up with solutions to these
    problems, rather than throwing the problems in your lap.
        Senator Allard. That's good news.
        Thank you, Mr. Chairman.
        Senator Durbin. Thank you, Senator.

                          PANEL ATTORNEY RATE INCREASE

        Let me address this issue about the pay increases for panel
    attorneys. The recommendation, as I understand it, for
    noncapital cases, is to increase the rate to $113 per hour for
    the next fiscal year. And I've read a little bit here in your
    testimony, and a little bit of history here, that indicates
    that part of this has to do with the fact that--we're familiar
    with this, as Members of Congress--part of it has to do with
    the fact that there were years where there were no increases;
    and so, there was no effort for--or there was, in effect, no
    cost-of-living adjustment for the rate that was paid. And now,
    the suggested increase would move, I think, from $94 to $113,
    which, by my quick calculations in my head, is somewhere a
    little over 20 percent increase.
        First, let me ask you about these attorneys, these panel
    attorneys in noncapital cases. What kind of requirements are
    there for these attorneys to serve on those panels?
        Judge Gibbons. Well, districts set their own requirements,
    but generally the requirements are geared to making sure that
    attorneys who are members of the panel are competent to
    represent defendants in the sort of cases we have in Federal
    court. So, for example, a court might decide not to put a
    brand-new attorney on the panel until the attorney has gained
    some experience, perhaps being mentored by another attorney, or
    if an attorney fails to perform well, is not conscientious
    about representing the client, then the court might not want to
    appoint that attorney anymore. So, there's no standardized set
    of qualifications, but courts do take steps to make sure these
    are people who have the skills and experience to effectively
    represent defendants in Federal court.
        Senator Durbin. And one of the things that you refer to in
    your testimony is a statistical survey of attorneys. And can
    you tell me what your conclusions were from that survey?
        Judge Gibbons. Well, the surveys showed us that over 50
    percent of judges thought that their courts were having
    difficulties in recruiting attorneys at the then-hourly rate of
    $90. Thirty-eight percent of the attorneys surveyed said they
    had declined a case because of the low rate of compensation; 70
    percent of the attorneys said an increase would be required for
    them to accept more cases; and then, most importantly, we
    learned that, after overhead deductions, the attorneys are
    actually making about $26 an hour. These same attorneys, if
    billing to a private-paying client, would be charging an
    average of $212 an hour. This was in early 2005, when the
    surveys were done. And so, then, after deduction of overhead,
    the effective rate for the attorney would be $148 an hour.
    Those are the primary results of the survey. I've been told by
    the helpful staff behind me that panel attorneys, on average,
    have at least 5 years experience.
        Senator Durbin. Now, let me ask you about the universe of
    those who were surveyed. Are they those who had previously
    served on panels?
        Judge Gibbons. Yes, they were serving on the panel at the
    time the survey was done.
        Senator Durbin. And do you know how this $113-an-hour rate
    was arrived at?
        Judge Gibbons. Well, yes.
        It's one of those judgment calls. We believe----
        Senator Durbin. Since you're a judge, that makes sense.
        Judge Gibbons. That seems appropriate. There's a
    methodology under which we believe calculating inflationary
    increases that actually we would be entitled to--we could make
    a case, we thought, for asking up to, I believe it's $133 an
    hour for fiscal year 2008. However, we felt that, given current
    budgetary constraints, and given the fact that we were asking
    for a fairly large jump at one time, we felt that $113 was an
    appropriate rate to request.
        Senator Durbin. Is the current rate inadequate to attract
    qualified panel attorneys?
        Judge Gibbons. In some cases, yes.
        Senator Durbin. Thank you.
        Senator Allard.

                            FISCAL YEAR 2008 REQUEST

        Senator Allard. Thank you, Mr. Chairman.
        In the fiscal year 2007 appropriations, they were not
    enacted until February 15, but you'd been working on your 2008
    budget long before that. So, I'm curious, in developing that
    2008 request, what funding levels did the judiciary assume for
    2007?
        Judge Gibbons. In formulating the 2008 request, we assumed
    that we would receive the midpoint of the House-passed and
    Senate-reported bills, less 1 percent for an across-the-board
    rescission. What we actually got was $44 million less than
    that.
        Senator Allard. I see. Okay. And what impact did the 2007
    enacted level have on the judiciary's 2008 request?
        Judge Gibbons. Well, we made adjustments to our fiscal year
    2008 request based on 2007 enacted levels. In the normal course
    of things, we would be providing a formal budget re-estimate to
    you in May. We have gone ahead and revised the 2008 request
    downward by $80 million. And what's changed since its original
    submission is $37 million in reduced rental costs as a result
    of the rent validation efforts. Some judgeship vacancies were
    not filled that we had assumed would be filled. That reduced
    our 2008 request by $23 million. The $20 million we got in 2007
    for additional staff for our immigration and law enforcement
    workload, actually enabled us to take out of the 2008 request
    the $21 million we requested for new staff. And the reason for
    that is the $20 million translates to about 200 employees, and,
    because of the nature of the employees we're hiring, we can't
    bring that many employees onboard that quickly. So, we asked
    for no new staffing for 2008, and plan to revisit our staffing
    needs, as far as any upward adjustment, in 2009.

    GENERAL SERVICES ADMINISTRATION CONSTRUCTION PROJECTS FOR THE JUDICIARY

        Senator Allard. Well, thank you, I appreciate your answer
    on that.
        GSA recently sent us a list of projects, including
    courthouses that it proposes to fund in 2007. Does this list
    represent the judiciary's priorities?
        Judge Gibbons. Yes, it reflects our 5-year construction
    plan.
        Senator Allard. And I'm curious, could you explain the
    process for scoring and ranking a project and determining the
    cost?
        Judge Gibbons. Well, the court--the projects that are
    listed on the 5-year plan are scored in priority order on the
    basis of criteria that are weighted, in terms of importance.
    Security concerns count for 30 percent; length of time a
    building has been filled to capacity, 30 percent; operational
    problems of existing facilities, 25 percent; number of current
    and projected judges needing a courtroom, 15 percent. As far as
    costs are concerned, we use estimates. When we have an estimate
    from GSA, we use that. Until we have an estimate from GSA, we
    use our own estimates. And I think that, in very broad terms,
    describes the process.
        Senator Allard. Now, sometimes these changes that occur, I
    understand from--there are some changes that occur from year to
    year. Why does that happen?
        Judge Gibbons. Well, delays cost money.
        Senator Allard. I see.
        Judge Gibbons. Sometimes things don't turn out quite as
    intended. I looked this morning at the 5-year plan, and
    learned, for example, there was one project where initially GSA
    intended to use federally owned property. Later, that property
    didn't become available, and so another site acquisition was
    required. All kinds of things that can come up in the course of
    a construction project.
        Senator Allard. I see.
        Mr. Chairman, my time's expired. I have--I'd like to follow
    up on this, and that would complete my questioning, if I might.
        Senator Durbin. Go ahead.

                            COLORADO DISTRICT COURT

        Senator Allard. In Colorado, we're hearing about the need
    for two district courts. I mean, we've got--one district court
    covers the whole State. We look at Arkansas. They have two
    districts in that State, and they don't have a mountain range
    that runs up and down and divides the State into two distinct
    geographic areas with problems in transportation, particularly
    when we've had a winter like we've had this winter. And we also
    have two population centers. The population center in El Paso
    County, which is Colorado Springs, is as big as the Denver--the
    city and county of Denver now; and we have huge growth issues,
    as far as the State is concerned, 30 percent. And they're not
    listed on the priority. And I know that when you create a new
    district, you create a new courthouse. And I wondered if you
    might comment on our situation in Colorado. We've got some
    opposition, I think, from the judges that are sitting on the
    court in Denver, because they like it there, it's a nice, big
    metropolitan area. In Colorado Springs, we--from law
    enforcement, we hear a lot of concerns because of having to
    move prisoners, when there's traffic concerns and problems and
    security issues, and then, over the mountain, obviously, the
    truck goes on the pass, gets turned sideways on the road in
    some way, that creates a problem.
        Judge Gibbons. You know, unless Jim feels that he has
    enough information to speak to Colorado directly, if we may, I
    would prefer that we get back to you about that.
        Senator Allard. I would appreciate that.
        Judge Gibbons. I, obviously, in order to advocate the
    judiciary's budget, have to know something about construction
    and how those are processed, but the primary committee within
    the judiciary that deals with those issues is our Space and
    Facilities Committee. A representative from that committee,
    either in talking with you directly or in providing a
    supplemental answer to the question, would be able to tell you
    in much more detail how this would be approached, whether
    anything is actually going on with respect to the Colorado
    situation, at this time----
        Senator Allard. I'd appreciate that. Thank you very much.
        And thank you, Mr. Chairman, for your indulgence.
        Senator Durbin. Thank you, Senator.
        [The information follows:]

        The Judicial Conference does not take a position on the
    creation of a new judicial district unless legislation has been
    introduced in Congress. The Judiciary is not aware of any
    legislation that has been introduced in the current or previous
    Congresses to create a second judicial district in Colorado.
    When legislation is introduced that creates a new district or a
    new division within an existing district, the Judicial
    Conference sends the legislation to the chief judge(s) of the
    affected district(s) and circuit(s) to evaluate the merits of
    the legislative proposal based on caseload, judicial
    administration, geographical, and community-convenience
    factors. During this evaluation, the views of the affected U.S.
    Attorney(s) are also considered. Only when the legislative
    proposal has been approved by both the affected district
    court(s) and the appropriate circuit judicial council(s) does
    the Judicial Conference's Committee on Court Administration and
    Case Management review the proposal and recommend action to the
    Judicial Conference.
        Since legislation has not been introduced, the Judicial
    Conference has not taken a position on splitting the District
    of Colorado, although the district court in Colorado does not
    believe that splitting the district would be cost effective.
    Doing so would require a new courthouse, clerk of court,
    bankruptcy court, and probation and pretrial services office. A
    new district would also significantly impact the U.S. Marshals
    Service. The federal court caseload in Colorado Springs does
    not support either a second district for Colorado or the
    creation of a separate division within the current district.
    From fiscal year 2004 to fiscal year 2006 criminal felony
    filings for Colorado Springs/Pueblo declined 29 percent from 95
    to 67 filings. Criminal misdemeanor filings handled by a
    magistrate judge declined by 46 percent, from 307 filings in
    fiscal year 2004 to 167 filings in fiscal year 2006. Also, the
    district's probation office is currently reducing its officers
    in Colorado Springs due to declining caseload.
        Colorado Springs, county seat for El Paso County is
    approximately 65 miles from Denver on Interstate 25, a
    significant part of which is now three lanes each way. El Paso
    County is served weekly by a magistrate judge to handle petty
    offense and misdemeanor matters generated at the numerous
    military installations in the area (Public Law 108-482, enacted
    on Dec. 23, 2004, amended Section 85 of title 28, to include
    Colorado Springs as a place of holding court). The district
    recognizes and is addressing the need for enhanced magistrate
    judges presence in Colorado Springs to address civil matters
    there.
        The district court in Colorado is not supportive of a
    separate district or division based upon the above cost-versus-
    need considerations. The district's long-range plan approved by
    the circuit council is now complete with the construction of
    the Alfred A. Arraj U.S. Courthouse and the Byron Rogers
    Federal Building and U.S. Courthouse in Denver.

                              THE COURTS' CASELOAD

        Senator Allard. I'd like to address this caseload issue, if
    I might. And the statistics which you have referred to when it
    comes to staffing indicates a pretty substantial increase in
    aggregate caseload--195 percent, in fact--between 1984 fiscal
    year and fiscal year 2006. And yet, in all of the categories of
    anticipated filings in this fiscal year, with perhaps one
    exception--appellate filings, civil filings, criminal filings,
    and bankruptcy filings--you are anticipating a decline in
    caseload, the exception being the Southwest area, where
    caseloads have gone up dramatically on immigration questions. I
    can see the case you're making for an increased caseload up to
    2006, while staffing resources have barely increased. Tell me,
    as you look forward to 2007, if the argument can't be made that
    things are starting to level off, in terms of caseload.
        Judge Gibbons. Well, maybe. The reason we included, in the
    written testimony, the historical chart that goes back to 1984
    was to give an illustration of how, although caseload
    fluctuates, maybe goes up and down in the short term, over time
    it has trended upward. And that's really just to give you a
    context within which to consider the current rather modest
    declines.
        Another thing to keep in mind is, these are projections,
    and so we're always a little bit careful about how we use them.
    I asked, yesterday, ``How do we project what our filings are?''
    Well, the answer is, ``We take our actual filings for 1 year,
    and we run them through various statistical forecasting models
    and get, you know, a 3-year projection.'' I said, ``How
    accurate are they?'' And they said, ``Well, first year, pretty
    good; second year, a little less so; third year, a little less
    so.''
        So, we don't really know what to make of these modest
    declines in appellate and district court caseload. We also
    don't quite know yet exactly what to make of the situation in
    bankruptcy. It's obvious there's a real drastic decline in
    cases, but that may not translate into a drastic decline in
    workload, given the requirements of the new law. And then, of
    course, we have upward trends in workload, still, in probation
    and pretrial. So, maybe it's the beginning of some overall
    trend, but maybe not. I think we'd be hesitant to attach too
    much future importance to it.

                        PROBATION AND PRETRIAL SERVICES

        Senator Durbin. And I want to go to the one point you just
    made. I think the case you make on probation and pretrial
    services is very compelling, the nature of the work that's
    being done there, and the importance. It appears that the rate
    of incarceration has dramatically increased for those who are
    being served by that part of our system. And, of course, their
    success can reduce recidivism, which is an added cost to
    society, first; and taxpayers, second. So, when it comes to the
    allocation of staff, let's say, for the probation services,
    where's that decision made?
        Judge Gibbons. Well, we have various work measurement
    formulas which are our ways of measuring the work. And those
    are the--those, plus some adjustments for--for example, we done
    a 2-percent productivity assumption--but those are--figure in
    to what our budget request is. Then, after we receive our
    request, we have the ability to make some ad hoc adjustments,
    depending on, you know, if we've had, say, since the time of
    the submission of the request, or since the time of our last
    re-estimate, we've had substantial increases in an area, we'll
    take that into account and make adjustments in the financial
    plan, which comes back to you for approval and review, and then
    in the allotments to the courts.
        [The information follows:]

        The Judiciary has work measurement formulas that it uses to
    measure the courts' work in order to determine staffing needs.
    The allocation of staff and the associated funding is based on
    each court units' workload as well as resources available for
    the courts on a national level. Once Congress provides an
    appropriation, the Judiciary makes a determination on how best
    to utilize the funding to cover rent costs, information
    technology investments, judge and chamber needs, and staffing
    needs in clerks and probation offices nationwide. The bulk of
    the Judiciary's costs are for must-pay items over which it has
    little control. The remaining funds are used for court staffing
    and operating costs. Workload in a specific court or probation
    office is the primary cost driver of how staffing allocations
    are made to each court unit, although funding constraints
    necessitate that funding for staff be reduced well below the
    staffing levels indicated as necessary by the staffing
    formulas.

                   ADAM WALSH CHILD PROTECTION AND SAFETY ACT

        Senator Durbin. And you make a point here in your testimony
    about recent legislation, the Adam Walsh Child Protection and
    Safety Act of 2006, which will increase, significantly, the
    number of sex offenders coming into the Federal probation and
    pretrial system for supervision; and monitoring their behavior,
    you say, is very challenging, requires intense supervision. I
    will say, and I'm sure it comes as no surprise, that I'm not
    sure that any Member of Congress even paused to think about
    that part of the law. We were--obviously felt that we were
    answering a need to keep our streets safer and our children
    safer, but never stopping to think what that meant in terms of
    additional people working in this area. And for those who
    believe that you can just consistently cut back in the number
    of people who are working in the Federal Government, they have
    to understand that sometimes we pay a price that we don't want
    to pay. Having people who are effective in this area could
    protect a lot of children and a lot of families.
        Judge Gibbons. I looked at that statute yesterday, and was
    really quite surprised at the very specific kinds of ways in
    which it's going to affect probation and pretrial: Longer
    periods of supervised release, notification requirements,
    searches of homes of offenders, required electronic monitoring,
    in some cases, for pretrial releasees, more stringent Bail
    Reform Act requirements resulting in more detainees--I mean,
    it's broad and has an impact in many different ways.
        Senator Durbin. And each and every aspect of it is
    defensible and laudable, and yet, from a practical standpoint,
    it puts a greater burden on the courts, and one that is more
    costly to the taxpayers. It is something which we should be
    more honest about when we talk about these things here in
    Washington.

                        REPORTING ON IMPACTS AND RESULTS

        The judiciary routinely reports statistical information,
    but doesn't necessarily take it to the next level by providing
    the impact or results of the data. For example, Congress
    mandated, in 1988, that district courts make alternative
    dispute resolution available to litigants, but there hasn't
    been a report of accomplishment about which methods of
    alternative dispute resolution are more likely to settle cases
    and avoid a trial. Would you consider reporting on the impact
    of the way the judiciary does its work, beyond simple
    statistical reporting?
        Judge Gibbons. I gather you're asking for a report, beyond
    an answer to your question today.
        Senator Durbin. Yes.
        Judge Gibbons. We will report on whatever Congress asks us
    to report on, Mr. Chairman.
        Senator Durbin. Thank you.
        Well, this is one of those congressional mandates which we
    think is a very compelling thing and is usually ignored by many
    agencies. So, I hope that you'll take a second look at it and
    see if you might report to Congress on which methods are most
    successful.
        Judge Gibbons. I will just make one very general comment. I
    was a district judge for 19 years before becoming an appellate
    judge, and had a number of experiences with a number of
    different kinds of alternative dispute resolution in the
    district court. And there are a number of them that are very
    effective. And most courts are quite enthusiastic about
    implementing them.
        [The information follows:]

        Staff at the Administrative Office of the U.S. Courts will have
    further discussions with Subcommittee staff regarding a report on which
    methods of alternative dispute resolution are most effective.

        Senator Durbin. Thank you very much.
        I want to apologize to you and to Mr. Duff, and to all
    present, for coming in late. That's something that I think is
    disrespectful, and feel very badly about that. But I thank you
    for your patience, and especially for your testimony.

                         ADDITIONAL COMMITTEE QUESTIONS

        And we will leave the record open for those who might
    submit additional questions for you to consider.
        I appreciate the benefit of hearing from you about your
    funding needs for the judiciary. I think we have further
    insights into your operations, and they'll help us in our
    deliberations.
        As I have mentioned, the hearing record will remain open
    for a period of 1 week, until Wednesday, March 28, at noon, for
    subcommittee members to submit statements and/or questions for
    the record.
        [The following questions were not asked at the hearing, but
    were submitted to the judiciary for response subsequent to the
    hearing:]
                Questions Submitted by Senator Richard J. Durbin
        Question. The Judiciary received an additional $20 million in the
    fiscal year 2007 continuing resolution to address critically
    understaffed workload associated with immigration and other law
    enforcement needs. The funding was provided because the caseload at the
    Southwest Border courts has reached critical levels, in part, due to
    forced staffing reductions a few years ago. How do you plan to use
    these resources?
        Answer. The $20 million will enable courts that are critically
    understaffed to hire about 200 staff to address increased workload
    needs resulting from immigration and law enforcement initiatives as
    well as other workload drivers.
        The Judiciary's fiscal year 2007 financial plan allots a net
    additional $5.7 million in salary funding based on the workload needs
    of the courts as determined by the staffing formulas. Of this amount,
    $3.3 million (58 percent) was allotted to the five Southwest Border
    courts to address workload needs. This $3.3 million equates to
    approximately 65 FTE. The remaining $2.4 million (42 percent) was
    provided to the remaining appellate and district courts and probation
    and pretrial services offices to address workload needs.
        Since the Judiciary was operating under a continuing resolution
    until February 15, 2007, courts were instructed to operate at fiscal
    year 2006 funding levels and to restrict discretionary spending. This
    meant that only courts that had attrition during the continuing
    resolution were allowed to hire. Some courts conducted preliminary
    recruitment activities during this time and are ready to fill vacancies
    quickly, while other units have delayed the entire hiring process until
    final 2007 funding levels were known.
        Given the lead time it takes to recruit and hire, all $20 million
    cannot be obligated during fiscal year 2007. We have therefore set
    aside in reserve the remaining $14.3 million (the $20 million less $5.7
    million for new staff in the 2007 plan) so that funding will be
    available in fiscal year 2008 for courts to continue to fill these
    positions.
        Question. The Judiciary's revised fiscal year 2008 budget request
    this year calls for a 7.6 percent increase, an amount likely to be more
    than the Subcommittee will be able to provide. What are you doing to
    make yourself more efficient in order to accommodate lower resource
    levels?
        Answer. While the Judiciary requires a 7.6 percent overall increase
    to fund fully its request, it requires a 6.5 percent increase just to
    maintain a current services level of operations.
    Actions That Reduced Fiscal Year 2008 Appropriations Requirements
        The Judiciary has taken several actions to become more efficient
    and to limit fiscal year 2008 appropriations requirements in the
    Salaries and Expenses account. These actions reduced the fiscal year
    2008 appropriation requirements for the Salaries and Expenses account
    by $80 million. These actions include:
      --Applying a productivity factor to the staffing formulas to reflect
            the enhanced productivity achieved through the use of improved
            business processes and the use of technology (-$15 million,
            -199 FTE).
      --Implementing cost containment initiatives in probation and pretrial
            services offices (-$28 million, -322 FTE).
      --Reviewing and validating GSA rent bills to ensure that GSA is
            applying its space pricing policies accurately ($37 million).
    Space Initiatives
        The Judicial Conference continues to build on its cost-containment
    strategy that was adopted in September 2004. The Judiciary is
    establishing budget caps in selected program areas in the form of
    maximum percentage increases for annual program growth. For our space
    and facilities program, the Judicial Conference approved in September
    2006 a cap of 4.9 percent on the average annual rate of growth for GSA
    rent requirements for fiscal years 2009 through 2016. By comparison,
    the increase in GSA rent in our fiscal year 2005 budget request was 6.6
    percent. This cap will produce a GSA rent cost avoidance by limiting
    the annual amount of funding available for space rental costs, and
    courts will have to further prioritize space needs and deny some
    requests for additional space.
        An interim budget check process on all pending space requests was
    implemented in order to slow space growth. The budget check ensures
    that circuit judicial councils, together with the Administrative
    Office, consider alternative space, future rent implications, and the
    affordability of any request by the Judiciary. This approach is helping
    to control the growth in costs associated with space rent for new
    courthouses and major renovations.
        The Judiciary completed a comprehensive review of the U.S. Courts
    Design Guide. In March 2006, the Judicial Conference endorsed revisions
    to the U.S. Courts Design Guide that lower the future rental costs of
    chambers space by reducing the size of the judge's office in non-
    residential chambers and chambers' conference rooms, and reducing the
    number of book shelving ranges and chambers' closets. The standards of
    the revised Design Guide will apply to the design and construction of
    new buildings and annexes, all new leased space, and repair and
    alteration projects where new space, including courtrooms and chambers,
    is being configured for an entire court unit.
        The Judiciary's rent validation project has achieved significant
    savings. This initiative originated in our New York courts where staff
    spent months scrutinizing GSA rent bills and found rent overcharges.
    The cumulative effect of this discovery was savings and cost avoidance
    over three fiscal years totaling $30 million. The Administrative Office
    expanded this effort nationwide by training all circuit executive
    offices to research and detect errors in GSA rent billings. Although it
    is quite time consuming, detailed reviews of GSA rent billings are now
    a standard business practice throughout the courts. Through the rent
    validation effort the Judiciary recently identified additional
    overcharges totaling $22.5 million in savings and cost avoidance over
    three years. GSA has been very responsive to correcting billing errors
    that we bring to their attention. By identifying and correcting space
    rent overcharges we are able to re-direct these savings to other
    Judiciary requirements, thereby reducing our request for appropriated
    funds.
    Information Technology Initiatives
        The Judiciary is at the forefront of the federal government's
    efforts to leverage the use of information technology to automate
    business processes and maximize efficiency. For example, the
    Judiciary's Case Management/Electronic Case Filing (CM/ECF) project
    automates the paper intensive case filing process. The Judiciary's CM/
    ECF system is operational in all bankruptcy courts, 92 district courts,
    one appellate court, the Court of International Trade and the Court of
    Federal Claims. Implementation is underway in all remaining courts. The
    Judiciary anticipates long-term efficiencies will be achieved as a
    result of the CM/ECF implementation. This benefits not only the
    Judiciary, but also the bar and public who will have greater access to
    court information.
        At least 80 percent of all bankruptcy cases are being filed
    electronically by attorneys in about 80 percent of the bankruptcy
    courts, and in many bankruptcy courts nearly all of the cases are being
    filed electronically. In addition, the courts have been enhancing
    efficiency through a combination of local management initiatives and
    court-developed automation innovations. For years, the bankruptcy
    clerks have been adopting new management techniques, developing and
    sharing best practices, and using the flexibility provided under the
    Judiciary's budget decentralization program to invest in automation
    solutions that save resources as well as improve quality and
    performance.
        In our probation and pretrial services program, the Probation
    Automated Case Tracking System (PACTS) electronic case management
    system makes probation and pretrial services officers more efficient by
    enabling them to access from their workstations a wide range of case-
    related information. In fiscal year 2007, the Judiciary will complete
    consolidation of PACTS servers from all 94 districts into two
    contractor-owned and operated facilities. The consolidation will help
    the Judiciary avoid $3 million in costs over the next five years, with
    no degradation in service. Further, consolidating servers provides two
    levels of fail-over capabilities, a feature that did not exist in the
    old decentralized system of district-based servers, thereby providing
    extraordinary value in terms of continuity of operations planning.
    Probation and pretrial services offices continue to automate segments
    of their business processes to improve service to the court, other law
    enforcement and criminal justice agencies, and the community.
    Enhancements to the PACTS will continue in fiscal year 2008 to help
    offices manage cases more efficiently.
        Question. The fiscal year 2008 request for Defenders represents an
    $84 million or 11 percent increase over last year and the fiscal year
    2007 appropriation level helped address the needs of Defenders. Why is
    this level of increase still needed?
        Answer. In fiscal year 2008, the requested $83.6 million increase
    in appropriations consists of the following categories:

    ----------------------------------------------------------------------------------------------------------------
                                                                         Amount of        Percent       Percent of
                                                                      Total Increase     Increase     Total Increase
    ----------------------------------------------------------------------------------------------------------------
    Pay/benefit adjustments and standard inflationary increases.....     $29,685,000             3.8            35.5
    Additional 8,200 representations................................      21,960,000             2.8            26.3
    Replace fiscal year 2006 carryforward...........................       9,509,000             1.2            11.4
                                                                     -----------------------------------------------
          Subtotal, Adjustments to Base.............................      61,154,000             7.9            73.2
                                                                     ===============================================
    Increase in panel attorney rates from $96 to $113 per hour......      21,797,000             2.8            26.1
    Establishment of two new FDOs...................................         600,000             0.1             0.7
                                                                     -----------------------------------------------
          Subtotal, Program Increases...............................      22,397,000             2.9            26.8
                                                                     ===============================================
          Total Increase............................................      83,551,000            10.8           100.0
    ----------------------------------------------------------------------------------------------------------------

        Although the Defender Services' fiscal year 2008 request of $859.8
    million represents an $83.6 million (10.8 percent) increase in
    appropriations, a $61.2 million (7.9 percent) increase is required in
    this account just to maintain current services which includes funding
    for standard pay and non-pay inflationary increases and funding for
    8,200 additional Criminal Justice Act representations projected for
    fiscal year 2008. The remaining $22.4 million (2.9 percent) is
    requested for program increases to (1) increase the non-capital panel
    attorney rate from $96 to $113 per hour ($21.8 million)--substantially
    less than the $133 hourly rate panel attorneys would receive had COLAs
    been funded every year since 1986; and (2) establish two new federal
    defender organizations ($0.6 million).
        Question. The Judiciary has commented in recent years on the
    inadequacy of court staffing levels, given the courts' workload growth
    over the last several years. In applying budget balancing reductions
    each year, what priority does the Judiciary give to funding court staff
    salaries versus other program priorities (information technology, space
    rent, operating costs, etc.)?
        Answer. The Salaries and Expenses (S&E) financial plan is divided
    into four main categories: (1) mandatory, (2) historically fully
    funded, (3) short-term uncontrollable, and (4) controllable. The first
    three spending categories are funded fully in the development of the
    financial plan. For formulation and long-range planning purposes, all
    funding categories are subject to scrutiny and cost-containment
    initiatives.
        The first three categories include funding for judges and chambers
    staff salaries and benefits, court staff benefits, funding for law
    enforcement activities and contracts including drug testing and
    treatment, mental health treatment and electronic monitoring, law
    books, GSA space rental, background investigations, law enforcement
    training, and long distance telephone charges.
        All budget balancing reductions are applied to the fourth spending
    category, the controllable portion of the budget which includes items
    such as court staff salaries, court operating expenses, information
    technology, and national training programs. Budget balancing-reductions
    reflect the views, input, and in some instances, specific
    recommendations from various Judicial Conference committees and court
    advisory groups. Once funds are allotted to the courts, funding
    priorities are determined at the local level in accordance with the
    Judiciary's budget decentralization policies.
        Court salaries comprise about 32 percent of the Salaries and
    Expenses total budget and over 80 percent of the controllable spending
    category. The formulas used to calculate staffing and salary needs are
    scientifically-derived and incorporate the functions and work
    requirements of the different court programs. Of the controllable
    items, court staff salaries receive the highest priority.
        To balance requirements with available resources, the Judiciary has
    traditionally applied a lower percentage reduction to court salary
    allotments. In years in which the Judiciary has received severe funding
    reductions, the percent reduction applied to the non-salary accounts
    has been up to three times the reduction applied to court salaries. The
    fiscal year 2007 financial plan reflects a 5.9 percent reduction to
    court salary allotments, and a 12 percent reduction to court operating
    expenses from full requirements.
        Question. In studying how you formulate your budget, the National
    Academy of Public Administration (NAPA) recently recommended that you
    work with Executive Branch agencies such as Justice and Homeland
    Security more closely to determine the impact of their operations on
    the Judiciary. This would appear to be a good idea and might have
    helped you last year when the Administration did not include needs for
    the Judiciary in its Southwest Border Initiative package for
    consideration in the fiscal year 2006 Supplemental Appropriations bill
    last year. What is your opinion on this recommendation?
        Answer. The Judiciary has received a draft copy of the study and is
    in the process of preparing agency comments. Comments will be provided
    to NAPA for its consideration in finalizing the report.
        Page 37 of the draft NAPA report states the following:

        ``A strategic, comprehensive approach to budgeting is further
    hampered by the constitutional separation of powers between the
    judicial and executive branches. The absence of communication or
    integrated deliberations about budgets for all parts of the justice
    system make it more likely that budgets for the executive and judicial
    branches will not address reciprocal workload implications. Such
    disconnects can reduce the overall effectiveness of the justice system
    and can, in extreme cases, produce bottlenecks or disruptions that
    threaten the fair and full administration of justice. The Panel
    realizes that this is something over which the Judiciary has no
    control. It is not a practice within OMB or among congressional
    appropriations committees to ensure that actions in one part of the
    federal budget do not have an impact on another. Assembling and
    considering a federal budget is complex and can consume those involved
    with broad issues and program details; it is enough to deal with their
    portion of it. However, as the entity at the final end of the `decision
    continuum,' the Judiciary may have the most incentive to urge the
    branches to consider better ways to assess the impact of the proposed
    policies and spending decisions.''

        As the excerpt above notes, the Judiciary is at the tail end of the
    ``decision continuum.'' Although the draft report indicates the
    Judiciary may have the most to gain in urging the three branches to
    work cooperatively to assess the impact of polices and spending
    decisions on the other, the Judiciary is powerless to effect change
    unilaterally. The Judiciary welcomes opportunities to work more closely
    with Executive Branch agencies on policies and initiatives that impact
    the federal courts.
        Question. Strategic planning has become a valuable tool to
    Executive Branch agencies as they plan for the future. Why doesn't the
    Judiciary use strategic planning?
        Answer. The Judicial Branch has engaged in strategic planning for
    many years. The Judiciary's role in our constitutional system and its
    unique governance structure necessitate different planning approaches
    than used in the Executive Branch, but its planning efforts are
    nonetheless serious and meaningful. Indeed, the Judiciary has
    successfully incorporated strategic planning into the fabric of its
    policy-making processes.
        The Judiciary developed two strategic planning documents in the
    1990's that remain valid. They are supplemented, as described below,
    with ongoing long-range planning activities that identify and address
    emerging strategic issues. The plans followed an extensive process that
    involved reaching out within the Judiciary and to other branches of
    government, the bar, and the public. Chief Justice William H. Rehnquist
    appointed a Long-Range Planning Committee of the Judicial Conference to
    coordinate this activity. The resulting Long-Range Plan for the Federal
    Courts identified the Judiciary's mission, core values and strategic
    concerns. It articulated a vision to guide the federal courts in
    fulfilling the role the Constitution and Congress assign to them, and
    it was intended to be relevant for the foreseeable future and serve as
    the underlying framework for planning, policy-making, and
    administrative decisions. That plan was closely followed with The
    Administration of Justice: A Strategic Business Plan for the Federal
    Courts, which articulated broad goals and objectives.
        The Judiciary's national policy-making body is the Judicial
    Conference of the United States. The Judicial Conference's strategic
    planning process is coordinated by its Executive Committee and involves
    committees of the Judicial Conference and the Administrative Office of
    the U.S. Courts. Through its planning process the Judiciary identifies
    strategic issues and ensures long-term implications are considered in
    assessing Judiciary operations and programs; analyzing trends and
    developments; identifying ways to improve efficiency, effectiveness,
    and economy; and developing policies. The strategic planning process
    has enabled the Judicial Branch to anticipate, react and adapt to
    events and changes in a manner that conserves and enhances its core
    values.
        The Judicial Conference's Executive Committee coordinates long-
    range planning efforts across committees, including the identification
    of crosscutting strategic issues. The Executive Committee meets with
    the chairs of committees twice each year to discuss Judiciary planning
    matters. One member of the Executive Committee serves as long-range
    planning coordinator. The process is supported by the Administrative
    Office's long-range planning office, in existence since 1991.
        The long-range planning meetings of committee chairs provide an
    effective forum to discuss Judiciary-wide planning issues such as long-
    range projections of caseload and resources, funding constraints,
    workforce trends, changes in programs and operations, and the impact of
    technology. The various committees also engage in strategic planning
    within their areas of responsibility. They identify strategic issues,
    analyze trends, undertake studies, seek input, and consider alternative
    approaches before making policy recommendations to the Judicial
    Conference.
        This active planning process enables the Judiciary to identify and
    address matters of strategic importance. For example, the consideration
    of workload and budget projections, in conjunction with anticipated
    funding constraints, highlighted the need for a long-term strategy to
    control the rates of growth in the Judiciary's future costs. An
    intensive effort was launched to assess the situation, and it resulted
    in the development of a cost-containment strategy for the Federal
    Judiciary.
        The committees' planning efforts have been conducted in a manner
    best suited to their areas of responsibility. For example,
    administrative aspects of the Judiciary's business are more conducive
    to the development of specific plans of action, such as determining
    what technology projects will be pursued. The Committee on Information
    Technology produces a Long Range Plan for Information Technology in the
    Federal Judiciary, which is provided to Congress.
        Question. The Judiciary does not regularly publish stated goals
    that you are then held to. Why not? How do you expect us to be informed
    of how accurately you use your resources without such information?
        Answer. The goals of the Judiciary reflect the responsibilities
    that the Constitution and the Congress have assigned to the Third
    Branch. Based on the mission and core values set forth in the Long
    Range Plan for the Federal Courts, six fundamental goals are defined in
    The Administration of Justice: A Strategic Business Plan for the
    Federal Judiciary: to safeguard the rule of law; to guarantee equal
    justice; to preserve judicial independence; to sustain our system of
    federalism with national courts of limited jurisdiction; to maintain
    excellence; and to ensure accountability.
        These goals do not change from year to year. The Judiciary's role
    is to handle the cases that come before the courts in a manner that is
    consistent with the fundamental values expressed in these goals. The
    Constitution vests the federal courts with the Judicial Power of the
    United States and the federal courts' business is defined by others.
    Congress determines the scope of federal jurisdiction, the structure of
    the Judiciary, places of holding court, and the number of judgeships.
    Litigants bring cases to the courts, and the Executive Branch is a
    primary litigant in the federal courts. Simply stated, the courts
    render decisions on matters that are brought to them; they do not
    determine what those matters will be, when they will come, how many
    will come, or who will bring them.
        The Judiciary's resource needs are linked to the courts' caseload,
    the number of judicial districts and places of holding court, and
    related workload measures. Initiatives of importance undertaken by the
    Judiciary are reported to Congress in the Judiciary's budget as well as
    through annual reports and reports of the proceedings of the Judicial
    Conference.
        Funding is provided to the courts through established national
    formulas based on workload factors, and the Judiciary reports
    extensively on its work. Many reports are produced, but of particular
    importance are reports on Judicial Business of the United States Courts
    and Federal Court Management Statistics, published annually by the
    Director of the Administrative Office of the U.S. Courts. These
    comprehensive reports contain details on national and court-specific
    statistics and comparative indicators. They cover cases filed,
    terminated, and pending; disposition actions; actions per judgeship;
    median time to (case) disposition; activities and actions on cases;
    probation and pretrial services work; defender services work, and many
    other facts. Semi-annual reports prepared pursuant to the Civil Justice
    Reform Act of 1990 provide data on motions pending for more than six
    months, bench trials submitted for more than six months, bankruptcy
    appeals and social security appeal cases pending more than six months,
    and civil cases pending more than three years. Juror utilization data
    are published each year. The United States Sentencing Commission
    collects records on each criminal sentence and reports on the courts'
    sentencing actions. Also, specialized reports on particular topics are
    frequently produced by the Judiciary, including reports requested by
    Congress.
        In summary, accountability is a core value of the Judiciary. Its
    proceedings and records are open to the public, and an array of reports
    provides a broad and deep accounting of the work performed by the
    Judiciary with the resources provided.
        Question. The new bankruptcy legislation took effect in October
    2005, and it appears that filings have not yet rebounded. What filing
    patterns do you expect will emerge over the longer term?
        Answer. Over 600,000 petitions were filed in October 2005, most of
    them just prior to the implementation date, October 17, 2005, of the
    Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
    (BAPCPA). Immediately following October 17, the number of new petitions
    plummeted--14,000 cases were filed in November 2005. Monthly filings
    have since been rising.
        Historically, bankruptcy filings have exhibited strong seasonal
    patterns--with filings increasing during the early spring and declining
    during the late fall and early winter. Following October 17, 2005, the
    normal seasonal patterns were disrupted. Recent data, however,
    indicates that the seasonal patterns are reasserting themselves,
    evidenced by the 74,000 bankruptcy filings recorded for March 2007, a
    new post-BAPCPA high. This may suggest a return to historical filing
    patterns.
        No consensus exists regarding the long-term effect of BAPCPA on
    overall filings. Some bankruptcy experts believe that the long-term
    effect will be minimal; others substantial. Most agree that the more
    work intensive chapter 13 filings will become more prominent.
        Question. What has been the impact on the courts' workload as a
    result of the Booker/Fanfan Supreme Court decisions? Have all of the
    cases that came into the system been dispensed with?
        Answer. The Supreme Court's decisions in Blakely v. Washington, 542
    U.S. 296 (2004) (Blakely) and United States v. Booker, 543 U.S. 220
    (2005) (Booker), affected filings in the appeals and district courts as
    the Judiciary reported in a June 2006 report requested by the House and
    Senate Appropriations Committees. This impact began when Blakely was
    decided in June 2004. Since then, in the courts of appeals, over 13,700
    appeals resulting from Blakely and Booker were filed. During the same
    time, in the district courts, over 6,000 Booker-related habeas corpus
    petitions were filed by prisoners sentenced in the federal courts,
    about the number of such motions district courts receive each year. By
    the one-year anniversary of Booker in January 2006, all habeas corpus
    motions by prisoners who were eligible to file when Booker was decided
    had been filed. By September 2006, the numbers for the filings of these
    motions had returned to their levels prior to Booker. To date, appeals
    and district courts have processed large numbers of such motions.
    However, their pending caseload remains high so all of the cases that
    came into the system have not been dispensed with.
        Since January 2006, fewer criminal appeals have been filed than
    during the first year after Booker. However, the current numbers
    continue to be at levels 29 percent above what they had been before
    Booker. This leads the Judiciary to conclude that the criminal appeals
    caseload after Booker will remain at a level higher than it was before
    Booker, just as the criminal appeals caseload rose permanently to a new
    level after the U.S. Sentencing Guidelines were created.
        In addition, Booker-related filings in the appeals and district
    courts are taking longer to resolve. This has increased the median
    disposition times for criminal appeals by two months, and for appellate
    prisoner petitions and district court criminal cases by one month. This
    explains why the Booker-related pending caseload remains high despite
    the increase in the number of such cases resolved.
        Question. Please provide a brief summary of the Judiciary's cost-
    containment efforts.
        Answer. In fiscal year 2004, the Judiciary received a significant
    reduction to its budget request, primarily due to across-the-board cuts
    applied during final conference on our appropriations bill. This
    funding shortfall resulted in staff reductions of 1,350 employees,
    equal to 6 percent of the courts' on-board workforce. Of that number,
    328 employees were fired, 358 employees accepted buyouts or early
    retirements, and 664 employees left through normal attrition and were
    not replaced.
        The 2004 situation made clear that the Judicial Conference had to
    take steps to contain costs in a way that would protect the judicial
    process and ensure that budget cuts would not harm the administration
    of justice. In March 2004, the late Chief Justice William H. Rehnquist
    charged the Judicial Conference's Executive Committee with leading a
    review of the policies, practices, operating procedures, and customs
    that have the greatest impact on the Judiciary's costs, and with
    developing an integrated strategy for controlling costs. After a
    rigorous six-month review by the Judicial Conference's various program
    committees, the Executive Committee prepared, and the Judicial
    Conference endorsed, a cost-containment strategy. The strategy focused
    on the primary cost drivers of the Judiciary's budget, which included
    an examination of the number of staff working in the courts, the amount
    they are paid, and the rent paid to the General Services Administration
    for courthouses and leased office space. Pursuing the implementation of
    cost containment initiatives is a top priority of the Judicial
    Conference.
        Question. Does the fiscal year 2008 request reflect any reductions
    associated with cost-containment?
        Answer. The Judiciary has taken several actions to become more
    efficient and to limit fiscal year 2008 appropriations requirements in
    the Salaries and Expenses account. These actions reduced the fiscal
    year 2008 appropriation requirements for the Salaries and Expenses
    account by $80 million. These actions include: (1) applying a
    productivity factor to the staffing formulas to reflect the enhanced
    productivity achieved through the use of improved business processes
    and the use of technology (-$15 million, -199 FTE), (2) implementing
    cost containment initiatives in probation and pretrial services offices
    (-$28 million, -322 FTE), and (3) reviewing and validating GSA rent
    bills to ensure that GSA is applying its space pricing policies
    accurately (-$37 million).
        Question. What future savings/reductions does the Judiciary
    anticipate?
        Answer. Pursuing the implementation of cost containment initiatives
    is a top priority of the Judicial Conference. The Judiciary has
    implemented cost containment initiatives that have already yielded
    significant savings. Future savings are expected to be achieved through
    continuing to control space costs; aggregating information technology
    servers in contrast to the current decentralized deployment scheme;
    shaping a more focused, cost efficient court support staff through
    process redesign; evaluating compensation policies with an emphasis on
    cost containment, and sharing administrative functions in the courts to
    create efficiencies and reduce operating costs.
        Question. As a cost-containment measure the Judicial Conference
    authorized a two-year moratorium on courthouse construction projects
    and major renovation projects while the Judiciary re-examined its long-
    range space planning and design standards. Please summarize the results
    of your re-examination.
        Answer. In March 2006, the Judicial Conference approved, in
    concept, a new long-range planning methodology for the Judiciary called
    ``Asset Management Planning.'' The major features of asset management
    planning include: developing a more comprehensive assessment and
    documentation of the requested new courthouse and how it would meet the
    operation needs of the court; identifying space alternatives and
    strategies, including minor and major renovation projects as opposed to
    constructing a new courthouse to meet current deficiencies and future
    growth needs; the development of a preliminary estimate of the costs to
    the Judiciary for the project, including additional rent; and
    developing a cost-benefit analysis to help identify the plan that best
    meets the short- and long-term needs of the Judiciary.
        In addition, over the last two years the Judicial Conference has
    endorsed multiple amendments to the U.S. Courts Design Guide, that sets
    forth the space standards for new courthouse and renovation projects.
    These changes included decreases in the size of chambers suites for all
    types of judges, public space, atriums and staff offices, and technical
    amendments to save money.
        Question. The Judiciary's rental payments to GSA have increased
    from $133 million in fiscal year 1986 to more than $1 billion in fiscal
    year 2008, equal to one-fifth of the courts' spending for salaries and
    expenses. What is the cause for this increase and what is the Judiciary
    doing to control these costs?
        Answer. The increase in rental costs is caused partially by growth
    in the amount of space occupied by the Judiciary, but also by growth in
    the rental rates assessed by GSA. According to GSA, since 1985, the
    Judiciary has undergone growth of 166 percent in terms of the amount of
    space occupied, but the growth in court rental costs over the same time
    period has been 585 percent or 3.5 times the rate of increase in the
    amount of space. The biggest cost driver, then, has been the growth in
    rental rates--a consequence of GSA's ``market'' pricing approach.
        The Judicial Conference has approved a cap of 4.9 percent on the
    average annual rate of growth for GSA rent requirements for fiscal
    years 2009 through 2016. By comparison, the increase in GSA rent in the
    fiscal year 2005 budget request was 6.6 percent. This cap will produce
    a GSA rent cost avoidance by limiting the annual amount of funding
    available for space rental costs, and courts will have to further
    prioritize space needs and deny some requests for additional space.
        An interim budget check process on all pending space requests was
    implemented in order to slow space growth. The budget check ensures
    that circuit judicial councils, together with the Administrative
    Office, consider alternative space, future rent implications, and the
    affordability of any request by the Judiciary. This approach is helping
    to control the growth in costs associated with space rent for new
    courthouses and major renovations.
        The Judiciary completed a comprehensive review of the U.S. Courts
    Design Guide. In March 2006, the Judicial Conference endorsed revisions
    to the U.S. Courts Design Guide that lower the future rental costs of
    chambers space by reducing the size of the judge's office in non-
    residential chambers and chambers' conference rooms, and reducing the
    number of book shelving ranges and chambers' closets. The standards of
    the revised Design Guide will apply to the design and construction of
    new buildings and annexes, all new leased space, and repair and
    alteration projects where new space, including courtrooms and chambers,
    is being configured for an entire court unit.
        The Judiciary's rent validation project has achieved significant
    savings. This initiative originated in the New York courts where staff
    spent months scrutinizing GSA rent bills and found rent overcharges.
    The cumulative effect of this discovery was savings and cost avoidance
    over three fiscal years totaling $30 million. The Administrative Office
    expanded this effort nationwide by training all circuit executive
    offices to research and detect errors in GSA rent billings. Although it
    is quite time consuming, detailed reviews of GSA rent billings are now
    a standard business practice throughout the courts. Through the rent
    validation effort the Judiciary recently identified additional
    overcharges totaling $22.5 million in savings and cost avoidance over
    three years. GSA has been very responsive to correcting billing errors
    that are brought to their attention. By identifying and correcting
    space rent overcharges the Judiciary is able to re-direct these savings
    to other Judiciary requirements, thereby reducing the request for
    appropriated funds.
        Question. Enactment of bankruptcy legislation and the subsequent
    decline in filings have reduced fee revenues that the various parties
    in the bankruptcy system rely on to fund operations. Would you please
    comment on the impact this decline has had on the Judiciary, as well as
    the proposals of the case trustees and U.S. Trustees to generate
    additional fee revenue?
        Answer.
    Impact on the Judiciary
        Filing fee revenue has historically comprised 5 percent of total
    financing for the Salaries and Expenses financial plan, with 75 percent
    of all fee collections coming from bankruptcy filing fees. In contrast,
    filing fee revenue in fiscal year 2007 comprises 3 percent of total
    financing, with 60 percent of all fee collections coming from
    bankruptcy filing fees. The table below displays bankruptcy filing fees
    from fiscal year 2004 to fiscal year 2008. A significant drop-off in
    fee revenue is evident beginning in fiscal year 2006 (the bankruptcy
    reform legislation went into effect at the beginning of fiscal year
    2006, on October 17, 2005. The impact of declining fee revenue is that
    the Judiciary is forced to request additional appropriations from
    Congress in order to fund current services requirements.

                                                [In thousands of dollars]
    ----------------------------------------------------------------------------------------------------------------
                                                                                  Fiscal Year--
                                                            --------------------------------------------------------
                                                                2004       2005       2006        2007        2008
                                                               Actual     Actual     Actual     Projected  Projected
    ----------------------------------------------------------------------------------------------------------------
    Bankruptcy Fees........................................    220,759    236,537    168,287      85,532      91,522
    Yr-Yr. Change..........................................  .........     15,778    (68,250)    (82,755)      5,990
    ----------------------------------------------------------------------------------------------------------------

        In addition to the reduced number of bankruptcy filings, the change
    in case mix between Chapter 7 filings and Chapter 13 filings may also
    be a cause of reduced fee revenue. Prior to the bankruptcy reform
    legislation, bankruptcy filings were comprised of 70 percent Chapter 7
    filings and 30 percent Chapter 13 filings. The current mix is
    approximately 55 percent Chapter 7 and 45 percent Chapter 13s. The
    change in case mix will likely result in a reduction in fee collections
    over the short-term, since various motion-related fees under Chapter 13
    may be collected over a period of up to 5 years, versus 90 days for
    Chapter 7 filings.
    Department of Justice Proposals to Increase U.S. Trustee Fees
        In its fiscal year 2008 Budget Request, the Department of Justice
    included two proposals relating to the United States Trustee program.
    The first would amend Section 589(a) of title 28, United States Code,
    to designate the deposit of fines collected from bankruptcy petition
    preparers pursuant to BAPCPA. This provision would have no impact on
    the Judiciary.
        The second proposal, amending Section 1930(a) of Title 28, would
    increase the quarterly fees collected by the U.S. Trustee in Chapter 11
    cases. These fees are paid by debtors directly to the United States
    Trustee program, based upon the debtor's quarterly disbursements. This
    proposal would affect the Judiciary in that parallel Chapter 11
    quarterly fees are also collected in the six bankruptcy administrator
    districts in Alabama and North Carolina. The Judiciary would most
    likely increase quarterly fees in those districts, parallel to the
    increases proposed by the Department of Justice to the U.S. trustee
    quarterly Chapter 11 fee increases, to maintain national parity between
    the two programs. Such fees are deposited as offsetting receipts to the
    fund established under section 1931 of title 28, United States Code.
    Aside from a parallel increase in the Chapter 11 quarterly fee in the
    bankruptcy administrator districts, this proposal would not affect the
    Judiciary.
    Chapter 7 Case Trustee Compensation
        For several years, the National Association of Bankruptcy Trustees
    (NABT) has sought increased compensation for Chapter 7 case trustees.
    Chapter 7 case trustees are paid $60 per case from a portion of the
    debtors' filing fee. The Chapter 7 case trustee's compensation is paid
    over to the trustee by the court if the debtor pays the full filing
    fee. The Judiciary merely acts as a pass-through for the fees paid by
    the debtor to the Chapter 7 trustee. The Judiciary has no
    responsibility to pay the Chapter 7 trustee's fees if the debtor does
    not pay a filing fee. Additionally, Chapter 7 trustees receive a
    percentage of distributions made in asset-Chapter 7 cases. Asset
    Chapter 7 case distributions made by the case trustee are reviewed and
    approved by the bankruptcy court.
        Under the provisions of bankruptcy reform legislation, if a Chapter
    7 debtor is granted in forma pauperis status, the debtor does not pay a
    filing fee. In this circumstance, none of the entities that usually
    receive a portion of the filing fee (Judiciary, case trustee, U.S.
    trustee fund and U.S. Treasury) receive any funds.
        One NABT proposal is to increase the case trustees' statutory per
    case compensation from $60 to $100. The case trustees are also seeking
    a way to receive payments in in forma pauperis cases. The Judicial
    Conference and the Judiciary have no position on the amount of money
    Congress determines the case trustees should be paid by the debtors.
    The only concern of the Judiciary is that the proposals should not
    impact the amount of fee revenue the Judiciary receives.
        Based upon the efforts of NABT, this proposal was included in the
    House version of the Financial Netting Improvements Act of 2006
    (``Contracts Netting Act''). However, it was stripped from the bill in
    the Senate before the ultimate enactment of the legislation as Public
    Law 109-390. The case trustee fee increase included in the House
    version of the Contracts Netting Act would also have streamlined the
    collection of fees for processing of payments to case trustees, thus
    reducing an administrative burden in bankruptcy clerks' offices.
        NABT continues to pursue various proposals to enhance Chapter 7
    bankruptcy trustees' compensation.
                                     ______

               Questions Submitted by Senator Frank R. Lautenberg
        Question. Judge Gibbons, in your experience, do current judicial
    pay levels pose a threat to the independence and success of the federal
    judiciary?
        Answer. I believe Chief Justice Roberts was correct when he stated
    in his 2006 Year-End Report on the Judiciary that judicial pay levels
    pose a threat to the independence of the federal judiciary.
        In the past, a federal judgeship was viewed as a capstone to a
    legal career. As the Chief Justice noted, judges have been leaving the
    federal bench in increasing numbers. In the past six years 38 judges
    have left the federal bench, including 17 in the last two years. While
    this may not represent a mass exodus, it reflects a disturbing trend
    nonetheless. To the extent that judges are leaving the bench for more
    lucrative paying jobs then, yes, pay levels do pose a threat to
    retaining talented, experienced judges. Low pay levels also discourage
    some well-qualified candidates from seeking and accepting appointment
    to the federal bench. The strength of our Judiciary is largely
    determined by the quality of our judicial officers, so the
    unattractiveness of federal judicial pay is a concern.
        Pay erosion is also affecting diversity on the bench. If only the
    extremely wealthy can afford to accept an appointment, or only those
    who are appointed from within government service, we will lose
    diversity on the federal bench.
        The Framers of our Constitution saw judicial independence as linked
    to life tenure. Time has verified their wisdom. Federal judges have
    historically been scrupulous about adhering to the rule of law and
    excluding extraneous and inappropriate factors from their decision-
    making. Chronically low pay levels threaten to create a Judiciary in
    which judges worry about what their next job will be and whether
    litigants will be in a position to affect their future careers, which
    would jeopardize judicial independence and public confidence in an
    independent Judiciary. This would be a Judiciary far different from
    that envisioned by the Framers and one with fewer institutional
    protections against inappropriate influences. I do not believe that it
    is desirable to test our constitutional system by paying judges
    inadequately.
        Question. In its 1995 Long Range Plan for the Federal Courts, the
    Judicial Conference recommended giving credit toward retirement
    benefits for years served as bankruptcy and magistrate judges when such
    judges are elevated to the Article III bench. Do you believe that
    bankruptcy and magistrate judges' current inability to receive
    retirement credits is a disincentive for qualified, experienced
    bankruptcy and magistrate judges to seek promotion to the District
    Court?
        Answer. It could possibly be a disincentive for bankruptcy judges
    and magistrate judges to seek Article III judgeships because the years
    they served in those positions would not be credited towards meeting
    Article III retirement eligibility. Article III judges must satisfy the
    ``rule of 80,'' that is, pursuant to 28 U.S.C.  371(a), (b) and (c),
    an Article III judge may not retire from office or take senior status
    until the judge reaches age 65 with a minimum of 15 years of Article
    III service.
        Bankruptcy judges and magistrate judges are not required to satisfy
    the ``rule of 80'' provision. Therefore, depending on the age of the
    bankruptcy judge or magistrate judge, he/she may be able to retire
    earlier if he/she remains in that capacity. Under the Judicial
    Retirement System (JRS), a bankruptcy or magistrate judge can retire on
    an annuity after eight years of service, payable at age 65. For
    example, a bankruptcy judge or magistrate judge appointed at age 50
    will have vested in a JRS annuity at age 58 equal to 8/14 (57 percent)
    of the salary of the office (payable at age 65); and that same judge
    would receive a full salary JRS retirement at 65. If that same judge
    were elevated to an Article III judgeship at age 58, he or she would
    not be entitled to an Article III ``rule of 80'' retirement until age
    69 when the age and years of service total at least 80. If that judge
    were allowed to receive credit for his or her 8 years of bankruptcy
    judge or magistrate judge service, that judge would be entitled to
    ``rule of 80'' retirement at age 65 instead of 69.
                                     ______

                  Questions Submitted by Senator Sam Brownback
        Question. Your revised fiscal year 2008 budget submission does not
    request resources for additional staff. Do you feel that you currently
    have the appropriate number of staff to address your workload?
        Answer. No, the Judiciary does not have the appropriate number of
    staff to address current workload. The steady workload growth in recent
    years has not been matched with the staffing resources needed to keep
    up with that workload. Between fiscal years 2001 and 2006 the courts'
    aggregate caseload increased by 23 percent while staffing resources
    increased by only 1 percent.
        The Judiciary's staffing formulas indicate that an additional 2,000
    staff are required in order for clerks and probation offices to be
    staffed fully. However, because of the late enactment of appropriations
    and uncertainty about whether funding will be available in the
    subsequent year to pay newly hired staff, court managers have been
    reluctant to hire. This also contributes to the widening gap between
    workload and staffing resources. The Judiciary has sought to narrow the
    gap between staffing levels and workload through the implementation of
    automation and technology initiatives, improved business practices, and
    cost-containment efforts, but has not been able to close it entirely.
        The $20 million provided in fiscal year 2007 will enable the courts
    to hire about 200 new staff to meet workload demands. However, because
    full-year fiscal year 2007 funding was not made available to the courts
    until six months into the fiscal year, and given the lead time it takes
    to recruit and hire, all $20 million cannot be obligated during fiscal
    year 2007. We have therefore set aside in reserve the remaining $14.3
    million (the $20 million less $5.7 million for new staff in the 2007
    plan) so that funding will be available in fiscal year 2008 for courts
    to continue to fill these positions.
        The fact that the courts' workload has begun to stabilize provides
    the Judiciary an opportunity to use this funding to partially close the
    gap between current staffing levels and workload.
        Question. Given the reduced bankruptcy filing levels over the past
    18 months, why does the 2008 Budget Request not reflect a staffing
    reduction in bankruptcy courts?
        Answer.
    Workload Per Case Is Increasing
        Although bankruptcy filings are down, by virtue of the law's
    design, case management under Bankruptcy Abuse Prevention and Consumer
    Protection Act (BAPCPA) of 2005 is more complex and time consuming.
    Court staff are needed to ensure that new requirements mandated by the
    law to weed out fraudulent debtors and improve the bankruptcy process
    are being met. Preliminary data from a sampling of courts indicates
    that per-case work has increased significantly under the new law. Such
    work not only reflects case management activity related to new
    requirements, such as means testing for Chapter 7 eligibility, but also
    to an increased number of motions, orders, and noticing requirements.
        Despite the drop in filings, bankruptcy court staff continue to
    make more than one million docket entries per month and provide quality
    control checks for one million additional entries generated
    electronically by attorneys. These figures reflect the results of an
    initial court sampling of data regarding workload. That data indicates
    that, under BAPCPA, the number of motions filed per case has increased
    by 59 percent; more specifically, motions for relief from stay has
    increased by 73 percent; court orders, by 35 percent, and Chapter 13
    cases, the most work intensive cases, by 50 percent.
        Pending more definitive information, regarding both filing
    projections as well as workload analyses, the Judiciary must proceed
    cautiously to ensure that it protects the needs of the bench, bar, and
    public. Downsizing of the magnitude that could be required in the
    bankruptcy clerks' offices could be expensive to conduct as well as
    disruptive to court services. Once separated, those staff (and their
    highly specialized electronic case management skills) would not be
    easily replaced to meet any future upturn in filings. The Judiciary
    would not only lose its personnel training investment, it would also
    incur huge severance pay requirements. In the mean time, the courts
    would not be in a position to address an upswing in filings, especially
    given the extra work required to carry out the mandates of the law.
    Future Filing Trends Still Uncertain
        Eighteen months after implementation of the BAPCPA of 2005, experts
    still cannot agree on its future impact. Bankruptcy filings for March
    2007 were 74,000, the highest since the bankruptcy reform legislation
    went into effect in October 2005 although based on historical trends
    March is typically a high filing month.
        The Judiciary also recognizes that the root causes of bankruptcy--
    job loss, business failure, medical bills, credit problems, and
    divorce--were not affected by the law and are expected to continue to
    be the primary drivers of caseload. Moreover, economic reports continue
    to advise that leading indicators of bankruptcy, such as personal debt,
    late credit card payments, and mortgage foreclosures, are on the rise.
        Question. What actions are you taking to align resources more
    closely with workload?
        Answer.
    Work Measurement Begins Summer 2007
        To quantify workload changes under Bankruptcy Abuse Prevention and
    Consumer Protection Act of 2005 and align resources accordingly, the
    Judiciary will be conducting an extensive new work measurement process
    for the bankruptcy courts this summer. That measurement will be used to
    develop a new staffing formula for allocating bankruptcy resources in
    fiscal year 2009.
        Until that time, the situation will be monitored carefully and
    contingency plans developed for implementation beginning in fiscal year
    2008 if filings do not show a distinct upward trend by summer 2007.
    Transition Planning In Progress
        For each of the past five years, the bankruptcy clerks program has
    been downsizing to reflect its increased reliance on electronic filing
    as well as budget realities. In the process, the program has shed
    nearly 900 full-time equivalent, on-board employees, about 17 percent
    of the workforce.
        From June through September 2007, various Judicial Conference
    committees will be considering proposals to continue the gradual
    reduction in the bankruptcy courts as warranted by filings and (pending
    the work measurement study) the Judiciary's best professional judgment
    as to workload. The process must be managed in a way so as to minimize
    impacts on bankruptcy court operations and staff.
        Question. We recently received a draft copy of the NAPA study that
    was directed in the fiscal year 2006 appropriations bill.
        What is the Judiciary's reaction to the findings and conclusions?
        Answer. The Administrative Office has also received a draft copy of
    the study and is in the process of preparing agency comments. These
    comments will be provided to NAPA for its consideration in finalizing
    the report.
        The Administrative Office is pleased with the report's finding that
    the Judiciary's budget formulation and execution activities reflect
    sound stewardship of federal funds and its recognition of improvements
    in the space area, including our relationship with GSA.
        Some of the areas addressed in the report (program based budgeting
    and long-range planning) are issues that the Judiciary has given
    considerable thought to in the past and the Judiciary welcomes the
    opportunity to have discussions about them again, taking into account
    the insights presented in the NAPA report.
        Question. What actions do you plan to take in the future in
    response to the study?
        Answer. Once we receive a final report, the Judicial Conference
    Committees will consider the recommendations specific to their areas of
    jurisdiction. Depending on when the report is received, this could take
    place either at the summer 2007 meetings or the following winter
    meetings. We expect a final report in June 2007. Ultimately the
    Judicial Conference will determine if and how the recommendations are
    adopted.
        Question. Please discuss your post-conviction supervision program.
        How do you determine the services and support supervisees require
    and receive, including education, job training, and treatment?
        Answer. In most cases, an offender's needs have been identified
    well before supervision begins, either at the pretrial or presentence
    stage of the Federal criminal justice system. The presentence report
    and the resulting sentencing document identify treatment, educational,
    employment, and other needs that will most likely have associated
    special conditions of the supervision term.
        Following an offender's placement on probation or release from an
    institution, the probation officer works with the offender to assess
    the offender's risks, needs and strengths to prepare an individualized
    comprehensive supervision plan. Not all offenders require the same
    level of supervision to reach this goal. It is the officer's job to
    distinguish among them and to implement supervision strategies that are
    appropriately matched with the offender's risks, needs and strengths.
        If substance abuse or mental health treatment conditions are
    ordered, the officer will either conduct an informed assessment or
    direct the person to undergo a clinical assessment performed by a
    professional treatment provider. If treatment is necessary, the officer
    refers the offender to a treatment program tailored to his needs.
    Treatment is part of the overall supervision objectives and strategies
    for the case. The officer monitors the offender's progress in treatment
    and collaborates with the treatment provider to further the offender's
    chances for success on supervision.
        If the offender is unemployed, the officer determines factors
    contributing to the situation. Often, officers will assist offenders in
    finding employment or vocational training programs. Officers maintain
    contact with employers and educators as necessary to support the
    offender in meeting his supervision objectives. Many districts have
    implemented formal employment programs in cooperation with other
    agencies, such as the Department of Labor, Bureau of Prisons, local
    one-stop centers, state employment agencies, and local social service
    agencies to assist offenders in securing and maintaining meaningful
    employment. Many probation offices hold job fairs in their communities
    especially geared toward ex-offenders.
        If, during the period of supervision, an officer identifies
    educational, vocational or treatment needs for which there is no court-
    ordered special condition requiring the offender participation in the
    program(s), the officer will petition the court to modify the release
    conditions accordingly. A court-ordered special condition allows the
    officer to leverage sanctions if the offender does not comply with the
    condition. In many cases, the backing of the court will induce the
    offender to achieve the necessary skills and/or treatment necessary to
    succeed on supervision and beyond. All of the above interventions, in
    addition to individualized professional care and concern, contribute
    toward the goal of increasing the likelihood of success on supervision.
        Question. Do you have any data on education levels of people under
    supervision and do you ensure that supervisees receive a GED if needed?
        Answer. If education is identified as a need for an offender who
    never completed high school, the officer may identify obtainment of a
    GED as a supervision objective. If so, the officer assists the offender
    in enrolling in a local educational program. The officer continually
    monitors the offender's progress in this type of program, as well as in
    many others, intended to enhance the offender's success on supervision
    and beyond.
        The table below provides data on education levels of people under
    supervision. It reflects cases received for post-conviction supervision
    in fiscal year 2006, with education level reported.

    ------------------------------------------------------------------------
                       Education Level                     Number    Percent
    ------------------------------------------------------------------------
    No Education........................................       478         1
    Elementary..........................................     3,014         6
    Some High School....................................    12,726        27
    GED.................................................     7,004        15
    High School Diploma.................................    10,843        23
    Vocational Degree...................................       487         1
    Some College........................................     9,471        20
    College Graduate....................................     3,183        70
    Post-Graduate.......................................       775         2
                                                         -------------------
          Total.........................................    47,981       100
    ------------------------------------------------------------------------
    Source: National PACTS Reporting Database.

        Question. The Judiciary's fiscal year 2007 financial plan and
    updated 2008 request both include rent reductions.
        What additional actions is the Judiciary taking to reduce rent?
        Answer. The Judiciary has achieved significant rent savings through
    its rent validation project. This initiative originated in our New York
    courts where staff spent months scrutinizing GSA rent bills and found
    rent overcharges. The cumulative effect of this discovery was savings
    and cost avoidance over three fiscal years totaling $30 million. The
    Administrative Office expanded this effort nationwide by training all
    circuit executive offices to research and detect errors in GSA rent
    billings. Although it is quite time consuming, detailed reviews of GSA
    rent billings are now a standard business practice throughout the
    courts. Through the rent validation effort we recently identified
    additional overcharges totaling $22.5 million in savings and cost
    avoidance over three years. Total savings have been $52.5 million. GSA
    has been very responsive to correcting billing errors that we bring to
    their attention. By identifying and correcting space rent overcharges
    we are able to re-direct these savings to other Judiciary requirements,
    thereby reducing our request for appropriated funds.
        Question. In particular, a GAO report issued last year identified
    several opportunities for the Judiciary to reduce its space usage and
    therefore its rent costs. What has the Judiciary done in response to
    that report?
        Answer.
    GAO Recommendation #1
        Work with GSA to track rent and square footage trend data on an
    annual basis for the following factors: (1) rent component (shell rent,
    operations, tenant improvements, and other costs) and security (paid to
    the Department of Homeland Security); (2) judicial function (district,
    appeals, and bankruptcy); (3) rentable square footage; and (4)
    geographic location (circuit and district levels). This data will allow
    the judiciary to create a better national understanding of the effect
    that local space management decisions have on rent and to identify any
    mistakes in GSA data.
                Actions Taken By the Judiciary
        The Judiciary is continuing its efforts to obtain from GSA more
    specific information with regard to its rent bills that will aid the
    judiciary in assigning costs to its various components. This effort has
    been quite time consuming as it requires GSA to remeasure its space and
    reclassify the information in GSA's database according to its type,
    e.g., district court courtrooms and chambers, clerk's office space,
    libraries, etc.
        The Judiciary is also continuing its national rent validation
    initiative to identify mistakes in GSA data. This program has two
    phases that are moving forward on separate but parallel tracks. Thus
    far, the Judiciary has received $52.5 million in rent credits and cost
    avoidance for both current and prior fiscal years.
    GAO Recommendation #2
        Create incentives for districts/circuits to manage space more
    efficiently. These incentives could take several forms, such as a pilot
    project that charges rent to the circuits and/or districts to encourage
    more efficient space usage.
                Actions Taken By the Judiciary
        On March 14, 2006, the Judicial Conference approved, in concept,
    the establishment of an annual budget cap for space rental costs. The
    budget cap will require that local decision-makers balance competing
    space requests at the circuit level, so that circuit judicial councils
    may prioritize their space planning.
        Until the implementation methodology for the rent budget cap is
    established (which is anticipated to be approved by the Judicial
    Conference in September 2007), the Judiciary has a budget check process
    in place that applies to any prospectus or non-prospectus space request
    that has the potential to affect rent. Every such project must be
    approved by the Judicial Conference of the United States before it can
    proceed.
    GAO Recommendation #3
        Revise the Design Guide to: (1) establish criteria for the number
    of appeals courtrooms and chambers; (2) establish criteria for space
    allocated for senior district judges; and (3) make additional
    improvements to space allocation standards related to technological
    advancements (e.g., libraries, court reporter spaces, staff efficiency
    due to technology) and decrease requirements where appropriate.
                Actions Taken By the Judiciary
        Over the last two years, the Judicial Conference of the United
    States approved multiple reductions to the space standards set forth in
    the U.S. Courts Design Guide that have reduced staff office sizes and
    chambers space for senior, district, appellate, bankruptcy and
    magistrate judges. In addition, the Committee on Space and Facilities
    plans to consider the criteria for the number of appeals courtrooms.
    Finally, the Judicial Conference approved technical amendments
    including reductions in atrium, lighting, and HVAC systems that will
    result in cost savings.
        As to the impact of electronic filing on court space, the judiciary
    has reduced Design Guide requirements for some of the clerk's office
    space, including intake areas and records storage, due to the impact of
    the electronic case filing/case management system and has reduced the
    library space by 13 percent due to reductions in lawbook collections.

                              SUBCOMMITTEE RECESS

        Senator Durbin. I thank you for your attendance today. And
    the subcommittee hearing is recessed.
        [Whereupon, at 4:15 p.m., Wednesday, March 21, the
    subcommittee was recessed, to reconvene subject to the call of
    the Chair.]

      FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL
                                   YEAR 2008

                                  ----------

                           WEDNESDAY, MARCH 28, 2007

                                           U.S. Senate,
               Subcommittee of the Committee on Appropriations,
                                                        Washington, DC.
        The subcommittee met at 3:58 p.m., in room SD-192, Dirksen
    Senate Office Building, Hon. Richard J. Durbin (chairman)
    presiding.
        Present: Senators Durbin and Allard.

                           DEPARTMENT OF THE TREASURY

                            Office of the Secretary

    STATEMENT OF HON. HENRY M. PAULSON, JR., SECRETARY

                     STATEMENT OF SENATOR RICHARD J. DURBIN

        Senator Durbin. Good afternoon. This meeting of the Senate
    Appropriations Subcommittee on Financial Services and General
    Government will come to order.
        We continue our budget hearings today with the Department
    of the Treasury. We welcome Secretary Henry Paulson to the
    hearing, along with his associates and my colleagues, who will
    be joining me, I'm sure, after the rollcall vote. I apologize
    for the delay in beginning, but we scheduled rollcalls and it
    changed our timing.
        This is a budget hearing for the Treasury Department. We'll
    defer most of the questions pertaining to the Internal Revenue
    Service (IRS) until April 18, when Commissioner Everson will
    appear. The IRS represents 90 percent of the Treasury budget,
    in terms of actual dollars; the remaining 10 percent contains
    some very critical activities and programs, which we'll talk
    about today.
        I was pleased, during consideration of the recent
    continuing resolution, we were able to provide some additional
    funds for the Department. We do have a budget request for next
    fiscal year from the Treasury, of about $12.140 billion, an
    increase of $514 million, or 4.4 percent. Excluding the IRS,
    the request for the remainder of the Department is $1.45
    billion, a net increase of $16 million over the last fiscal
    year, or 1.5 percent. This appears, at first glance, to be a
    very tight budget for the Treasury Department.
        I have a number of areas of concern, which I will save for
    the question period. It is now my pleasure to welcome the
    Secretary to the hearing.
        Mr. Secretary, the floor is yours.

                       STATEMENT OF HENRY M. PAULSON, JR.

        Secretary Paulson. Mr. Chairman, thank you very much.
        I've submitted a longer statement for the record. I had a
    shorter statement that I was going to read, and I just think,
    in the interest of brevity, what I'll do is, I'll just read two
    paragraphs of the shorter statement and submit that for the
    record also, because, as you know, and as you've said, Treasury
    has a broad and important role in maintaining the economic and
    national security of this Nation and ensuring the effective
    operation of the Government, and I'm continually impressed with
    the caliber of professionalism of Treasury's employees,
    particularly the career staff, who carry out this work every
    day.
        Now, we have established four priorities in this budget for
    next year: maintaining the growth and competitiveness of the
    U.S. economy for the benefit of all our workers and families;
    investing in tax enforcement and taxpayer services, because it
    is important that individuals and business pay what they owe;
    promoting strong economic ties and balanced trade relationships
    with foreign nations, including China; and continuing our
    important contribution to the war on terror by choking off
    terrorist financing and other illicit activities.

                               PREPARED STATEMENT

        Senator Durbin. Without objection, your entire statement
    will be made part of the record.
        Secretary Paulson. Good.
        [The statement follows:]
                  Prepared Statement of Henry M. Paulson, Jr.
        Chairman Durbin, Senator Brownback, and members of the
    subcommittee. Thank you for the opportunity to appear before you today
    to discuss the President's Fiscal Year 2008 Budget for the Department
    of the Treasury.
        I am pleased to be here today to provide an overview of the
    President's Budget for Treasury in fiscal year 2008. The President's
    Fiscal Year 2008 Budget reflects the Department's budget priorities and
    dedication to promoting economic growth and opportunity, strengthening
    national security, and exercising fiscal discipline.
        The $12.1 billion request focuses resources on key programs
    necessary to promote economic growth, fund the activities of the
    Federal Government and effectively fight the war on terror. The request
    is $523 million above the amount provided by the fiscal year 2007
    funding level, a 4.5 percent increase. By collecting the revenue due to
    the Federal Government and working to reduce illicit threats to the
    financial system, the Department of the Treasury contributes to the
    financial integrity of the United States.
        Treasury has a primary role as steward of the U.S. economic and
    financial systems, including the role of the United States as an
    influential participant in the international economy. Treasury promotes
    financial and economic growth at home and abroad. Treasury also
    performs a critical and far-reaching role in national security. The
    Department battles national security threats by coordinating financial
    intelligence, targeting and imposing sanctions on supporters of
    terrorism, narcotics traffickers, and proliferators of weapons of mass
    destruction, improving the safeguards of our financial systems, and
    promoting international relationships to combat the financial
    underpinnings of terrorist and other criminal networks.
        Managing these complex tasks requires expanded capabilities. Fully
    funding the President's Fiscal Year 2008 Budget request will allow the
    Treasury Department to continue and improve its ability to study,
    recommend, and support initiatives that strengthen the U.S. economy,
    create more jobs for Americans, and enhance citizens' economic
    security. The Department will actively work to protect the security of
    pensions, reform Social Security, and improve the Federal income tax
    system by providing timely, usable, and comprehensive analyses that
    advance the policy process.
              promoting economic growth, security and opportunity
        The Treasury Department works diligently to fulfill its role as the
    administration's chief economic advisor. We strive to provide the
    President with the best information available on a broad range of
    domestic and international economic issues. Treasury's Offices of
    International Affairs, Tax Policy, Economic Policy, and Domestic
    Finance support this role through the provision of technical analysis,
    economic forecasting, and policy guidance on issues ranging from
    federal financing to responding to international financial crises. The
    Treasury Department supports policies that stimulate U.S. economic
    growth, strengthen and modernize entitlement programs, and minimize
    regulatory burdens while ensuring the safety and soundness of financial
    institutions.
        The fiscal year 2008 budget request funds Treasury's efforts to
    promote domestic and international economic growth through financial
    diplomacy. Treasury stimulates economic growth and job creation by
    working to open trade and investment, encouraging growth in developing
    countries, and promoting responsible policies regarding international
    debt, finance, and economics. Treasury supports trade liberalization
    and budget discipline through its role in negotiating and implementing
    international agreements pertaining to export subsidies. These
    agreements open markets, level the playing field for U.S. exporters,
    and provide effective subsidy reductions that save the U.S. taxpayer
    millions of dollars annually. Since 1991, cumulative budget savings
    from these arrangements are estimated at over $10 billion. The growth
    of these activities makes it necessary to enhance policy coordination
    and resources through the addition of regional experts. Treasury's
    fiscal year 2008 budget request provides additional staff to support
    key policy dialogues around the globe. These experts will enhance
    policy coordination on international matters and will support key
    policy dialogues with priority countries like China.
        Treasury also remains committed to protecting the homeland from
    international investments that may threaten our national security. The
    Committee on Foreign Investment in the United States (CFIUS) is an
    interagency group responsible for investigating the national security
    implications of the merger or acquisition of U.S. companies by foreign
    persons. One of my key responsibilities as Secretary is to chair this
    committee, and to make sure that the interagency CFIUS process performs
    as efficiently as possible. As foreign investment in the United States
    has increased, so has the number of cases reviewed by CFIUS. As a
    result, the fiscal year 2008 budget request provides additional
    resources to support Treasury's investigations of foreign investments.
        The President's fiscal year 2008 request for Treasury also includes
    $28.6 million for the Community Development Financial Institutions
    (CDFI) fund. CDFI fund's mission is to expand the capacity of financial
    institutions to provide credit, capital, and financial services to
    underserved populations and communities in the United States. In order
    to ensure that the CDFI program continues to operate in the most
    efficient and effective manner, Treasury is proposing to phase out the
    CDFI Bank Enterprise Awards (BEA) program in 2008. There is no evidence
    that the BEA program improves economic development, and we believe that
    the program's goals are better served through other CDFI fund
    activities.
                        strengthening national security
        The sponsorship of terrorism and potential acquisition of weapons
    of mass destruction (WMD) by rogue regimes and non-state entities
    represent grave threats to U.S. national security and the security of
    all free and open societies. Terrorists, WMD proliferators and other
    non-state threats require support networks through which money and
    material flow. The Treasury Department draws on financial and other
    all-source intelligence, and also works to utilize its unique
    regulatory and law enforcement authorities, to combat national security
    threats and safeguard the financial system.
        The Department's Office of Terrorism and Financial Intelligence
    (TFI) provides financial intelligence analysis, develops and implements
    systems to combat money laundering and terrorist financing, administers
    the Bank Secrecy Act, and administers and enforces the U.S.
    Government's economic sanctions programs.
        Treasury exercises a full range of intelligence, regulatory,
    policy, and enforcement tools in tracking and disrupting terrorists'
    support networks, proliferators of weapons of mass destruction, rogue
    regimes, and international narco-traffickers, both as a vital source of
    intelligence and as a means of degrading their ability to function.
    Treasury's actions include:
      --Freezing the assets of terrorists, proliferators, drug kingpins,
            and other criminals and shutting down the channels through
            which they raise and move money;
      --cutting off corrupt foreign jurisdictions and financial
            institutions from the U.S. financial system;
      --developing and enforcing regulations to reduce terrorist financing
            and money laundering;
      --tracing and repatriating assets looted by corrupt foreign
            officials; and
      --promoting a meaningful exchange of information with the private
            financial sector to help detect and address threats to the
            financial system.
        The fiscal year 2008 President's Budget will enable Treasury to
    enhance these capabilities. Treasury requests funding for investments
    to further the Department's national security mission in three critical
    areas. First, this budget, if enacted, will enable Treasury to expand
    its capacity to identify potential national security threats and to
    enforce U.S. policies to counter those threats. Next, Treasury will
    enhance the information technology and physical infrastructure of TFI
    and its component bureaus and offices to improve data security, access,
    and quality. Finally, the budget would provide funds to help integrate
    TFI's Office of Intelligence Analysis into the broader intelligence
    community.
        Specifically, this request includes an additional $5.3 million to
    respond to emerging national security threats, provide strategic policy
    coordination in regions key to the fight against terrorist financing,
    and to enhance implementation of sanctions against state sponsors of
    terrorism and WMD proliferation. The request also includes $8.1 million
    for infrastructure and information technology projects to enhance data
    access, security, and quality, including construction of a Sensitive,
    Compartmented Information Facility (SCIF), stabilization and
    maintenance of the Treasury Foreign Intelligence Network, and the
    Critical Infrastructure Protection program. Finally, $1 million is
    requested for initiatives to further Treasury's integration into the
    broader intelligence community.
        The Financial Crimes Enforcement Network (FinCEN) is responsible
    for administering the Bank Secrecy Act (BSA). The fiscal year 2008
    budget request provides funding to strengthen recovery capability for
    mission-critical information technology systems and emergency operation
    capabilities; and improve information technology planning and
    oversight.
                       managing u.s. government finances
        The Treasury Department manages the Nation's finances by collecting
    money due the United States, making its payments, managing its
    borrowing, investing when appropriate, and performing central
    accounting functions. Key priorities in managing the government's
    finances include maximizing voluntary compliance with tax laws and
    regulations, continually improving financial management processes, and
    financing the government at the lowest possible cost over time. The
    fiscal year 2008 budget request provides the funding necessary to
    properly administer these functions.
    Collecting Taxes
        Collecting taxes in a fair and consistent manner is a core mission
    of the Treasury Department. Treasury's priorities in tax administration
    are enforcing the Nation's tax laws fairly and efficiently while
    balancing taxpayer service and education to promote voluntary
    compliance and reduce taxpayer burden. In an effort to maximize tax
    compliance, the fiscal year 2008 budget includes $11.1 billion for the
    IRS, which is an increase of $498 million above the amount provided in
    the fiscal year 2007 funding levels.
        The fiscal year 2008 budget request provides funding to enhance
    coverage of high-risk compliance areas, as well as to address the tax
    gap, which represents the annual difference between taxes owed and
    taxes collected, including a multi-year research effort that will
    provide continuous feedback on noncompliance. Enforcement will focus on
    critical reporting, filing, and payment compliance programs, and
    highlight abusive tax avoidance transactions and high income individual
    examinations involving pass-through entities (e.g., partnerships and
    trusts). The IRS will also continue to reengineer its examination and
    collection procedures to reduce audit time, increase yield, and expand
    coverage. As in fiscal year 2006 and fiscal year 2007, the
    administration proposes to include IRS enforcement increases as a
    Budget Enforcement Act program integrity cap adjustment.
        The IRS will continue efforts to improve services offered to
    taxpayers, primarily focusing on those outside of traditional telephone
    access. For example, the fiscal year 2008 request provides funding to
    expand the Volunteer Income Tax Assistance program. The IRS will also
    implement the Taxpayer Assistance Blueprint, a 5 year strategic plan to
    deliver taxpayer service; a collaborative effort of the IRS, the IRS
    Oversight Board, and the National Taxpayer Advocate.
        Finally, the fiscal year 2008 request will allow the IRS to make
    critical IT infrastructure upgrades. IRS will continue to invest in
    technology, process improvements, and training to achieve consistent
    quality service with reduced costs. The budget also includes funding
    for the IRS's Business Systems Modernization program, which is designed
    to provide IRS employees the tools they need to continue to administer
    and improve both service and enforcement programs.
        The President's budget also includes a number of legislative
    proposals intended to improve tax compliance with minimum taxpayer
    burden. Once implemented, it is estimated that proposals will generate
    $29 billion over 10 years. These proposals are presented in detail in
    the fiscal year 2008 Department of the Treasury Blue Book. The
    legislative proposals fall into four categories: expand information
    reporting, improve compliance by businesses, strengthen tax
    administration, and expand penalties.
        Treasury's Alcohol and Tobacco Tax and Trade Bureau also collects
    excise taxes on alcohol, tobacco, firearms, and ammunition. In fiscal
    year 2006, the bureau collected $14.8 billion in excise taxes,
    interest, and other revenues on these products and also regulates the
    manufacture of alcohol and tobacco products.
    Ensuring Efficient Fiscal Service Operations
        The fiscal year 2008 budget request provides the funds necessary
    for Treasury to meet its responsibilities as the Federal Government's
    financial manager.
        Treasury's management of the Federal Government's finances includes
    making payments, collecting revenue, preparing public financial
    statements and collecting delinquent debt owed to the Federal
    Government through the Financial Management Service (FMS). Treasury
    oversees a daily cash flow in excess of $58 billion and disburses 85
    percent of all federal payments. The Department is working to improve
    its payments and collections processes by moving toward an all-
    electronic Treasury. In fiscal year 2006, Treasury issued 742 million
    electronic payments including income tax refunds, Social Security
    benefits, and veterans' benefits. Treasury is also encouraging Social
    Security and Supplemental Security Income recipients to switch to
    Direct Deposit through the Go Direct campaign. Direct deposit
    represents a cost savings to the Federal Government, and consequently
    to the American taxpayer, of 80 cents per transaction compared to a
    check payment.
        Treasury's Bureau of the Public Debt manages all of the public
    debt, which includes marketable securities, savings bonds, and other
    instruments held by State and local governments, federal agencies,
    foreign governments, corporations, and individuals. To improve debt
    management and offer better customer service, Treasury offers
    TreasuryDirect, an electronic, web-based system that electronically
    issues securities to retail customers and enables investors to manage
    their accounts on-line.
        The budget also includes three legislative proposals for FMS that
    are estimated to save the Federal Government over $3 billion over 10
    years. These proposals will allow the government to trace and recover
    federal payments sent electronically to the wrong account, eliminate
    the 10-year limitation on the collection of delinquent non-tax federal
    debts, and remove the disincentive for the IRS to refer tax debts to
    FMS for collection.
                      strengthening financial institutions
        One of the principal objectives of the Treasury Department is to
    enable commerce. The Department is responsible for the safety and
    soundness of national banks and federally-chartered savings
    associations. The Treasury Department also produces the coins and
    currency needed for commerce, and guards against counterfeiting and
    other misuse of our money. While the Office of the Comptroller of the
    Currency (OCC), the Office of Thrift Supervision (OTS), the U.S. Mint
    (Mint), and the Bureau of Engraving and Printing (BEP) are funded
    through direct annual appropriations, their contribution to Treasury's
    mission cannot be understated.
        Treasury, through OCC and OTS, maintains the integrity of the
    financial system of the United States by chartering, regulating, and
    supervising national banks and savings associations. In fiscal year
    2006, OCC and OTS oversaw financial assets held by these financial
    institutions totaling $8.1 trillion.
        The Mint and BEP are responsible for producing the Nation's coins
    and currency, respectively. In fiscal year 2006, the Mint and BEP
    produced 16.2 billion coins and 8.2 billion paper currency notes,
    respectively. The Mint issued five new quarters for the 50 State
    Quarters program and BEP introduced the new $10 currency note into
    circulation. Also, despite significant increases in the price of
    metals, the Mint was able to return $750 million to the Treasury
    General Fund in fiscal year 2006.
    Managing Treasury Effectively
        Treasury is committed to using the resources provided by taxpayers
    in the most efficient manner possible. The Department will drive
    improved results through decision-making that considers performance and
    cost. The Treasury Department strives to serve its stakeholders in the
    most effective way while working to leverage resources across the
    Department and across government.
        Funding requested in Treasury's departmental offices and
    Department-wide Systems and Capital Investments Program (DSCIP) is
    sought for building a strong information technology infrastructure,
    ensuring that Treasury remains a world-class organization that meets
    the President's standard of a citizen-centered, results-oriented
    government.
        The DSCIP account funds technology investments to modernize
    business processes throughout Treasury, helping the Department improve
    efficiency. In fiscal year 2008, Treasury requests $18.71 million for
    ongoing modernization and critical information technology
    infrastructure projects, and for investment in other new technologies
    that will improve efficiency and service to the American people. The
    budget request includes:
      --$6 million to begin work on a Treasury-wide Enterprise Content
            Management System. The initial system will meet the business
            requirements of the Office of Foreign Assets Control and the
            Financial Crimes Enforcement Network;
      --$2 million for the continued stabilization of the Treasury Secure
            Data Network; and
      --$4 million to improve Treasury's FISMA performance, strengthen the
            Department's overall security posture, leveraging the
            President's management agenda, including the E-Government
            initiatives, across the Department.
        This budget request also includes funding for the Office of the
    Inspector General and the Treasury Inspector General for Tax
    Administration. These offices play important oversight roles in the
    overall management of the Department and the fair administration of the
    Nation's tax laws.
                                   conclusion
        Mr. Chairman, thank you again for the opportunity to come here
    today to discuss with you and the committee the President's Fiscal Year
    2008 Budget request for Treasury. I look forward to working with you
    and the members of the committee in ensuring that Treasury maximizes
    its resources and funding so that the American people can be assured
    that their tax dollars are being used in the most effective way
    possible. I would be more than happy to answer any questions.

              COMMUNITY DEVELOPMENT FINANCIAL INSTITUTIONS PROGRAM

        Senator Durbin. Let me zero in on a few issues that I think
    I'd like to raise.
        The first relates to the community development financial
    institutions (CDFI). Since its inception, CDFI has sought to
    increase the availability of credit, investment capital, and
    financial services to relatively poor urban and rural
    communities. The fund pursues these objectives by augmenting
    the private resources for investment in economic development,
    housing, banking services. It works with two sets of partners
    in boosting such investment: private financial institutions,
    certified by the CDFI as community development financial
    institutions, and private equity groups.
        Now, the administration's budget request includes a request
    for $28.5 million for this CDFI fund. This is an improvement
    over last year's budget request, but it is a reduction of
    nearly 50 percent from the fiscal year 2007 amount of $54.5
    million. And $12.2 million of your fiscal 2008 request consists
    of administrative costs which are necessary, but really don't
    provide the capital that we're talking about for these
    institutions.
        I'd like to ask you--and I'm going to give you just an
    illustration of why I think this needs to be discussed.
    According to the Treasury's own calculations, every dollar the
    Federal Government invests in the CDFI funds leads to another
    $27 in non-Federal fund investment. So, meeting the CDFI
    community request of $100 million, instead of the Treasury
    Department request of $28.5 million, would cost the Government
    only an additional $71.5 million, but would provide needy
    communities over $1.9 billion. That's based on the Treasury's
    calculations.
        Based on the data provided by the Opportunity Finance
    Network, which advocates on behalf of CDFIs, and on
    calculations made by my staff, here's the difference that $1.9
    billion into inner-cities, rural communities, and Native
    American reservations would mean: 28,000 jobs, 6,000 new
    businesses, 64,000 extra housing units, and 1,000 new or
    improved community facility projects. Isn't that worth $71
    million?
        Secretary Paulson. Mr. Chairman, first of all, thanks for
    your question. Second, this is a good program, so we're not
    debating this. As you've pointed out, we increased our request
    this year, and did it meaningfully, although below the funded
    level. It's something I've looked at carefully, myself. We'd be
    happy to work with you on this. We have a few differences,
    maybe, on which parts are the most valuable parts of the
    program. And so, we can talk about that. But I agree with your
    basic assertion that this is a good program.
        Senator Durbin. I'm going to get into this a little more
    with you directly in conversation----
        Secretary Paulson. Sure.
        Senator Durbin [continuing]. To talk about this, because I
    think I've made a point for the record, and you've----
        Secretary Paulson. We would like----
        Senator Durbin [continuing]. Left an opening for further
    discussion.
        Secretary Paulson. And we'll work with you--we've got
    someone new that's running this. I'd be happy to send her up to
    work with----
        Senator Durbin. Good.
        Secretary Paulson [continuing]. Your staff, and would be
    happy to get involved, myself.

                       INFORMATION TECHNOLOGY MANAGEMENT

        Senator Durbin. Thank you.
        The inspector general, in his October 16, 2006, memorandum
    to you concerning management and performance challenges facing
    the Department, indicated that the Department has difficulties
    in managing large acquisitions of mission-critical systems and
    other capital investments. What changes have you made to
    improve your performance in managing the Department's
    information technology (IT) projects? Why will this year be
    better?
        Secretary Paulson. Well, let me say, the report happens to
    be right, that there are problems, and there have been
    problems. And it's not easy to correct them all at once. I
    would say part of them relate to having the right people in the
    right jobs. We're looking for a new Assistant Secretary of
    Management, and I think we're close to announcing something
    there. We're also looking for a new CIO for the Department. And
    getting those people in place, when we find them, will be
    important. But it also takes, I think, an integrated approach
    to this. Bureau heads and key managers have to also buy into
    this and recognize that managing the IT programs has got to be
    part of their day-to-day business. It takes training, and we've
    instituted a number of things in the training area. So, I would
    say I've been here 8 months; before I came, I had Senator Bond
    take me aside and tell me there were problems. And he was
    right.
        Senator Durbin. Since you've been here 8 months, and you
    come from some of the highest levels of the private sector,
    it--I don't have that same life experience that you've had. I
    continue to be puzzled, in Federal agency after Federal agency,
    why they have such a difficult time with information
    technology. Does the private sector go through the same pain?
        Secretary Paulson. Well, I would say this. In the private
    sector, I don't believe I knew a CEO that said, ``I'm really
    happy with my IT. I know that I'm spending all the money
    properly, that we're getting and doing everything we should,
    that it's working as well as it should.'' And I know, in the
    company I came from, we felt a big part of it. The IT
    professionals, the CIOs, were important, but every manager had
    to take responsibility for it, and it couldn't be something
    separate, it had to be part of their business. I know it is
    difficult in the private sector when you can offer a lot of
    money. I know people work for a lot of things, and one of the
    things I've learned since coming here is how hard people work,
    how Treasury's got great people and great career people, and
    the people that are filling in, in these jobs right now, are
    doing a good job. But it is not easy to find people who are
    really qualified. And then, the change of culture to make it
    work isn't easy. But I think the Government overall has
    problems, and to the best of my judgment, maybe Treasury has a
    few more problems than some other areas, but I haven't been in
    some of the other areas. But we're on top of them, and we're
    doing everything we can. And I think we're making some
    progress.

                            BANK SECRECY ACT DIRECT

        Senator Durbin. Let me move to another issue. In June 2004,
    Treasury established the Bank Secrecy Act (BSA) Direct
    Retrieval and Sharing Program. This program was designed to
    make it easier for law enforcement to access and analyze BSA
    data and to improve our overall data management.
        Secretary Paulson. Right.
        Senator Durbin. On July 13, 2006, the Financial Crimes
    Enforcement Network (FinCEN) halted the program due to problems
    with its main contractor. Robert Werner, then director of the
    program, testified, in September, that the Financial Crimes
    Enforcement Network is initiating a replanning effort, in his
    words, for the retrieval and sharing component of the Bank
    Secrecy Act Direct. Where does this stand, at this point? Tell
    me about your efforts to improve the sharing of BSA data
    between Treasury and law enforcement.
        Secretary Paulson. Well, I think we're making progress.
    But, again, this is in some ways, the same answer to the
    question that I gave that--in other words, our IT and
    technology programs throughout Treasury had issues and weren't
    up to snuff. We've got this up and going. I think we're making
    progress, in terms of sharing information. I think it's working
    pretty well. But I'm not going to tell you that we didn't have
    systems problems.
        Senator Durbin. This predates your arrival.
        Secretary Paulson. Right.
        Senator Durbin. This has been an ongoing issue for 4 years.
    And we have tried to, with Director Mueller, at the Federal
    Bureau of Investigation (FBI), and so many other agencies,
    Homeland Security. I really, kind of, focused on a theme,
    because I couldn't execute it with any personal knowledge, but
    the theme was to upgrade information technology and the
    opportunities for sharing information when it came to security
    and law enforcement. And what you've just said--I'm not
    surprised, but it's the same thing that's been said before. And
    I hope that your expertise in the private sector will help
    break through some of these problems.
        Secretary Paulson. We're making progress. I would say this.
    I gave you the negative. The positive is, if I've been
    surprised on anything on the upside, it's been the quality of
    the professionals--career professionals who we have at Treasury
    that are doing this job. And the work that gets done is first-
    class work, even when we don't have the best systems. And we're
    approaching this, and we're determined to make some progress
    here.

                     TREASURY FOREIGN INTELLIGENCE NETWORK

        Senator Durbin. I believe you've identified the Treasury
    Foreign Intelligence Network as your top IT development
    priority. What's the current status of that system?
        Secretary Paulson. I think we're back on track. It's
    operating. Again, with any of these systems, I'm not going to
    tell you, with 100 percent certainty, until we get our new
    Assistant Secretary of Management, and our new CIO in place,
    but we've done a bit more work----
        Senator Durbin. What is the timetable for filling those
    spots?
        Secretary Paulson. Soon. I think we're weeks away, knock on
    wood, from being able to get an Assistant Secretary of
    Management in place, and I think it may take a little bit
    longer on the CIO.

                              TERRORIST FINANCING

        Senator Durbin. One of your critical responsibilities
    relates to terrorism and financing of terrorism, in the Office
    of Terrorism and Financial Intelligence (TFI). They seek to
    integrate the operations and resources of the Office of
    Terrorist Financing and Financial Crime, the Office of Foreign
    Assets Control, the Financial Crimes Enforcement Network, and
    others. Two basic responsibilities of TFI, gather and evaluate
    financial intelligence, and, two, enforce various financial
    laws and regulations relative to that intelligence. What do you
    see as some of the major challenges facing the Office of
    Terrorism and Financial Intelligence?
        Secretary Paulson. First of all, this is a very important
    area, and we've got first-class people. Part of what we ask for
    in our budget is money to build the new SCIF, and to hire and
    train additional people, because we've got first-rate
    individuals that work very hard, so that is obviously part of
    it. The team, I believe, works quite well with others in the
    intelligence community and, in a number of programs, we play a
    support role, working with colleagues at State or elsewhere. I
    think the teamwork is good there. But this area, like anything
    else, comes down to having the right people in the right jobs,
    and asking--are they trained well? And are they thinking
    creatively? And are they working as part of a team? You're
    talking about an area that I think is as well managed as any
    area at Treasury, with first-rate professionals.
        Senator Durbin. Mr. Secretary--before I turn it over to my
    colleague Senator Allard--there's an article in yesterday's
    Washington Post; it spoke of private business, such as rental
    and mortgage companies, car dealers, checking the names of
    customers against a list of suspected terrorists and drug
    traffickers, made publicly available by the Treasury
    Department, sometimes denying services to ordinary people whose
    names are similar to those on the list. The Office of Foreign
    Asset Control (OFAC) list of specially designated nationals has
    long been used by banks and other financial institutions to
    block financial transactions of drug dealers and other
    criminals, but an Executive order issued by President Bush
    after the September 11 tragedy has expanded the list and its
    consequences in unforeseen ways. Businesses have used it to
    screen applicants for home and car loans, apartments, and even
    exercise equipment, according to interviews in a report by the
    Lawyers Committee for Civil Rights of the San Francisco Bay
    area. To what extent is this list put out by the Office of
    Foreign Asset Control creating problems for average consumers
    in this country?
        Secretary Paulson. That's a very good question, and it's
    something we've talked about and had a number of meetings
    about. Clearly, these activities that we have to disrupt
    terrorist financing, to deal with weapons proliferation, and to
    deal with other illicit activities, are very important. So,
    we're very careful, in terms of when we publish the list, to
    get the name right and to have the birth date. And then, what
    you're dealing with is this. These sanctions need to be public,
    and so you'll have a number of credit bureaus which will take a
    look at the list and then, if there's a name that's similar or
    if the name may be the same, but doesn't have the same birthday
    or whatever, they'll put a flag by it. And then, in some
    instances, you'll find examples of businesses or others that
    just don't want to be bothered, or for whatever reason, aren't
    as careful as they should be in denying credit.
        Senator Durbin. Well, it seems like that would create a
    pretty serious hardship on some people--innocent people.
        Secretary Paulson. It does, and it's something we're
    concerned about. Now, what we do is, we've got a hotline that
    is open 24 hours a day. There are many, many, many calls. And
    Treasury is very quick about this. There are people that call
    because the name is similar, but not exact, or the name is the
    same but there's a different birth date. And these things get
    answered and get cleared up very quickly. So, how do we do
    this, and have you got any ideas? We ask ourselves, what can we
    do? We've got people manning these hotlines. There are
    literally thousands and thousands. The number that sticks in my
    mind is 90,000 calls over the last year, which received very
    quick answers. Whenever you have any list with sanctions,
    there's room for confusion if people don't use it properly. And
    Treasury's doing everything they can to make sure it is used
    properly.
        Senator Durbin. Let me recognize the Senator from Colorado.
        Senator Allard. Well, thank you, Mr. Chairman, for holding
    this hearing.
        I understand, in your opening remarks, you said you're
    going to have a separate hearing on the Internal Revenue
    Service. And I'm going to have some questions then, but I do
    have an opening statement I'd like to have made a part of the
    record, if we might.
        Senator Durbin. Without objection. We will also insert the
    statement from Senator Brownback.
        [The statements follow:]

                   Prepared Statement of Senator Wayne Allard

        I would like to thank Chairman Durbin for holding today's
    hearing.
        The Treasury Department encompasses a number of important
    responsibilities, ranging from managing the government's
    accounts and the public debt; creating coins, currency, and
    stamps; supervising banks and thrifts; managing and promoting
    the domestic economy; promoting international trade and
    finance; detecting and preventing terror finance, money
    laundering, and other financial crimes; to administration of
    the tax code and collection of taxes owed. The breadth of these
    responsibilities perhaps belies the size of the $12.1 billion
    budget request.
        While there are a number of areas of interest within the
    Treasury Department, I have the opportunity to delve into many
    of them on the Banking Committee; therefore, I intend to use my
    time today to examine some current practices of the Internal
    Revenue Service.
        For some time now I have been concerned by increasingly
    hostile IRS actions towards conservation easements. Colorado
    has been a national leader in this area, so it is particularly
    worrisome to my constituents that the IRS is targeting
    legitimate easements for audits. It would appear that the IRS
    is attempting to dramatically narrow the number of legitimate
    conservation easements by applying a standard that has been
    struck down by federal courts two different times.
        While I support investigation and enforcement of legitimate
    fraud, we must not target honest taxpayers, and Colorado's
    reputation should not be tarnished. There is a significant need
    for conservation easements in Colorado, and a few abuses should
    not end the charitable tax credit for everyone.
        I have been in communication with the IRS over this matter
    for some months, however, I have been very frustrated that I am
    unable to get answers to my questions on this matter.
    Therefore, I will follow up with the Secretary in more detail
    during the question and answer period.
        I would like to thank Secretary Paulson for appearing
    before the subcommittee. I recognize that he has a very busy
    schedule, so I appreciate his presence and look forward to his
    testimony.
                                    ------

                  Prepared Statement of Senator Sam Brownback

        Good afternoon. I want to thank you, Chairman Durbin, for
    your leadership of this new subcommittee. I look forward to
    working together with you during this coming year as we make
    funding decisions and provide oversight to the various agencies
    within this subcommittee's jurisdiction.
        Secretary Paulson, thank you for appearing before our
    subcommittee today. I look forward to hearing the details of
    your fiscal year 2008 budget request and the key efforts that
    your Department will be undertaking this year.
        Looking at the President's budget, I am pleased that it
    assumes the continuation of the President's tax cuts, which
    have helped our economy rebound from recession to its current
    robust health. I am also pleased that the economy is continuing
    to grow steadily and am encouraged that the President's budget
    projects a balanced budget in 2012.
        Mr. Secretary, the lion's share of your budget--
    approximately 90 percent--is for the Internal Revenue Service.
    I understand that you are seeking additional resources to close
    the so-called ``tax gap.'' Certainly, we must ensure that taxes
    which are owed are collected. However, I remain concerned that
    our tax system is overly complex, complicated, and burdensome.
    Americans spend roughly $157 billion each year in tax
    preparation to ensure they do not run afoul of the IRS. The
    system is desperately in need of reform. I support a flat tax
    concept that simplifies tax preparation, applies a low tax rate
    to all Americans, and respects the special financial burden
    carried by American families raising children. One reason we
    have a ``tax gap'' may be that our tax system is so complex
    that taxpayers cannot figure out what they owe.
        Mr. Secretary, I want to commend your Department for its
    efforts to combat terrorism. Your ``Office of Terrorism and
    Financial Intelligence'' is working hard to safeguard the
    financial system against illicit use and combating rogue
    nations, terrorist facilitators, money launderers, drug
    kingpins, and other national security threats. This is
    important work and I am supportive of your efforts in this
    area.
        I understand that the President has asked the Treasury
    Department to aggressively block U.S. commercial bank
    transactions connected to the government of Sudan, including
    those involving oil revenues, if Khartoum continues to balk at
    efforts to bring peace to Sudan's Darfur region.
        We know that Sudan's economy is largely dollar-based,
    meaning many commercial transactions flow through the United
    States. This fact makes Sudan vulnerable to your Department's
    actions. Anticipating Treasury's actions, there have been
    reports that Khartoum is exploring ways of obtaining oil
    revenues that do not involve dollars, such as barter deals.
    Clearly, we have an opportunity here to put greater pressure on
    Khartoum to enter into peace negotiations. Mr. Secretary, I am
    whole-heartedly supportive of these efforts and I would like to
    hear what actions you plan to take in the coming weeks and
    months.
        Mr. Secretary, I look forward to hearing your testimony
    this afternoon. Your Department has an important role as the
    steward of our financial systems and in promoting our
    participation in the international economy.
        Thank you for your leadership, Mr. Chairman. I look forward
    to working with you this year.

                                TAX ENFORCEMENT

        Senator Allard. And I do want to ask a few questions
    related to the Internal Revenue Service, because it's an
    evolving issue in Colorado, and very important, and that has to
    do with conservation easements. The Congress passed some
    specific legislation providing for conservation easements,
    which is an incentive to have open space, you know, in your
    State. And what is happening in the State of Colorado is that
    the commissioners there, or the enforcers there, have--seem to
    be taking enforcement action that's over and beyond what's
    provided for in the legislation. They're being--they're
    interpreting it in a more strict way. It's, twice, gone to the
    courts, have been on--and the Internal Revenue has been
    overruled in the courts on two cases. And so, my question is,
    is why--after they've been overruled twice in the courts, why
    they're continuing to push this. I hope that you're aware of
    this. If you're not--and, if you are, somewhat, I'd like to get
    a response; if not, we can follow up with this when we're
    having the hearing on the Internal Revenue Service.
        Mr. Secretary, do you have a response to that?
        Secretary Paulson. I'm not familiar with the issue, but I
    think you're right to follow up with Commissioner Everson. I
    think he would be the appropriate person to talk with about
    that.
        Senator Allard. Well, I hope you have him adequately
    briefed, and tell him that I'm going to be waiting for him.
    And--hope I don't have--I hope I can be here, but I'm going to
    make every effort to be here, because I think this is really
    important.
        Secretary Paulson. Good.
        Senator Allard. And then, also--and it's not that I don't
    think we ought--shouldn't be doing more to enforce our tax
    laws; I think we ought to be doing more. And I--you know,
    we're--there's actual--in the budget, more money, with the idea
    there's going to be more strict enforcement on collecting from
    those who are not paying their taxes.

                                  PART PROGRAM

        Now, in regard to that, you're familiar with the PART
    Program? This is the President's program, where he asked the
    agencies to set up goals and objectives; and then, if you don't
    meet those goals and objectives, or if you don't even bother to
    set those up, then there's a rating system that goes into that.
    And that is--you can find that PART Program rating on the
    Internet, by the way; you go to--the ExpectMore.gov--and if you
    go there, you'll find that there's one of your agencies that is
    rated as ineffective. If you were--if it was a classroom, that
    would be an ``F.'' And it's the Internal Revenue Service earned
    income tax credit compliance (EITC). Have you looked at that
    particular program? Why is it ineffective?
        Secretary Paulson. Well, I would, respectfully, disagree,
    because this is something that I have looked at and spent some
    time with. I have actually spent some time with a number of
    people in the House and in the Senate, have gone out to a
    center, with John Lewis and Charlie Rangel, and here's the
    issue with the EITC.
        Senator Allard. Now, this is the compliance aspect of EITC.
        Secretary Paulson. I understand that.
        Senator Allard. Yes.
        Secretary Paulson. I'm going to get to that. And I'm going
    to say you should take a look sometime at the form and 53 pages
    of instructions. This is an area where it's easy to make
    mistakes. I sometimes get questions from the other side, which
    say, ``Tell us why Everson and the IRS have so many people
    auditing this area, as opposed to the high net worth.'' And, I
    explain it's a totally different function. The audit is done
    from remote locations, and it is just looking at the forms, and
    checking for mistakes and errors and inconsistencies, which is
    a very different type of function. And it's not possible to
    transfer those people to do other things. So, we're doing our
    best. And we have quite an outreach program this year to help
    with the education, and we will, hopefully, as we move into the
    next tax season, find ways to simplify the form and make it
    easier. But, again----
        Senator Allard. Well, I think that's key. And that was
    going to be my next question. You know, we need to--it seems to
    me like that needs to be simplified, and, hopefully, that
    that's within your purview to do that, and more clearly define
    goals and objectives so people understand where they're going
    to be, and put it in terms in which they can be measured.
        Secretary Paulson. Right. And you should ask, when he's
    here, because, he's spent a lot of time on this, himself--
    Commissioner Everson.
        Senator Allard. Now, there are some programs under your
    purview that show ``results not demonstrated.'' And the way
    those are explained to me is, those agencies have done nothing,
    or very little, to try and set up any measurable goals and
    objectives. And, in the Treasury, we have global environment
    facility of the Internal Revenue Service, healthcare, tax
    credit administration, Internal Revenue Service tax collection,
    Tropical Forest Conservation Act--are just a few that is
    named--are listed on here. Why aren't those agencies--why
    haven't they done anything at all to try and comply with PART?
    Why is their rating ``results not demonstrated?''--and that's
    what that means, that they haven't been able to put together a
    management objectives program.
        Secretary Paulson. Well, I can't, again, accept the
    assertion that, with these programs or these areas, we don't
    have people that are working to achieve objectives. And if you
    would like to pick any of those programs that are of particular
    interest to you, I'd be happy to discuss it further and have
    the people involved come up and spend some--
        Senator Allard. Well, they're of interest to me, because
    I'm on the Budget Committee and I'm on the Appropriations
    Committee.
        Secretary Paulson. Right.
        Senator Allard. And I want to--I want to see taxpayer
    dollars spent on programs where we get results that has more--
    --
        Secretary Paulson. Right.
        Senator Allard [continuing]. We don't want programs out
    there running that have empty promises.
        Secretary Paulson. Well, I----
        Senator Allard. And so, the reason for this whole program
    is that we have--the taxpayer dollars are going to programs
    that create measurable results, so that, as policymakers, we--
    and, as you know, this is--this evaluation is done by the
    Office of Management and Budget (OMB). And I suggest that maybe
    you sit down with them, see what you need to be doing, and--I'm
    just--what I'm trying to do, on this hearing, is to highlight
    it for you----
        Secretary Paulson. Right.
        Senator Allard [continuing]. So that next year when you
    come in, you won't be--you'll know that we'll be looking at
    these--that this makes a difference in our thinking.
        Secretary Paulson. Well, let me give you an example, just
    on one of the programs, which is the global environmental fund.
    This is a multilateral fund that deals with environmental
    issues. And, in that case, we, the U.S. Government, have
    underfunded our request and our obligation, globally. And so,
    this is one where I know we had held back, because we had felt
    that certain objectives weren't being met. This year, we
    decided to fund it more fully, because we felt it was
    appropriate. And so, that's one. In terms of how someone in
    PART did the analysis, I can't comment on it.
        Senator Allard. Well----
        Secretary Paulson. I can just tell you that we looked very
    carefully at everything we put in the budget.
        Senator Allard. Well, we get down to the----
        Secretary Paulson. Right.
        Senator Allard. I mean, I commend you for looking at that
    and evaluating it, and maybe it does need more money.
        Secretary Paulson. Right.
        Senator Allard. And--but it would be interesting, now, to
    look at this program, next year, to see if the more money that
    you put in there got spent wisely. And if they--and I would
    hope that, on these international agencies, that you expect
    accountability in taxpayer dollars when they go into them.
        Secretary Paulson. We do. We expect accountability, and
    there's also a point, on some of these things, that, if we want
    to be global leaders, and if we want to play the role that
    people would like us to play at some of these multilateral
    organizations, that we have to put some money on the table. So,
    it's a tradeoff.

                 ASSISTANT SECRETARY FOR INTERNATIONAL AFFAIRS

        Senator Allard. Mr. Chairman, I have one more question, if
    you have time for that.
        Would you like--let's see, on--the 2008 budget proposed
    creating an additional Assistant Secretary in the Office of
    International Affairs (OTA). Would you comment on why this is
    necessary, and what this position will be doing now that you're
    not currently doing?
        Secretary Paulson. Yes. This, to me, of all the things to
    defend, is the easiest. When I look at the role that I believe
    you should want Treasury to play in the world, and I look at
    the wide variety of issues that we're dealing with right now--
    you know, the strategic/economic dialogue with China; there's
    just a wide variety of things where we want to play a major
    role when we're dealing with our economic partners around the
    world--and if a man from Mars came down and looked at this in
    today's world and said, ``They've got one assistant secretary
    in the international area,'' and then looked at the things that
    this man has on his plate, and the complexity of some of these
    issues, CFIUS being one of them, you know, the Committee on
    Foreign Investment----
        Senator Allard. CFIUS?
        Secretary Paulson. Yes.
        Senator Allard. The ports.
        Secretary Paulson. Yes. I would just simply say the level
    and the complexity of the issues we've got--Europe, Latin
    America, Asia--investment issues, trade issues--this is an
    important job. My Assistant Secretary for International right
    now is in Korea, helping Sue Schwab and her team with some
    investment provisions in an FTA they're trying to negotiate.
    It's a perfectly reasonable thing for him to be doing, but
    there's three or four other things he's not doing because he's
    there. And when I look at how other agencies are staffed, to
    me, this would be an important job to fill. And the interesting
    question, to me, is not why there's not two, it's why there's
    maybe not three. So, we went in, and have requested another
    assistant secretary.
        Senator Allard. Well, thank you for your responses to my
    questions, and we'll follow up on the stuff on Internal Revenue
    on that hearing.

                                  PART PROGRAM

        I just--on all the--Mr. Chairman, on all these hearings
    that we have where we have the Secretaries show up who are in
    charge of the various Departments, I'm making an effort to sort
    of sensitize everybody to how important the PART Program is,
    because, as policymakers here on the congressional side, budget
    and appropriators, it's shedding information. And we get
    particularly concerned, I think, when we see something that's
    rated as ineffective. And if we--even worse yet, in my mind,
    is, we see an agency that is not demonstrating results, which,
    to me, lacks--shows a lack of effort.
        Secretary Paulson. Let me just make one additional comment.
    I do believe we should focus on performance, and we should have
    to justify performance. One of the things I learned in the
    private sector, how you measure that performance and who
    actually measures the performance, makes the difference. And
    so, sometimes--and I'm not making any comment about PART or any
    other program, this is just a general observation. Some of the
    performance measurements that I've looked at are not worth the
    paper they're printed on. We will take responsibility. We know
    we need to answer to you, and to others, for performance, and,
    on any of these things, we're just happy to spend the time, and
    I'm not saying we're perfect----
        Senator Allard. Yes.
        Secretary Paulson [continuing]. Because I found plenty of
    issues, but----
        Senator Allard. Well, if that's the case, I'd hope you'd
    sit down with----
        Secretary Paulson. Right.
        Senator Allard [continuing]. OMB and work that out.
        Secretary Paulson. Right. Right.
        Senator Allard. Thank you.
        Thank you, Mr. Chairman.
        Senator Durbin. Thank you, Senator.

                              FINANCIAL REPORTING

        Mr. Secretary, the Office of Foreign Assets Control and the
    Financial Crimes Enforcement Network have been overwhelmed by a
    backlog of financial reports filed by financial institutions,
    prompted by a desire to err on the side of caution.
        Secretary Paulson. Right.
        Senator Durbin. The result is said to be an abundance of
    filings reporting only nominally suspicious activity or
    transactions. First, is this the case? How would you
    characterize the magnitude of the backlog there? And what
    percentage of suspicious activity reports received are actually
    examined?
        Secretary Paulson. Well, let me say that this is an area
    where one thing I've learned to do is listen. As we look at
    competitiveness in the financial services industry, and capital
    market's competitiveness, one issue we need to look at is
    regulation, and, is there a cost benefit? You know, are we
    putting too many requirements under its institutions?
        Senator Durbin. So, what do you think?
        Secretary Paulson. This has been an area that has been
    cited, and it's one we're in the process of looking at right
    now.
        Senator Durbin. Can you explain to me----
        Secretary Paulson. I don't know what we have--sometimes if
    you build a haystack too big, you can't find the needle. And
    I'm not saying we've done that, but we've got a new head of
    FinCEN, we've got a very outstanding young man, and he's got
    his hands full. But this is one thing that we will be looking
    at, at Treasury, and, again, talking to others at the Fed and
    elsewhere.

                            IRAQ THREAT FINANCE CELL

        Senator Durbin. Can you explain to us what the Iraq threat
    finance cell is and how it's operating?
        Secretary Paulson. No, sir.
        Senator Durbin. I'll give you a chance to respond to that
    in writing, if you would, please.
        Secretary Paulson. Yes.
        [The information follows:]

                            Iraq Threat Finance Cell

        The Department of the Treasury broadened its unique
    intelligence role overseas through the Baghdad-based Iraq
    Threat Finance Cell (ITFC). Since its establishment in late
    2005, the ITFC has paid significant dividends. Co-led by the
    Departments of the Treasury and Defense, the ITFC collects,
    analyzes, and disseminates timely and relevant financial
    intelligence to the war-fighter. U.S and Coalition military
    commanders have come to depend on this intelligence to help
    combat the Iraqi insurgency and disrupt terrorist, insurgent,
    and militia financial networks.

                              FINANCIAL REPORTING

        Senator Durbin. Some critics question whether U.S. economic
    sanctions and financial regulation, as you've just said, place
    too much burden on financial institutions and international
    banks without providing sufficient guidance and training to
    implement the measures in a cost-effective way. One estimate
    from 2003 suggested the annual cost of U.S. anti-money
    laundering efforts for businesses was upwards of $7 billion. Do
    you agree that U.S. counterterrorist financing efforts have
    placed too much burden on the private sector?
        Secretary Paulson. As I said to you, I thought I tried to
    answer the question, you know, the first time you asked it--
    which is that this is something we're looking at. There is a
    cost benefit. We need to get it right. Those activities are
    very important, they're critical to our national security. So,
    what we need to judge is, is there a way where we could reduce
    the burden and get a better, more effective result? Okay?
    Because----
        Senator Durbin. That's being studied now?
        Secretary Paulson. That's being studied now--because the
    goal is to stop terrorism, to stop illicit financial
    activities. And it's a very important goal. And these programs
    have been very successful. So, the question we're now asking
    is, what's the right balance? You've asked the question, and I
    obviously think it's a good question, because I've asked the
    question, myself, and we're looking at it.
        Senator Durbin. I always like it when----
        Secretary Paulson. We really don't have an answer yet.
        Senator Durbin. I always like it when my questions are
    complimented. Thank you.

                                  SUDAN POLICY

        Let me ask you another. You and I had a conversation in my
    office about Sudan and Darfur, and I expressed my concern about
    this situation which President Bush has, I think, accurately
    characterized as a genocide. We talked about things that we can
    do, as a Nation, to put pressure on Khartoum, the Sudanese
    Government, to allow U.N. peacekeepers to come in and provide a
    rescue effort for these poor people.
        I'd like to ask you, if you can, to tell me what the
    Treasury Department of the United States can do to help in this
    situation. Can we block Sudanese transactions that flow through
    U.S. banks, so that we can reduce the resources that the
    Sudanese Government can bring to bear against its own people?
    And what resources would you need to accomplish that, if
    possible?
        Secretary Paulson. Well, let me say, as you mentioned, we
    had a chance to talk about this. I've talked with the President
    a number of times about this. As you know, he's very committed
    and very passionate; talked with Secretary Rice, as she and
    Special Envoy Natsios are leading the efforts, Treasury is
    playing a support role, and, I believe, an important support
    role. We've had sanctions in place since 1997. You've
    identified one of the things we can do, which is to identify
    and disrupt dollar payments to Sudapet or other entities in
    Sudan, particularly those that go through the U.S. financial
    system. I think you will see, sometime in the weeks and months
    ahead, some actions taken that will show you that we're being
    active and diligent. I press people all the time, as does the
    President, to be creative, to think out of the box.
        I know one thing we would like, and we're thinking it
    through, and we'll have some legislative suggestions. But right
    now, if we find a financing that is going through the U.S.
    banking system, we'd like the flexibility to charge a larger
    fine, because $50,000 per transaction may not be enough, when
    you run into a major transaction.
        And so, there will be some things. And I do think this is
    one area, Mr. Chairman, where, knowing your commitment, we've
    had people up, briefing you, as much as you want to talk to our
    people. We're committed. If you've got ideas, we want to
    explore them and work with you, because this is very important.
        Senator Durbin. We had a classified briefing with Special
    Envoy Natsios just last week.
        Secretary Paulson. Yes.
        Senator Durbin. And we're working with him, and I won't go
    any further in my statements at this hearing, but if the
    Treasury Department needs additional resources at any point, we
    want to be there to help.
        Secretary Paulson. Right. And I think Treasury might have
    been there when you had that----
        Senator Durbin. Yes, I believe you were.
        Secretary Paulson. We had people there, so----

                               ECONOMY AND WAGES

        Senator Durbin. I'd like to ask you some general questions
    about the economy, because I think you have a unique
    perspective, having come from the private sector, now in the
    administration, dealing with some of the policy decisions that
    are being made. Our economy has clearly grown over the last
    several years, but there is ample evidence that the benefits of
    this growth have not been spread evenly across our population.
    Income inequality has been rising. Wages are not keeping up
    with productivity. And many families feel like they're being
    left behind. What do you think we should do to ensure that
    Americans benefit from the growth of our economy?
        Secretary Paulson. I think that is an important question,
    and one that I'm focused on. I would say this. When I came
    here, in July, and looked at the numbers--and, as a matter of
    fact, the first time I spoke on the economy, I talked about
    this issue--and it was my best judgment then that this was a
    time very much like the mid-1990s, and that if we kept adding
    new jobs and the top line stayed strong and productivity
    remained high, you would see that start to translate itself
    into real income growth for the average worker. And we've seen
    some real tangible signs of that. So, real income is now up 2
    percent over last year. So, there's some positive movement.
        But to get to your fundamental question, and the
    fundamental question really is that in this country, and in
    many other countries around the world, there's been a trend,
    that now goes back for almost three decades, which is the
    widening divergence between the top and the bottom. And there
    are different theories about this. Some people point to trade.
    I really believe that, by far, the biggest driver is technology
    and that what we're seeing--and there's been very, very major
    changes in productivity increases as a result of technology--
    and those people that are able to use technology and leverage
    themselves through technology, and have the skills that are
    most in demand, are getting the greatest benefits. So, I've got
    to believe that there are ways to do a better job than we, as a
    Nation, are doing. And I know this is something the President's
    talked about. It's education, but, more than education, longer-
    term education, it's training and skill development. And so, I
    do think, as I travel around the world and talk with people in
    other industrial nations, they're all focused on the same
    things.

                                 HOUSING MARKET

        Senator Durbin. Could I ask you about a specific issue that
    came up last week in hearings on the Hill? It relates to the
    basic desire of people to own a home, and people with limited
    financial resources get involved in some pretty risky borrowing
    with the subprime lending----
        Secretary Paulson. Right.
        Senator Durbin [continuing]. To buy--to build a home, and
    some of them guessed wrong, they weren't able to keep up with
    the payments and now have been overwhelmed by the situation.
    The banks are unhappy, the consumers, the homeowners are
    unhappy, and a lot of us in the Senate are unhappy when we hear
    from them.
        What's your view on the volatility in the subprime lending
    market? And how much impact do you think this'll have on our
    economy, as a whole? And can the Treasury do anything to
    address this issue?
        Secretary Paulson. I'll take a few minutes on this one,
    because it's very important, and, in some ways, it's
    complicated.
        But let's begin with the fact that we are making--and I
    believe it will be a successful transition, but a transition
    from an economy that was growing at an unsustainable level to
    one that's going to be growing at a more sustainable level.
    There are a number of positive signs. Inflation seems to be
    relatively contained. The labor market remains strong. We've
    had exports growing faster than imports for four quarters now.
    And the consumer is hanging in there. But there's been a major
    correction in housing. And, of course, housing was growing at a
    level way above what was sustainable, for a number of years.
    And it's quite a significant correction. And it has impacted a
    lot of people.
        It would appear to me that the housing--because you're
    dealing with the systemic impact on the economy--that it would
    appear that the housing correction is at the bottom, or near
    the bottom. We need to watch it longer, but that's what it
    would appear. It is then not surprising, as regrettable as it
    is, that you would have the issue with subprime mortgages and
    other mortgage resets. And this will take longer to work its
    way through the system.
        Looking at it from a systemic standpoint--again, I'm going
    to get to the human situation in a minute, but from the
    systemic standpoint, my best judgment is that this is largely
    contained. And, in terms of people that have been impacted, it
    has to be a grave concern, and we need balance. I think, the
    understanding of the balance, that access to credit and credit
    availability made homeownership available to a good number of
    people, and we need to get that balance right. At Treasury,
    we're looking at it from the systemic standpoint and the impact
    on the economy, but we're also asking ourselves other
    questions, and we have a process going where we're talking with
    the Federal regulators and other regulators at the State level,
    and that you know, the regulatory structure is something that
    we're looking at, at Treasury, as it relates to financial
    market's competitiveness. We have a Balkanized regulatory
    structure, and, in a number of areas, we have multiple
    regulators sometimes competing with each other, and, in others,
    there seem to be some holes where there isn't as much
    regulation. So, we're looking at it from the consumer
    protection standpoint, predatory lending issues, fraud issues,
    and those sorts of things, and lessons learned.
        But, again, I just want to emphasize, we want to take a
    careful, thoughtful look at this, and we don't want to rush to
    judgment or overreact, because, again, the availability of
    credit has been very important to millions of Americans.

                                FINANCIAL CREDIT

        Senator Durbin. I'd like to follow up on that. In my
    lifetime, and in yours, we have gone from an environment of
    usury laws to payday loans----
        Secretary Paulson. Yes.
        Senator Durbin [continuing]. From one extreme to the other.
        Secretary Paulson. Yes.
        Senator Durbin. And it strikes me that we do need some
    balance here. We want to make credit available, but I think
    there is credit exploitation taking place now. And I picked on
    payday loans, because, in my State, that--our State--that's the
    obvious place to go. But I also think it relates to credit
    cards and relates to a lot of credit that's now being extended
    to people, beyond their means, without real notification of the
    danger that they are courting if they're not careful. So, I
    hope, when you look at this, you will look at both sides of the
    equation, not only the availability of credit, but the abuse of
    credit by some institutions, at this point.
        Secretary Paulson. You're totally right. And as with
    everything in life, it's balance. It's like the question you
    were asking me about the anti-money laundering laws, Do we have
    the right balance? And that's the key question here.

                              DIALOGUE WITH CHINA

        Senator Durbin. I want to ask you--last question--about
    China, because you've shown an interest in China, and I've been
    watching your efforts to the strategic/economic dialogue over
    the past month. I thank you for bringing this issue to the
    fore. And obviously we have some concerns at Capitol Hill, and
    at home, and about whether the Chinese will float their
    currency soon. Will they shut down the rampant intellectual
    property theft that we know has robbed many American businesses
    of untold revenue? Will they enforce better labor,
    environmental, and human rights standards? And what steps is
    the administration taking to move in these directions?
        Secretary Paulson. Well, thank you for asking that
    question. This is a major focus of mine, and I think, as you
    know what we're doing through the strategic economic dialogue
    is getting all the agencies, departments in the U.S. Government
    that deal with economic issues to come together, prioritize,
    and speak with one voice to the highest levels of the Chinese
    Government.
        Now, let me take two issues you mentioned, because we're
    dealing with longer-term structural issues in the dialogue, but
    we also are dealing with the pressing short-term issues, which
    need to be solved. Take currency as an example. The renminbi,
    clearly we need more flexibility and we need more appreciation
    in the short term, and we're pushing very hard, and that's
    important, in our country--and, frankly, it's important in
    their country if their market's going to develop in a way in
    which it's going to be good for them and good for us. But we
    also need to get to the point where they can have a market-
    determined currency, because many countries in the world have
    managed currencies, many of them don't have market-determined
    currencies. But China is, by far, the largest that doesn't have
    a currency whose value is set in a competitive marketplace. And
    so, they're in this situation where they're a big part of the
    global economy, they're integrated into the global economy, in
    terms of trade and products and services, but their financial
    markets are very, very immature, they are not integrated into
    the markets. And so, a big part of what I need to do, and what
    I have been doing--and I was, matter of fact, in Shanghai
    several weeks ago, giving a speech on the need to reform their
    capital markets and open up to competition, because only when
    they do that are they going to be able to get to the point
    where we all want them to get, where they have a currency that
    trades in a competitive marketplace. And then, the other
    benefit is that right now they have a savings rate at a
    precautionary level, at 50 percent. And why do their
    individuals save at such a high level? Well, frankly, because
    they are not getting any reasonable return on their savings.
        There's over $2 trillion in Chinese banks earning 2\1/2\
    percent, which is negative after taxes and after inflation. And
    when you look at what we can get as a return in a savings plan,
    a pension fund in the United States or other industrialized
    nations that are growing at much lower levels than China, and
    you translate and say, if Chinese savers in their pension plans
    were able to get 8 percent, then we would have the kind of
    economy they'd like to have and the kind of economy we would
    have. And that's really going to be the only way we're going to
    be able to satisfactorily address the trade balance program.
        Now, on intellectual property, you're right, a very
    sensitive issue. This is something that is handled by USTR and
    Commerce through the JCCT. I do everything I can to help out,
    and we deal with that negotiating and also through the World
    Trade Organization (WTO) which has ways of resolving disputes,
    and so, we have a number of ways to go about trying to enforce
    proper laws, and this is quite important.

                                PRIVATE CAPITAL

        Senator Durbin. I said that was the last question. It turns
    out there's one I really have to go to, because it is
    important, and I hope you'll forgive me for one more question.
    And it's in an area that is a complex area. But the President's
    working group recently released principles and guidelines on
    private pools of capital.
        Secretary Paulson. Right.
        Senator Durbin. This principle-based framework generally
    relies on market discipline to strengthen investor protection
    and guard against systemic risk. Do you consider this a first
    step toward addressing the challenges presented by the growth
    of hedge funds? And, if so, what additional steps are being
    considered? And what evidence is there that this indirect
    approach to hedge-fund supervision is more effective than
    direct approaches, such as those employed by the United Kingdom
    Financial Services Authority, in protecting investors and
    mitigating systemic risk?
        Secretary Paulson. Well, again, that's a big important
    question, and let me do my best to answer it in a few minutes.
        First of all, there is no doubt that the global capital
    markets have changed significantly over the last 5 years, in
    particular. And there has been a big growth in private pools of
    capital, which are often referred to as hedge funds or private
    equity funds. And there's been a big increase in over-the-
    counter derivatives, as opposed to exchange-traded derivatives.
        As we've studied this at the President's working group,
    we've all concluded that, by and large, these are positive
    developments. They've helped disperse risk, make the markets
    more competitive and more efficient. But they're not without
    challenges. And so, we've thought about it very carefully, and,
    as we addressed it, what we came out of our deliberations with
    was something which I thought was quite important, because we
    had members of the President's working group and other
    important regulators, like the OCC, all come together and, with
    one voice, say, ``This is how we want to deal with this.'' And
    the focus was really in two areas--first of all, is systemic
    risk, managing systemic risk. And here, there is quite a
    proactive focus in dealing with the regulated entities--the
    banks, the prime brokers, and others that lend money and
    provide credit--and making sure that there is the proper
    liquidity, its transparency, all of those sorts of things. And
    then, on the investor protection end, the Securities and
    Exchange Commission's (SEC) obviously got a big role to play,
    in terms of their antifraud, and in terms of the threshold
    levels for investors to come into these funds. And, again,
    there is a big emphasis on transparency.
        Now, it is our view that--to have all of the regulators
    come together and, with a principles-based approach,
    emphasizing market discipline, and all speaking with one voice,
    would be a major development. And we're going to watch this,
    continue to study it, see how things develop.
        There's also a good deal of work that is really being
    coordinated under Tim Geitner, at the New York Fed, dealing
    with derivatives. And, again, they're dealing with a lot of the
    settlement issues, clearing settlement, the infrastructure
    issues, making sure that there are contracts that work in times
    of stress, that sort of thing. So, there's a lot of work being
    done in all of these areas, and we're going to continue to look
    at them.
        Senator Durbin. I'm sure that you remember the collapse of
    the Long Term Capital Management Group.
        Secretary Paulson. Yes.

                                RISK MANAGEMENT

        Senator Durbin. The President's working group released a
    report that contained a number of recommendations for improving
    risk management practices at the financial institutions that
    conduct transactions with hedge funds. What evidence is there
    that these recommendations have been implemented and that such
    implementation has reduced systemic risk from hedge-fund
    activity?
        Secretary Paulson. Well, again, that's a complicated
    question. Just as an observation, I'm not going to say there's
    a cause and effect--but we haven't had a financial shock since
    1998. So, we need to go back to long-term capital.
        I do believe, as someone who was in the financial sector
    when these recommendations came out, they made a difference.
    People looked at them. I think that there are real benefits,
    but there are challenges. And I think what we came out with--I
    was really gratified that we had all of the regulators, in the
    United States--the Federal regulators--come together with a
    forward-leaning approach, and we're going to watch this very
    carefully, and keep looking, and, if other steps need to be
    taken, we will recommend them.

                          SARBANES-OXLEY REQUIREMENTS

        Senator Durbin. Last question, for sure. Sarbanes-Oxley.
    Some of our mutual friends, in Chicago and other places, tell
    me it just goes too far, too darn many requirements, too
    expensive, discourages people from serving on corporate board
    of directors. And some of our other friends, mutual friends,
    say, ``Thank goodness for Sarbanes-Oxley''--restored the
    integrity of our corporate structures after the scandals of
    Enron and other companies, and were it not for that integrity,
    we would just be another competitor in the global scene. We
    have a primacy, because we do have tougher requirements, and
    people know there's transparency and accountability. So, where
    does Secretary Paulson come down on Sarbanes-Oxley?
        Secretary Paulson. Well, let me say that I've given a very
    long speech on the topic, which is probably too long for you to
    hear today. We had a Capital Markets Competitiveness Conference
    the other day, which was, I believe, quite successful. We will
    have follow-up on things we're going to do in three areas, but
    I'm going to try to summarize some of my thoughts for you. But,
    again, it'll be very similar to what we've said in some other
    things, that it's a matter of balance.
        Now, if you look specifically at the Sarbanes-Oxley
    legislation, I don't see--and I don't think--there have been a
    number of groups that studied it, and I think they've all
    concluded the same thing--it doesn't take a legislative fix.
    There are very good principles in that legislation, and, matter
    of fact, some of the abuses that have taken place, really, most
    of them were before that legislation, as it related to some of
    the abuses in the options areas and others. So, I think when
    people talk about Sarbanes-Oxley, they're using that as a
    shorthand for not just the law, but the implementation of the
    law, and the regulatory and enforcement environment, and the
    legal environment, and the fact that because the corporate
    scandals were accounting scandals, for the most part, and there
    were, then significant reforms, that there are also a number of
    ways in which the relationship between accountants and boards
    have changed, all of which are not constructive. And so, the
    question is now not, are there some issues? Because there are
    some issues. The question is what to do about it. And a lot of
    it is balance, a lot of it is taking a risk-based approach,
    looking at the cost and the benefits, and not saying, ``We want
    to regulate--that if we regulate to a large extent, we can
    eliminate losses or what have you.''
        So, we will be coming out with some ideas that deal with,
    first of all, regulatory structure, and, what are the issues
    surrounding regulatory structure in the United States? We'll be
    coming out with some steps that might be taken and thoughts we
    have in the accounting area. A very important step has already
    been led by Chairman Cox and Chairman Olson, of the SEC and
    PCAOB, on the way in which something that's called section 404
    of Sarbanes-Oxley is implemented, which is a very simple
    provision of the bill, but has to do with an accounting
    standard relating to control systems, and it's a place where
    implementation was very flawed, the cost-benefit equation got
    way out of balance, and it's got to be put back in balance.
        So, there are the accounting issues that we'll look at, and
    then look at the enforcement in the legal environment. But,
    again, I think, often when people talk about Sarbanes-Oxley,
    they don't really mean the bill, because if you say, ``Now,
    tell me, what specifically would you change in the bill?''--
    what they talk about is, there's been so much change that
    happened in such a short period of time that everyone in the
    private sector is still trying to digest that change and get it
    in the proper balance.
        Senator Durbin. Mr. Secretary, thank you for your patience.
    I'm sorry we got started so late.
        I want to thank all those who participated in preparing for
    this hearing. I appreciate the benefit of hearing from you
    about the Department. I think this forum has provided us some
    insight into the Department's operations, which will help us in
    our budgetary considerations.

                         ADDITIONAL COMMITTEE QUESTIONS

        The hearing record will remain open for a period of 1 week,
    until Wednesday, April 4, at noon, for subcommittee members to
    submit statements and their questions for the record.
        [The following questions were not asked at the hearing, but
    were submitted to the Department for response subsequent to the
    hearing:]
                Questions Submitted by Senator Richard J. Durbin
    alternative to outsourcing: fedsource--stay at treasury or move to gsa?
        Question. Franchise Funds were established by Congress under the
    Government Management Reform Act of 1994 to foster competition and
    creativity in government. ``FedSource'' operates under the franchise
    granted to the Treasury Department to provide business services to
    federal agencies on a competitive, cost-reimbursable basis. It has been
    reported that the Treasury Department may transfer this ability to the
    General Services Administration or Defense Logistics Agency.
        Mr. Secretary, can you explain to me why you are thinking about
    relinquishing this program and the potential timetable for doing so?
        Answer. The Treasury Department strongly supports Franchise Funds
    as a means of fostering competition in government. Treasury's Franchise
    Fund components will continue to offer administrative services such as
    travel, procurement, personnel and accounting. Only one component,
    FedSource, is affected.
        The Treasury Department will transition out of the interagency
    acquisition business operated by FedSource for two primary reasons:
      --The original purpose of FedSource was to provide small-scale and
            limited acquisition support, which met the Treasury
            Department's strategic needs at the time of its creation.
            However, the significant increase in activity related to
            customer demand has required an increase in operational
            commitment that is not compatible with the core mission and
            focus of the Department. Treasury management, both at the
            Department and at the Bureau of the Public Debt, has
            significant concerns with the risks associated with sustaining
            the current business model. In addition, recent reports by the
            Treasury Inspector General and the Defense Department Inspector
            General identified control weaknesses and procurement
            deficiencies.
      --Other government organizations (e.g., the General Services
            Administration and Defense Logistics Agency) whose core
            missions include providing these types of procurement services
            may be better positioned to provide these services at the best
            value to taxpayers.
        The Treasury Department will ensure a smooth and orderly transition
    process. The goal is to complete the transition, which will be managed
    by the Bureau of the Public Debt, by September 30, 2008.
        The Treasury Department is committed to protecting taxpayer
    resources, quickly addressing management issues, and operating the
    Department in the most efficient and effective way possible.
        Question. For the 10th consecutive year, certain material
    weaknesses in financial reporting and other limitations on the scope of
    its work resulted in conditions that prevented GAO from expressing an
    opinion on the federal government's consolidated financial statements.
    A major factor contributing to the GAO's disclaimer is the federal
    government's ineffective process for preparing the consolidated
    financial statements. As reported by GAO, such weaknesses in the
    consolidated financial statements preparation process impair the U.S.
    government's ability to ensure that these statements were (1)
    consistent with the underlying audited agency financial statements, (2)
    balanced, and (3) in conformity with U.S. generally accepted accounting
    principles.
        Although Treasury has made progress in addressing some of these
    identified weaknesses, what more can be done to timely resolve such
    problems so that this area is no longer a major impediment to the
    federal government receiving an opinion on its consolidated financial
    statements?
        Answer. Each year Treasury, through the Financial Management
    Service (FMS), continues to improve its policies, procedures,
    information systems and internal controls used to prepare the
    government-wide consolidated financial statements (formally the
    Financial Report of the United States Government or FR) and will
    continue to do so. During the fiscal year 2006 audit, FMS' efforts
    resulted in the resolution of approximately 60 GAO recommendations. FMS
    will continue to resolve the preparation issues that are in our realm
    of control. However, there are other preparation data integrity issues
    that depend on accurate and consistent data being submitted by the
    agencies.
        FMS is working diligently on providing the agencies with guidance,
    tools, and assistance to improve the accuracy and consistency of the
    agency data to the point where the issues identified by GAO are
    mitigated or resolved at the FR preparation level. The following
    discussion provides FMS' planned actions to address those
    recommendations, as well as the initiatives that FMS is implementing to
    help the agencies improve their data accuracy and consistency.
    Consistency with agency audited financial statements
        FMS currently uses the Government-wide Financial Reporting System
    (GFRS) as the principal information system to collect agency audited
    financial statement information and produce significant portions of the
    FR.
        In fiscal year 2006, GAO acknowledged and noted improvements with
    regard to consistency with agency information in the Balance Sheet, in
    the Statement of Net Cost and Statement of Social Insurance, and in the
    note disclosures that are directly linked to the amounts on these
    principal financial statements. FMS is currently revising its policies
    in fiscal year 2007 to ensure that the remaining notes are materially
    traceable to agency note disclosures.
        FMS has two major initiatives which will modernize longstanding
    Federal accounting processes and provide agencies with methodologies
    and tools to improve the accuracy and consistency of their financial
    data:
      --The Government-wide Accounting (GWA) Modernization project which
            will replace existing government-wide accounting functions and
            processes. This project will improve the reliability,
            usefulness, and timeliness of the government's financial
            information, provide agencies and other users with better
            access to that information, and will eliminate duplicate
            reporting and reconciliation burdens by agencies, resulting in
            significant government-wide savings. It will also improve the
            budgetary information being collected from the agencies at the
            transaction level.
      --The Financial Information and Reporting Standardization (FIRST)
            initiative integrates budget and financial reports from Federal
            Program Agencies. FIRST will improve the consistency of the
            budgetary and proprietary accounting data recorded in agency
            financial statements and reported to FMS through its trial
            balance.
    Balanced Consolidated Financial Statements
        A major challenge in preparing balanced financial statements is
    properly accounting for and eliminating unreconciled intra-governmental
    transactions. Some of these transactions occur solely between two
    federal agencies while others occur between the agencies and the
    general fund. FMS is taking the following actions to address this
    issue:
      --Requiring comprehensive intragovernmental accounting data from
            agencies on a quarterly basis that will allow FMS to provide
            data to all federal agencies for them to better analyze and
            reconcile intragovernmental differences.
      --Working with the CFO Council and OMB to enforce the business rules
            for intra-governmental transactions and to organize the Dispute
            Resolution Committee.
      --Encouraging greater auditor participation by requiring agency
            auditors to more closely scrutinize intra-governmental out-of-
            balance conditions with other agencies.
      --Moving forward on the FIRST initiative which is being designed to
            provide authoritative information contained in Treasury's
            central accounting system to the agencies to facilitate the
            reconciliation process for specific intra-governmental
            transactions.
    Compliance with GAAP
        During fiscal year 2006, FMS made significant improvements in
    improving overall GAAP compliance. FMS was able to significantly reduce
    the number of audit findings relative to GAAP compliance. For fiscal
    year 2007, FMS will
      --Use the Chief Financial Officers (CFO) Council, Central Agency
            Reporting Subcommittee as a forum to discuss those accounting
            and reporting issues that affect the FR.
      --Focus on the remaining material items with the expectation that the
            findings related to these items can be closed by GAO either
            this year or next year.
      --Continue to revise and update the Treasury Financial Manual with
            accounting, reporting, and disclosure policies and procedures
            to ensure compliance of the FR with generally accepted
            accounting principles (GAAP).
        Question. TFI is home to the newest addition to the U.S.
    intelligence community: the Office of Intelligence and Analysis (OIA).
        How well is the office being integrated into the intelligence
    community?
        How would you characterize the degree of intelligence sharing that
    takes place between Treasury and the rest of the intelligence
    community?
        Do any barriers to intelligence sharing exist?
        Answer. Since the creation of the Treasury's Office of Intelligence
    and Analysis (OIA) under the Intelligence Authorization Act of Fiscal
    Year 2004, it continues to build relations throughout the Intelligence
    Community (IC). In particular, OIA has developed important partnerships
    within the leadership of the IC, through collaborative projects,
    information sharing, and community support.
        Even though OIA is one of the newest and smallest intelligence
    elements in the IC, it participates on key IC committees. On April 9,
    2007, Director of National Intelligence (DNI) McConnell created an
    Executive Committee to serve as the principal decision-making and
    advisory board for the IC. Treasury's Assistant Secretary for
    Intelligence and Analysis, who manages OIA, was designated a member of
    that committee. In addition, the Deputy Assistant Secretary for
    Intelligence and Analysis and OIA's policy staff have been involved in
    ODNI boards and committees that have been responsible for setting
    policy for the IC, standards of analysis, and driving change in the IC
    culture.
        Through exchanges and detail assignments at the working level, OIA
    has built strong relationships with IC counterparts. Since OIA was
    created, it has hosted representatives from the Federal Bureau of
    Investigation (FBI), National Security Agency (NSA), the United States
    Central Command (CENTCOM), the Joint Warfare Analysis Center (JWAC),
    and other key intelligence partners. Moreover, OIA has detailed
    analysts to CENTCOM, the United States Pacific Command (PACOM), and the
    United States European Command (EUCOM). The 2008 President's budget
    request includes increased resources to expand OIA's detail
    assignments.
        A good example of how well OIA has integrated into the IC, as well
    as the high degree of intelligence sharing, is found in Treasury's
    Weapons of Mass Destruction (WMD) proliferation program. In order to
    work on targeting and researching potential targets for Treasury
    sanctions against WMD proliferators under Executive Order 13382, the
    Defense Intelligence Agency (DIA), with the assistance of the Director
    of National Intelligence, detailed several analysts to OIA. The DIA
    analysts have helped to expand and accelerate Treasury's activities on
    this program.
        A key element to OIA's integration into the IC is the ability to
    send and receive information relevant to Treasury's mission. Primarily
    a consumer of information, OIA has regular access to the intelligence
    it requires to prepare administrative records in support of targeted
    financial measures against terrorist supporters. While OIA produces
    very little raw information, it is producing both analytic cables and
    finished analytical products for dissemination to the IC. To aid the
    dissemination of those products, OIA has developed a Top Secret/
    Sensitive Compartmented Information (SCI) website that can be accessed
    by partners throughout the IC. Internally, OIA has access to Top
    Secret/Sensitive Compartmented Information (SCI) through the Treasury
    Foreign Intelligence Network (TFIN), an information technology system
    that is being redesigned and updated in fiscal year 2007.
        While OIA has made significant progress integrating itself into the
    culture of the IC, working to be a full partner in the intelligence
    enterprise, there are still some barriers that result from a continuing
    lack of understanding in other IC elements about OIA's IC role and
    expertise. As other IC components, however, become more familiar with
    OIA, this limiting factor will become less of an issue.
        Question. It has been asserted that OIA is primarily reactive,
    analyzing information that is provided to TFI by U.S. and other
    financial institutions.
        Is TFI able to initiate or influence intelligence collection
    priorities?
        Answer. Treasury's Office of Intelligence and Analysis (OIA) is a
    member of the Intelligence Community (IC) and provides all-source
    analysis, derived from intelligence, law enforcement, regulatory, and
    open sources, to Treasury and IC customers. As an IC member, OIA is
    able to ensure that its intelligence needs are met through the
    intelligence requirements process. In particular, OIA's involvement in
    national requirements mechanisms is enhanced by experienced analysts
    initiating and contributing to tactical requirements.
    National Requirements
        In 2005, OIA achieved a significant milestone by hiring a dedicated
    collection requirements officer. This officer has ensured that Treasury
    equities in financial, economic, enforcement, and other information
    needs are reflected in national intelligence priorities and collection
    requirements. Among the various national bodies with which OIA engages
    include the U.S. SIGINT Committee and its Analysis and Production
    Subcommittee, the Community HUMINT Management Office, the National
    HUMINT Requirements Tasking Center, various National Clandestine
    Services offices, the Open Source Center, and various CIA Directorate
    of Intelligence offices. In addition, OIA's subject matter experts work
    closely with the Director of National Intelligence's (DNI) Mission
    Managers, particularly those at NCTC, NCPC, Iran, and North Korea, to
    ensure Treasury priorities are incorporated into national collection
    and analysis strategies for these hard targets.
    Tactical Requirements
        OIA analysts actively provide feedback and direction on
    disseminated intelligence reports to ensure that information relevant
    to Treasury's mission is collected. Critical partnerships developed by
    Treasury in the last few years have enhanced this process. OIA analysts
    regularly engage with counterparts in collecting offices across the IC.
    Detail assignments and exchanges are particularly useful for
    communicating Treasury needs and priorities to partner agencies. OIA,
    for example, hosts several detailees from NSA to assist with its SIGINT
    collection needs. Another example is the Iraq Threat Finance Cell
    (ITFC) in Baghdad, which OIA co-founded and co-leads. The ITFC has
    worked diligently to increase the quantity and quality of reporting on
    terrorist and insurgent financing in Iraq, with considerable success.
        Question. Treasury has recently completed an initial study of the
    feasibility of mandating financial institutions to report cross-border
    wire transfer data. The study concluded that such reporting is
    technically feasible and might prove valuable in combating money
    laundering and terrorist financing. The report also noted that the
    proposed program could result in the filing of half a billion new
    financial reports by financial institutions.
        Given the additional costs that this might impose on the financial
    sector, do you believe mandating the reporting of cross-border wire
    transfer data is necessary and desirable?
        Answer. The Intelligence Reform and Terrorism Prevention Act of
    2004 contained two mandates related to the potential collection of
    cross-border electronic funds transfer reports. First, the Act directed
    that the Department study the feasibility of implementing a system to
    receive, store, process, analyze, disseminate, and secure such data.
    Second, the Act directed the Department to implement such a system if
    the Secretary deemed it ``reasonably necessary.''
        In its study, FinCEN concluded that the implementation of such a
    system is, indeed, feasible. FinCEN also identified a number of
    important policy questions that must be considered before the
    Department of the Treasury can make a final determination whether such
    a requirement is reasonably necessary. One of the primary concerns is
    the potential cost to the financial services industry. Therefore,
    FinCEN proposed conducting an additional cost-benefit analysis to
    support a final decision by the Secretary whether such a requirement is
    reasonably necessary. This cost-benefit analysis will directly address
    the potential costs to the financial services industry, and the
    potential value of the data to U.S. government efforts to combat
    illicit financing. Only after assessing these issues will the
    Department be able to reach a conclusion about whether mandating the
    reporting of such data is necessary and desirable.
        As part of the study FinCEN will:
      --explore the potential, but as yet unquantified, risks to the
            operations and competitiveness of the U.S. financial services
            industry;
      --further refine the use cases and requirements of our law
            enforcement and regulatory partners, which FinCEN describes in
            its Study; and
      --extend the preliminary assessment of the potential value of such
            data in our collective efforts to combat illicit financial
            activity.
        Question. Recent U.S. Executive Orders and the USA PATRIOT Act gave
    Treasury a greatly expanded tool-kit to combat terrorist financing.
    Subsequently, many of these measures have been used to curtail the
    international financial operations of rogue states such as Iran and
    North Korea.
        Can these measures be used more aggressively against non-state
    terrorist organizations? What operational challenges might you face?
        Please discuss how Treasury's use of its new authorities is viewed
    internationally, especially among our allies. Is getting foreign
    countries and companies to cooperate with U.S. measures a problem?
        Answer. The Department of the Treasury is acting aggressively
    against non-state terrorist organizations. We actively target al Qaida-
    related and Hizballah-related organizations under our relevant
    Executive Orders. Additionally, Treasury continues its effort to
    increase financial pressure on Hamas. A few examples of Treasury's
    recent activity utilizing our expanded tool-kit to combat terrorist
    financing include:
      --On February 20, 2007, Treasury designated Jihad al-Bina, a Lebanon-
            based construction company formed and operated by Hizballlah.
            Jihad al-Bina receives direct funding from Iran, is run by
            Hizballah members, and is overseen by Hizballah's Shura
            Council, at the head of which sits Hizballah Secretary General
            Hassan Nasrallah.
      --On January 26, 2007, Treasury designated two South African
            individuals, Farhad Ahmed Dockrat and Junaid Ismail Dockrat,
            and a related entity for financing and facilitating al Qaida,
            pursuant to Executive Order 13224. This financial measure
            freezes any assets the designees have under U.S. jurisdiction
            and prohibits transactions between U.S. persons and the
            designees.
      --On December 6, 2006, Treasury designated nine individuals and two
            entities that have provided financial and logistical support to
            the Hizballah terrorist organization. The designees are located
            in the Tri-Border Area (TBA) of Argentina, Brazil, and Paraguay
            and have provided financial and other services for Specially
            Designated Global Terrorist (SDGT) Assad Ahmad Barakat, who was
            previously designated in June 2004 for his support to Hizballah
            leadership.
        These designations, among many others, highlight Treasury's use of
    authorities granted by U.S. Executive Orders.
        Treasury's actions are most effective when other nations amplify
    our designations with their own measures. Thus, the most significant
    operational challenge has been when other states have not implemented
    remedial actions against designated targets. Treasury is working to
    address this issue through a variety of mechanisms, among them, the
    U.S.-EU Terrorism Finance Troika and the U.S.-EU Workshop on Financial
    Sanctions to Combat Terrorism. Treasury has also worked with USUN and
    other elements at the United Nations to advocate for the adoption of
    U.N. Security Council Resolutions aimed at combating terrorist
    financing. For example, UNSCR 1735, adopted in December 2006, is a
    follow-on resolution to UNSCR 1267 and it reiterates the international
    community's condemnation of al Qaida, Osama bin Laden and the Taliban,
    as well as the international commitment to countering terrorism and
    terrorist financing via measures that include a targeted economic
    sanctions regime (e.g., asset freeze and ongoing prohibition of
    commercial and economic dealings), a travel ban, and a ban on the sale
    or supply of arms and related material. Additionally, Treasury works
    with the Financial Action Task Force (FATF) to establish standards and
    commitments on targeted financial and economic measures that form a
    framework for multilateral action and cooperation in the fight against
    illicit financing. These efforts are bolstered through our work with
    the G-7, the International Monetary Fund (IMF), the World Bank, and
    FATF-Style Regional Bodies (FSRB).
        Acting multilaterally and working with various foreign governments
    and international organizations and companies to increase the effect of
    our actions are high priorities of the Treasury Department. Treasury
    has initiated strategic dialogues with all relevant parties of the
    international community and we enjoy great success and continued
    cooperation. Generally, foreign countries and private companies are
    eager to abide by and cooperate with U.S. authorities. Recently we have
    seen many international financial institutions implement their own
    measures to protect themselves from deceptive conduct without waiting
    for their governments to impose specific requirements and regulations.
              committee on foreign investment in the united states
        Question. The Committee on Foreign Investment in the United States
    is an inter-agency committee chaired by the Secretary of Treasury.
    CFIUS (SIF-EUS) seeks to serve U.S. investment policy through thorough
    reviews that protect national security while maintaining the
    credibility of our open investment policy and preserving the confidence
    of foreign investors here and of U.S. investors abroad that they will
    not be subject to retaliatory discrimination.
        Can you explain briefly to the Committee why the Committee on
    Foreign Investment in the United States (CFIUS) was established? What
    is its purpose?
        In your opinion, how well is it doing at achieving its purpose?
        What changes have been made in the operations of CFIUS during the
    past year?
        Who are the members of CFIUS?
        What role does the Director of National Intelligence play in the
    CFIUS process?
        As you know, the House recently passed legislation aimed at
    enhancing Congressional oversight of the CFIUS review process. What is
    the Department's position on that bill?
        Answer. CFIUS was established by Executive Order 11858 in 1975. The
    Secretary of the Treasury was designated as the chairman of CFIUS. Its
    original mission was to have primary continuing responsibility within
    the Executive Branch for monitoring the impact of foreign investment in
    the United States, both direct and portfolio, and for coordinating the
    implementation of U.S. policy on such investment.
        In 1988, the President, pursuant to Executive Order 12661,
    delegated to CFIUS his responsibilities under section 721 of the
    Defense Production Act of 1950 (``Exon-Florio'' amendment) to receive
    notices of foreign mergers and acquisitions of U.S. companies, to
    determine whether a particular acquisition has national security issues
    sufficient to warrant an investigation, and to undertake an
    investigation, if necessary, under the Exon-Florio provision. In
    addition, it allows the President to take action, if necessary, to
    suspend or prohibit any transaction that, in his judgment, threatens
    the national security.
        In essence, the purpose of CFIUS is to protect national security
    while keeping our country open to investment, which is critical to a
    strong U.S. economy.
        In the past 20 years, CFIUS has investigated over 1,700 cases. To
    the best of our knowledge, the CFIUS agencies have implemented Exon-
    Florio in a manner that has achieved the national security objectives
    as prescribed in the statute without compromising our open investment
    policy. Investigations are conducted by analysts with expertise from
    across the agencies in a professional and non-partisan manner.
        CFIUS has already implemented many of the reforms proposed by
    Congress. These include, among others:
      --Notification.--We now inform the relevant congressional committees
            of every case once deliberative action has concluded under
            Exon-Florio.
      --Briefings.--We are providing periodic briefings to Congressional
            oversight committees on all cases once deliberative action has
            concluded.
      --Accountability.--At Treasury, every case is briefed to senior
            policy levels, and only Senate-confirmed officials may close a
            CFIUS review.
      --Role of the DNI.--We have formalized the role of the intelligence
            community by having the Office of the Director of National
            Intelligence serve as advisor to CFIUS, facilitating a
            coordinated analysis of each case by the intelligence
            community.
        CFIUS includes six departments and six White House agencies.
    Specifically, the members of CFIUS are the Departments of Treasury,
    State, Defense, Justice, Commerce, and Homeland Security, as well as
    the Office of Management and Budget, the Council of Economic Advisers,
    the U.S. Trade Representative, the Office of Science and Technology
    Policy, the National Security Council and the National Economic
    Council. Other agencies, such as the Departments of Energy or
    Transportation, may be brought in when specific expertise is required
    in the investigation of a transaction.
        The Office of the Director of National Intelligence has a non-
    policy role as advisor to CFIUS, facilitating a coordinated analysis of
    each case by the intelligence community.
        The Administration's position on H.R. 556 is provided in the
    Statement of Administration Policy (SAP) submitted to the House on
    February 27, 2007, which we attach to these responses. In sum, the
    Administration regards national security as its top priority and
    supports the intent of the House bill to address national security
    imperatives in a post-9/11 world. We support enactment of legislation
    that will improve and strengthen CFIUS to ensure the protection of
    America's homeland and the strength of the U.S. economy. The SAP lays
    out the Administration's concerns about several provisions of the bill.

                     Executive Office of the President,
                               Office of Management and Budget,
                                     Washington, DC, February 27, 2007.
                                 (house rules)
                       statement of administration policy
    h.r. 556--national security foreign investment reform and strengthened
                                  transparency
                    (rep. maloney (d) ny and 58 cosponsors)
        The Administration supports House passage of H.R. 556 and
    appreciates the efforts of the House Financial Services Committee to
    strengthen the Committee on Foreign Investment in the United States
    (CFIUS). The Administration regards the Nation's security as its top
    priority. In addition, the Administration views investment, including
    investment from overseas, as vital to continued economic growth, job
    creation, and building an ever-stronger America. Therefore, the
    Administration seeks to improve the CFIUS process in a manner that
    protects national security and ensures a strong U.S. economy and an
    open investment environment that will serve as an example and thereby
    support U.S. investment abroad.
        In light of the President's responsibility to ensure the Nation's
    security, and in the context of comity between the executive and
    legislative branches, we believe the President should retain
    substantial flexibility to determine CFIUS's membership and
    administrative procedures and to make adjustments when national
    security so requires. Accordingly, the Administration has concerns with
    some of the provisions of H.R. 556 and looks forward to working with
    Congress to address these concerns, to strengthen CFIUS, and to ensure
    the protection of America's homeland and the strength of our economy.
    Establishment and Membership of CFIUS
        The President should retain the flexibility to determine and adjust
    the appropriate Executive Branch membership of CFIUS and their roles.
    H.R. 556 should not mandate that CFIUS have Vice Chairs, nor that CFIUS
    include members of the Executive Office of the President. Further, the
    President should retain the flexibility to determine roles and
    responsibilities of CFIUS and its members. For example, the
    Administration opposes any language in Section 6 that would call for
    the designation of a lead agency or agencies to represent other
    agencies or the Committee in negotiating, entering into, imposing,
    modifying, monitoring, or enforcing mitigation agreements.
    Deliberations and Decision-Making of the Committee
        The Administration is concerned that the legislation imposes
    procedural requirements, such as roll call voting and motions, which
    are ill-suited for executive bodies such as CFIUS and are inconsistent
    with the vesting of the executive power in the President. Given the
    bill's reporting requirements, such procedures will deter the full and
    open interagency discussion that is required to consider CFIUS cases
    properly.
        The Administration fully shares Congress' goal of ensuring senior-
    level accountability for CFIUS decisions. The Administration supports
    requiring the Secretary, Deputy Secretary, or an Under Secretary of the
    Treasury to sign CFIUS decisions at the conclusion of a second-stage
    (45-day) investigation, as H.R. 556 provides. With respect to cases for
    which CFIUS concludes its action at the end of the first-stage (30-day)
    investigation, the Administration supports the House Financial Services
    Committee's decision to authorize delegation of this authority.
    However, in view of the volume and variety of cases and to ensure that
    our most senior officials are able to focus on those cases that do
    raise national security concerns, this authority should be further
    delegable to other officials appointed by the President and confirmed
    by the U.S. Senate.
        The Administration believes that the current 30-day and 45-day time
    frames for first-stage and second-stage investigations provide CFIUS
    with sufficient time to examine transactions. The possibility of
    extensions may discourage foreign investment by generating uncertainty
    and delay for the parties to proposed transactions. The Administration
    therefore opposes allowing CFIUS to extend the second stage (45-day)
    investigation period. The Administration notes that the current CFIUS
    practice of encouraging parties to transactions to consult with CFIUS
    prior to filing provides CFIUS with additional time and flexibility to
    examine complex transactions.
        The Administration supports the role of the intelligence community
    as an independent advisor to CFIUS and appreciates the bill's inclusion
    of a provision that ensures that the Director of National Intelligence
    (DNI) is provided adequate time to complete the DNI's analysis of any
    threat to the national security of a covered transaction. However,
    language in H.R. 556 also appears to provide the DNI with the ability
    to force a second-stage (45-day) investigation if the DNI has
    identified particularly complex intelligence concerns and CFIUS was not
    able to satisfactorily mitigate the threat. Such a policy role would be
    inconsistent with the independent advisory role of the DNI envisioned
    in the legislation and supported by the Administration.
    Notification and Reports to Congress
        The Administration supports enhanced communication with Congress on
    CFIUS matters to better facilitate Congress' performance of its
    functions. CFIUS should be required to notify Congress of transactions
    only after all deliberative action is concluded, as H.R. 556 provides.
    As discussed above, roll call voting, particularly if reported outside
    the Executive Branch, would deter the full and open interagency
    discussion that is required to consider CFIUS cases, and reporting on
    internal Executive Branch deliberations, including the positions of
    individual CFIUS members, should not be required.
    Authorities of CFIUS
        The Administration believes current law and regulations give the
    President and CFIUS adequate authority to gather all information needed
    to conduct CFIUS investigations. The Administration is concerned that
    provisions of the bill that provide CFIUS with additional statutory
    authority to collect evidence and require the attendance and testimony
    of witnesses and the production of documents would make the CFIUS
    process more adversarial and less effective.
        The Administration believes its ability to protect national
    security would be enhanced by a statutory grant of authority to impose
    civil penalties for a breach of a mitigation agreement. This authority
    to seek civil penalties, which could be calibrated to the seriousness
    of the noncompliance, would be a useful and effective tool for
    enforcing those agreements.
    Presidential Review and Decision
        The Administration supports requiring the President to make the
    final decision on a case only when CFIUS recommends that a transaction
    be blocked or when CFIUS fails to reach a consensus after a second-
    stage investigation. Requiring Presidential action in a broader set of
    cases would undermine the President's ability to determine how best to
    exercise Executive Branch decision-making authority.
        The Administration looks forward to working with Congress on these
    important issues.
                            overseas attache program
        Question. Overseas attaches work in tandem with the Office of
    International Affairs and the Office of Terrorism and Financial
    Intelligence, as well as the relevant U.S. Embassies, to build
    relationships with foreign officials and to work with local U.S.
    industry, market and agency representatives.
        What are the main purposes of the overseas attache program?
        To what extent are they involved with your anti-terrorism program?
        How many attaches do you currently have around the world?
        You are in the process of expanding the program and we gave you
    additional funds in the recent 2007 CR to do it. How far do you intend
    to expand the program in 2007 and 2008?
        What qualifications are you seeking in candidates to fill these
    jobs?
        Answer. The attache program is essential for several priorities,
    including those related to:
      --Building Treasury's expertise on economic and financial sector
            issues and fostering stronger substantive dialogues that can
            advance U.S. Government objectives.
      --Identifying policy or regulatory barriers to U.S. firms and
            exports, particularly in the area of financial services.
      --Strengthening cooperation with other countries to implement U.N.
            resolutions and U.S. enforcement actions to prevent and punish
            money laundering, terrorism and proliferation financing, and
            other financial crimes.
      --Coordinating closely with other U.S. agencies and multilateral
            donors (such as the IMF and World Bank) to advance economic
            growth and development. This is particularly important in
            countries with a large U.S. Government presence, such as Iraq
            and Afghanistan.
        As of April 2007, Treasury has eight attaches in China, Japan,
    Southeast Asia (Singapore), Afghanistan, Iraq, Belgium, Brazil, and
    Egypt. We expect to place an attache in India in the coming months.
    Treasury is planning to open another nine attache posts during fiscal
    year 2007-fiscal year 2008, tentatively slated to include Abu Dhabi,
    Istanbul, Riyadh, Islamabad, Johannesburg, Mexico City, London,
    Jakarta, and Tel Aviv.
        To fill these positions, Treasury has been seeking professionals
    who can represent Treasury effectively within the U.S. Embassy and with
    senior officials of their counterpart countries, enhancing the
    effectiveness of Treasury's policy engagement. These tasks require a
    variety of substantive and interpersonal skills, including those
    related to macroeconomic analysis, financial sector development, and
    money laundering and the financing of terrorism. The precise nature of
    the substantive expertise will vary by country. For example, in Japan
    knowledge of macroeconomic and financial sector issues in a mature
    economy is critical. In contrast, experience with emerging markets and
    development issues is more important in attache posts such as Egypt and
    in Southeast Asia. In other posts, the principal focus will be on
    terrorist financing issues, putting a premium on familiarity with
    financial sector issues and U.S. Treasury authority to fight financial
    crimes.
                establishment of dynamic tax office at treasury
        Question. In last year's budget request, Treasury requested
    $513,000 to set up a Dynamic Analysis Division within the Office of Tax
    Policy.
        Are you making the same request in this year's budget?
        Can you tell us how such an office would work and what its purpose
    would be?
        Answer. The initial request to establish a Dynamic Analysis
    Division within the Office of Tax Policy was included in the
    President's 2007 budget request; however, due to the CR, the request
    was not enacted. A similar request is therefore included in this year's
    budget. If funded, Treasury would hire a director and several staff for
    the division. The purpose of the division, as the name suggests, would
    be to conduct dynamic analysis of tax proposals. Dynamic analysis
    incorporates a broad range of behavioral responses to tax changes and
    provides an estimate of how those tax changes affect aggregate labor
    supply, savings and national income in both the near term and the long
    run. This analysis would improve the policy making process by providing
    information to policy makers about the economic effects of tax
    proposals. Treasury already provides estimates of revenue and
    distributional effects of tax proposals, but does not normally provide
    estimates of the effects of tax proposals on national savings or
    output. Treasury's analysis will help inform and complement the type of
    dynamic analysis currently being done by the Joint Committee on
    Taxation and the Congressional Budget Office.
        In analyzing the revenue effect of potential tax policy changes,
    Treasury routinely considers how taxpayers might respond to the
    changes, but does not consider how the overall economy might be
    affected in its official scoring of tax proposals. Dynamic scoring of
    tax proposals would take dynamic analysis a step further by estimating
    how the change in economic activity translates into changes in tax
    receipts. Under the current proposal, Treasury would commit to
    conducting dynamic analysis of major tax policy changes, but not to
    dynamic scoring. Treasury plans to continue to rely on their
    traditional approach for ``official'' estimates of the revenue effect
    of the tax proposals, and to present dynamic analyses as supplemental
    information.
                      personally identifiable information
        Question. In the past year, there have been numerous incidents
    regarding the loss or theft of federal computers and disk drives at
    different agencies where the names and social security numbers of
    citizens may have been compromised. In one incident, VA reported the
    loss of a notebook computer that contained Personally Identifiable
    Information for 26 million veterans. Other incidents were reported by a
    number of federal departments.
        What is the Department doing to protect Personally Identifiable
    Information?
        Is the Department in compliance with the OMB recommendations on
    this? If not, what are its plans to become compliant and by when?
        Answer. The protection of sensitive personal and taxpayer
    information is of critical importance to the Department as is our
    ability to fulfill the Department's responsibilities to our citizens.
        The Department has an important obligation to exercise
    extraordinary diligence in handling Personally Identifiable Information
    entrusted to our care and is taking aggressive actions to avoid it
    being compromised. Towards protecting Personally Identifiable
    Information, approximately 90 percent of Treasury laptops, including 99
    percent of IRS laptops, have been encrypted (in accordance with FIPS
    140-2 encryption standards) including installation of an automatic full
    disk encryption solution. Additionally, some of the remaining 10
    percent of Treasury laptops have limited encryption already installed
    (e.g., specific folder encryption.) We are planning for a 99 percent+
    completion rate by the end of June. We are also working to provide
    enhanced protection to other portable IT devices, specifically
    including Blackberries, which contain Personally Identifiable
    Information.
        Additionally, in response to recommendations of the President's
    Identity Theft Task Force and the Office of Management and Budget,
    Treasury is in the process of establishing a Personally Identifiable
    Information Risk Management Group (PIIRMG). The Department is currently
    identifying points of contact as well as membership consistent with
    those identified in the Task Force recommendations and anticipates the
    initial PIIRMG kick-off meeting in the coming weeks. The establishment
    of the PIIRMG is an important component of our risk management efforts
    in the area of Personally Identifiable Information, particularly as
    Treasury Bureaus establish the capability to assess any Personally
    Identifiable Information-related incident that may occur and make
    recommendations for corrective and risk-reduction action to the PIIRMG.
        Following OMB's recent memorandum titled ``Safeguarding Against and
    Responding to the Breach of Personally Identifiable Information,'' over
    the next 120 days Treasury will review and reduce its current holdings
    of PII reduce them to the minimum necessary for the proper performance
    of a documented agency function. Treasury will also, within 120 days,
    review its use of social security numbers (SSN) in agency systems and
    programs to identify instances in which collection or use is
    superfluous, as well as establish a plan in which it will eliminate the
    unnecessary collection and use of SSN within eighteen months.
                              information security
        Question. The Inspector General has noted that the Department needs
    to improve its information security program and practices to achieve
    compliance with the Federal Information Security Management Act and OMB
    requirements. The Act, as you know, was meant to bolster computer and
    network security within the Federal Government and affiliated parties
    (such as government contractors) by mandating yearly audits. The IG's
    2006 evaluation disclosed deficiencies that constitute substantial
    noncompliance with the Act.
        What steps are you taking to come into compliance with that Act?
        Answer. Providing adequate security for the Federal government's
    investment in information technology (IT) is a significant undertaking
    and the Department is working towards improving its posture in this
    area. Our on-going efforts include taking steps to refine systems
    inventory for completeness and consistency, issuing Treasury policy in
    support of FISMA requirements, and strengthening the process for
    security remediation efforts.
        In the area of inventory management, the Department has defined the
    inventory of major information systems (including national security
    systems) operated by or under the control of the Department, as
    originally required by the Paperwork Reduction Act of 1995. As an
    indication of our progress, for the first time, in the OIG's 2006 FISMA
    evaluation, it was noted that ``[a]ll agency systems were accounted for
    on the inventory.'' Furthermore, Treasury issued Department-wide
    guidance on major and minor systems to ensure a consistent Treasury-
    wide approach in compiling system inventories.
        Treasury policy, in support of our FISMA compliance efforts, seeks
    to secure the information and information systems that support the
    operations and assets of Treasury, including those provided or managed
    by another agency, contractor, or other source on behalf of the
    Department. Clarifying guidance has been issued for contractor systems
    to ensure those systems are consistently and completely identified in
    the Department's systems inventory and that they comply with security
    requirements. Policy has also been issued to address acceptable system
    configuration requirements and to define our vulnerability management
    policy. Developing policy and ensuring compliance across the Department
    is an ongoing effort, but an area in which progress is being made.
        In order to strengthen Treasury's remediation efforts, and come
    into compliance with FISMA, the Department is developing a process for
    planning, implementing, evaluating, and documenting remedial action
    (Plan of Actions & Milestones, or POA&M) to address any deficiencies in
    the information security policies, procedures, and practices. In 2006,
    our POA&M process was judged to be effective, a significant improvement
    from 2005. Lastly, the Department continues to work to make progress in
    improving the quality of the certification and accreditation of its
    systems, testing of security controls and contingency plans, incident
    reporting, and employee training on systems security. The President's
    2008 budget request includes significant investments in information
    security, including $21 million for the IRS' Computer Security Incident
    Response Center and network infrastructure security.
        Question. Secretary Paulson, I understand that the United States is
    currently negotiating an OECD convention called the Large Aircraft
    Sector Understanding, which deals with the financing terms of aircraft,
    and that the negotiations are near conclusion. However, I have heard
    from U.S. industry that they do not believe their concerns have been
    addressed in the context of the negotiations. I am advised that the
    U.S. industry has prepared a comprehensive text that outlines its major
    concerns.
        Given that the health of the U.S. aerospace industry is critical to
    the economy, the national security and the technological base of the
    United States, I respectfully request that you meet with the industry
    group that prepared the report to discuss the negotiations, and that
    you and your team at Treasury carefully review the industry position
    before agreeing to critical provisions put forward by the EU, which
    could hinder the ability of American companies to compete.
        Answer. The U.S. Government negotiating team, led by Treasury, has
    been in continuous contact with industry throughout the negotiating
    process. That process has been underway for over two years. We will
    continue to consult intensively before reaching a final agreement. Over
    the past two months, the Deputy Secretary, Under Secretary, and
    Assistant Secretary have all met with industry representatives to
    gather their views.
        These consultations have occurred primarily through the Department
    of Commerce-led Aerospace Industry Trade Advisory Committee (ITAC) and
    the Aircraft Working Group (AWG--an international industry group for
    which Boeing serves as Vice Chairman). The AWG has met with OECD
    negotiators on a number of occasions, and has also provided formal
    written recommendations on the important competitive elements of an
    agreement. Treasury has followed appropriate procedures for reviewing
    the ITAC's recommendations, and the positions taken by the U.S.
    negotiators to date are in full accord with those recommendations.
        Treasury officials and substantive experts met several times with
    key industry representatives, including meetings as recently as the
    week of April 16th. In these meetings, the detailed industry-
    recommended text was thoroughly examined point-by-point, and U.S.
    negotiators worked with this text in discussions with other negotiators
    at the OECD the week of April 23.
        I can assure you that the provisions of this new agreement will
    ensure that U.S. industry will remain fully competitive. We will
    support an agreement that provides a level playing field for our
    exporters. The agreement will also sharply limit the ability of foreign
    governments to provide subsidized financing for their aerospace
    industries' exports. By limiting these subsidies, we will also limit
    subsidies that are currently provided to foreign airlines and that
    disadvantage our domestic airline industry, which does not have access
    to such subsidies.
                                     ______

                  Questions Submitted by Senator Sam Brownback
        Question. You've asked for some increases in your budget in the
    areas of Terrorism and Financial Intelligence and in the International
    economic policy area. Can you tell me a little bit about the Treasury's
    work in these areas and why these increases are important?
        Answer. The Terrorism and Financial Intelligence and International
    economic policy areas budget increases reflect the Department of the
    Treasury's expanding mission in these areas.
    Terrorism and Financial Intelligence
        The Treasury, and the Office of Terrorism and Financial
    Intelligence, in particular, has requested additional resources to
    increase the implementation of strategies and employment of targeted
    financial measures to disrupt and dismantle the financial networks that
    support terrorism, WMD proliferation, and organized crime. Targeted
    financial measures developed since 9/11 to combat terrorist support
    networks can and should be used to disrupt and dismantle the networks
    that support other threats. These types of financial measures have
    proven effective, in part because they unleash market forces by
    highlighting the risks and encouraging prudent and responsible
    financial institutions to make the right decisions about the business
    in which they are engaged. Treasury uses designations strategically to
    disrupt specific sources, means, and mechanisms of terrorist financing,
    including radical ideologues, charities and other sources and conduits
    of terrorist financing and support.
        The fiscal year 2008 President's budget requests additional
    analysts and production officers for the Office of Intelligence and
    Analysis to support Treasury's ability to address emerging national
    security threats. This request will allow Treasury to establish a
    permanent intelligence production structure, an essential component to
    the timely and accurate production of intelligence information. In
    addition to this initiative, OIA is seeking additional funds and
    personnel to expand the Department's ability to coordinate on
    terrorist-financing and WMD proliferation matters, and to improve OIA's
    working relationships with foreign intelligence services.
        The Office of Terrorist Financing and Financial Crimes, the policy
    and outreach apparatus for TFI, develops and implements strategies,
    policies and initiatives to identify and address vulnerabilities in the
    United States and the international financial system and to disrupt and
    dismantle terrorist and WMD proliferation financial networks.
    Treasury's request would give the Office of Terrorist Financing and
    Financial Crimes (TFFC) additional resources to devote specific policy
    advisors to critical regions in the Western Hemisphere, Africa, and the
    Middle East-South Asia nexus. Countries in these regions continue to
    provide a financial base for terrorists. Additional advisors would
    allow TFFC to meet multiple strategic objectives, including enhancing
    the Treasury Department's ability to disrupt terrorist financial and
    support networks and building the capacity of foreign governments to
    combat terrorist financing. Without adequate full-time staff dedicated
    to these region-specific issues, U.S. strategic priorities and specific
    Treasury responsibilities cannot be addressed in a comprehensive or
    strategic manner.
        TFFC has also requested additional resources to increase our
    development of strategies toward rogue regimes and their corresponding
    networks. North Korea, Syria, and Iran pose a constant threat to U.S.
    national security, and Treasury is tasked with applying all appropriate
    financial measures towards pressuring these rogue regimes, isolating
    them from the international financial system, and disrupting their
    financial networks.
        Treasury's request would fund additional policy advisors to cover
    North Korea, Syria, and Iran and would allow the Treasury Department to
    leverage tactical successes to develop ongoing strategic approaches to
    bring additional financial pressures. These positions would become the
    focal point for interagency efforts to bring financial pressures to
    bear against these rogue regimes, enhancing Treasury's ability to meet
    its strategic objectives and U.S. strategic priorities. In addition to
    achieving sustained, focused pressure on Iranian, Syrian, and North
    Korean WMD proliferation finance, criminal and terrorist financing
    activities, Treasury would establish future strategies on emerging
    regimes of concern (e.g., Venezuela). These positions would also
    provide TFFC the ability to provide support and guidance to senior NSC
    officials dealing with the relevant issues. This initiative is
    consistent and in support of Executive Orders 13338 and 13382 and
    Section 311 of the USA PATRIOT Act.
        The Office of Foreign Assets Control (OFAC), an office within TFI,
    is responsible for administering and enforcing economic sanctions based
    on U.S. foreign policy and national security goals against targeted
    foreign countries, terrorists, international narcotics traffickers and
    those engaged in activities related to the proliferation of weapons of
    mass destruction. Treasury's request would also give OFAC additional
    resources to implement U.S. economic sanctions policy. OFAC is
    committed to combating terrorist networks and state sponsors of
    terrorism. New Executive Orders with respect to Sudan and Syria were
    issued in 2006, and the Administration is also extensively engaged with
    respect to Iran. Each new Executive Order and/or OFAC designation of
    terrorists and their financial networks brings with it increasing
    demands on OFAC's enforcement, licensing, compliance and administrative
    support components. Additional resources in these areas are requested
    to match the increased tempo of new Executive Orders and Treasury
    designations.
        In addition, the WMD sanctions program is a Presidential national
    security priority and these resources will be used to strengthen OFAC's
    ability to track, identify and designate financiers and other
    supporters of WMD proliferation. Publicizing the designations, and
    assigning resources to enable OFAC to engage in outreach to the private
    sector and with government agencies, will greatly assist the Treasury
    Department in effectively isolating financiers and facilitators of WMD
    proliferation from the United States and international commercial
    communities. This request will also provide OFAC with additional
    resources to generally expand its enforcement capacity in support of
    investigation and blocking activities, which are critical to the
    enforcement of sanctions.
    International Affairs
        With the increasing importance of global economics and dynamics,
    the Department of the Treasury is increasing its international focus.
    First, the Executive Direction area is seeking additional positions and
    funding to effectively manage the U.S.-China Strategic Economic
    Dialogue (SED) and maximize the likelihood of progress on issues of
    concern to the United States such as the Chinese currency, energy and
    the environment, and intellectual property rights. The SED reflects the
    growing relationship between the economies of the United States and
    China, and is structured to provide a focused framework for addressing
    such issues of concern.
        Additionally, the Department of the Treasury, in its role as chair
    of the interagency Committee on Foreign Investment in the United States
    (CFIUS), has seen its responsibilities increase exponentially. CFIUS is
    responsible for monitoring and evaluating the impact of foreign
    investment in the United States, including for national security
    implications. In addition, CFIUS is the President's designee under
    Exon-Florio. In that capacity, CFIUS conducts in-depth national
    security investigations of transactions notified to CFIUS under Exon-
    Florio. The 2008 request includes additional resources to match the
    growth in transactions submitted for CFIUS review.
        The increase in CFIUS activity is described below:
      --CFIUS investigated 113 transactions in 2006--a 74 percent increase
            over the number of transactions for 2005 (65) and 85 percent
            more than the annual average (61). This increase can be
            attributed to a rise in cross-border merger and acquisition
            activity, an increase in international investor awareness of
            CFIUS and its role, and higher scrutiny of the security
            concerns posed by acquisitions of U.S. businesses by foreign-
            owned companies.
      --The percentage of transactions that proceeded to a 45-day second-
            stage investigation also increased significantly last year, to
            seven from two in 2005. Second-stage investigations require
            significant involvement of very high-level officials and
            commitment of staff resources.
      --CFIUS member agencies negotiate security agreements with the
            parties to a transaction in order to mitigate national security
            concerns raised by the transaction. In 2006 alone, 16
            agreements were negotiated, which was 35 percent of all CFIUS-
            related agreements negotiated since 1997. Last year CFIUS also
            prepared two reports on notified transactions recommending to
            the President how the case should be resolved. This is the
            largest number since 1990, when four such reports were sent.
            Each mitigation agreement and report to the President requires
            significant resources.
      --CFIUS anticipates an even greater number of transactions to be
            filed in 2007 and plans to continue to conduct thorough reviews
            in the context of an open investment policy. We have received
            approximately 65 filings and negotiated five mitigation
            agreements to date in 2007.
      --CFIUS has also increased its reporting to Congress, providing the
            relevant committees with information pertaining to every case
            once deliberative action has concluded. We also provide
            periodic briefings to Congressional oversight committees on all
            cases for which deliberative action has concluded.
        As you well know, the Department of the Treasury received funds in
    fiscal year 2007 to expand its overseas presence through the
    establishment of Treasury attaches in countries such as Iraq, China and
    Afghanistan. Funding is requested for the full fiscal year 2008 cost
    and FTE realization from this fiscal year 2007 initiative.
        The attache program is essential for several priorities, including
    those related to:
      --Building Treasury's expertise on economic and financial sector
            issues and fostering stronger substantive dialogues that can
            advance U.S. Government objectives.
      --Identifying policy or regulatory barriers to U.S. firms and
            exports, particularly in the area of financial services.
      --Strengthening cooperation with other countries to implement U.N.
            resolutions and United States enforcement actions to prevent
            and punish money laundering, the financing of terrorism, and
            other financial crimes.
      --Coordinating closely with other United States agencies and
            multilateral institutions (such as the IMF and World Bank) to
            advance economic growth and development. This is particularly
            important with places with a large U.S. Government presence,
            such as Iraq and Afghanistan.
        Question. Please explain how you plan to block U.S. commercial bank
    transactions connected to the government of Sudan?
        Answer. The United States has maintained comprehensive economic
    sanctions with respect to Sudan since 1997. Under Executive Order 13067
    of November 3, 1997, implemented through the Sudanese Sanctions
    Regulations, 31 C.F.R. Part 538, the United States government already
    requires U.S. persons to block all property and interests in property
    of the Government of Sudan. All major U.S. banks, including their
    foreign branches, and the U.S. offices of foreign banks, have programs
    in place to detect and block such transactions as they are processed.
    Treasury is working actively to enhance implementation and compliance
    to ensure that it is as responsive as possible.
        On October 13, 2006, the President issued Executive Order 13412 to
    implement the Darfur Peace and Accountability Act of 2006. E.O. 13412
    continues the countrywide blocking of the Government of Sudan's
    property and interests in property and prohibits all transactions by
    U.S. persons relating to Sudan's petroleum and petrochemical
    industries. E.O. 13412 also removes the regional government of Southern
    Sudan from the definition of Government of Sudan.
        In addition to these targeted sanctions, OFAC administers a
    targeted sanctions program against persons in connection with the
    conflict in Sudan's Darfur region. This program stems from Executive
    Order 13400 of April 26, 2006, in which the President ordered the
    blocking of four individuals listed in the Annex to the order, and of
    additional persons who meet the specified criteria set forth in the
    order.
        Question. Last year, the Department identified the following as the
    three most immediate challenges for TFI: (1) the need for additional
    resources to more aggressively pursue core objectives, (2) leveraging
    its authorities most effectively to deal with Iran and Syria, and (3)
    building the information technology systems necessary to effectively
    and efficiently carry out TFI's mission. Could you give us an update of
    where Treasury stands in meeting these challenges?
        Answer. Treasury has taken significant steps forward in addressing
    key national security threats, particularly terrorism and WMD
    proliferation, but there is still important work to be done on these
    and other emerging threats. The requested resources will improve
    Treasury's ability to expand its coverage of current national security
    threats and allow the Department to adapt to new emerging threats.
        The fiscal year 2008 President's budget requests additional
    analysts and production officers to support Treasury's ability to
    address emerging national security threats. In fiscal year 2005, when
    OIA was created, the Office focused on developing a process for
    exploiting current intelligence. In fiscal year 2006, OIA improved its
    strategic analytic capability and developed a research program, which
    was coordinated with IC partners. In the current fiscal year, OIA is
    concentrating on building breadth and depth to its analytic cadre, so
    that OIA can better address some of the national security threats that
    have developed in the past year. Still, to fulfill the intent of
    Congress and Treasury leadership when they created the Office, OIA must
    increase the systemic analysis of issues underlying key national
    security threats. This request will also allow Treasury to establish a
    permanent intelligence production structure, an essential component to
    the timely and accurate production of intelligence information. In
    addition to this initiative, OIA is seeking additional funds and
    personnel to expand the Department's ability to coordinate on
    terrorist-financing and WMD proliferation matters, and to improve OIA's
    working relationships with foreign intelligence services.
        The fiscal year 2008 President's budget requests additional
    resources to support the Office of Foreign Assets Control (OFAC), an
    office within TFI,which is responsible for administering and enforcing
    economic sanctions based on U.S. foreign policy and national security
    goals against targeted foreign countries, terrorists, international
    narcotics traffickers and those engaged in activities related to the
    proliferation of weapons of mass destruction. The fiscal year 2008
    request would give OFAC additional resources to implement U.S. economic
    sanctions policy combating terrorist networks and state sponsors of
    terrorism. New Executive Orders with respect to Sudan and Syria were
    issued in 2006, and the Administration is also extensively engaged with
    respect to Iran. Each new Executive Order and/or OFAC designation of
    terrorists and their financial networks brings with it increasing
    demands on OFAC's enforcement, licensing, compliance and administrative
    support components. Additional resources in these areas are requested
    to match the increased tempo of new Executive Orders and Treasury
    designations. In addition, resources are requested to strengthen OFAC's
    ability to track, identify and designate financiers and other
    supporters of WMD proliferation. The WMD sanctions program is a
    Presidential national security priority. Publicizing the designations,
    and assigning resources to work with the U.S. public will greatly
    assist the Treasury Department in effectively isolating financiers and
    other supporters of WMD proliferation.
        The Treasury Department has drawn upon its full range of
    authorities and influence to combat threats including WMD proliferation
    and terrorism. The strategies we have employed to combat the threats
    posed by Iran and Syria are good examples of the ways in which
    financial authorities are effective in dealing with state sponsors of
    terrorism.
    Iran
                Formal Measures
        Treasury has acted both formally and informally to combat the
    threat emanating from Iran, which includes a threat to the
    international financial system. Iran's dangerous activities, including
    the sponsorship of terrorism and the pursuit of a nuclear weapons
    program, rely on access to financial networks and financial systems.
    Our efforts to attack the financial roots of these threats work to
    simultaneously protect our own financial institutions as well as the
    international financial system.
        First, it must be noted that the United States has a longstanding
    country sanctions program against Iran. These commercial and financial
    sanctions, which are administered by the Treasury's Office of Foreign
    Assets Control (OFAC), prohibit U.S. persons from engaging in a wide
    variety of trade and financial transactions with Iran or the Government
    of Iran. They prohibit most trade in goods and services between the
    United States and Iran, and any post-May 7, 1995, investments by U.S.
    persons in Iran. U.S. persons are also prohibited from facilitating
    transactions via third-country persons that they could not engage in
    themselves.
        Beyond these general country sanctions, we are relying more and
    more on ``targeted'' measures directed at specific individuals, key
    members of the government, front companies, and financial institutions.
    These measures are aimed at specific actors engaged in specific
    conduct. Some require financial institutions to freeze funds and close
    the accounts of designated actors, denying them access to the
    traditional financial system. At times, the action includes bans on
    travel or arms transfers, which further confine and isolate those
    engaged in illicit activities. To maximize the effect, we try to apply
    these measures in concert with others. Whenever possible, we act with a
    partner or a group of allied countries.
        The United States is using various types of targeted measures to
    combat Iran's pursuit of nuclear weapons and development of ballistic
    missiles, as well as its support for terrorism. First, while under our
    general Iran country sanctions program Iranian financial institutions
    are prohibited from directly accessing the U.S. financial system, they
    are permitted to do so indirectly through a third-country bank for
    authorized payments, including payments to another third-country bank.
    In September 2006, we cut off one of the largest Iranian state-owned
    banks, Bank Saderat, from any access, including this indirect, or ``u-
    turn,'' access to the U.S. financial system. This bank, which has 25
    foreign branch offices, is used by the Government of Iran to transfer
    money to terrorist organizations. Iran has used Saderat to transfer
    money to Hizballah. Iran and Hizballah also use it to transfer money to
    E.U.-designated terrorist groups, such as Hamas, the PFLP-GC, and the
    Palestinian Islamic Jihad. Since 2001, for example, a Hizballah-
    controlled organization received $50 million directly from Iran through
    Saderat.
        We have also acted against 19 entities and individuals supporting
    Iran's WMD and missile programs, including another Iranian bank, Bank
    Sepah, using Executive Order 13382. That Executive Order, signed by
    President Bush in June of 2005, authorizes the Treasury and State
    Departments to target key nodes of WMD and missile proliferation
    networks, including their suppliers and financiers, in the same way we
    target terrorists and their supporters. A designation under E.O. 13382
    effectively cuts the target entity or individual off from access to the
    U.S. financial and commercial systems and puts the international
    community on notice about the threat they pose to global security as a
    result of their activities. Specifically, such a designation freezes
    any assets that the target may have under U.S. jurisdiction and
    prohibits U.S. persons from doing business with it.
        Senior Treasury officials have traveled all over the world, sharing
    a U.S. list of Iran-related designations with foreign government
    counterparts and private sector representatives, and stressing the
    importance of ensuring that these proliferators are not able to access
    the international financial system. Our list of targeted proliferators
    is incorporated into the compliance systems at major financial
    institutions worldwide, who have little appetite for the business of
    proliferation firms and who also need to be mindful of U.S. measures
    given their ties to the U.S. financial system.
        The Treasury's designation of Iran's state-owned Bank Sepah under
    E.O. 13382 in January of this year is particularly significant because
    it makes it more difficult for the regime to hide behind its banks to
    support its proliferation activities. Like certain other Iranian banks
    and entities, Bank Sepah has engaged in a range of deceptive practices
    in an effort to avoid detection, including requesting that other
    financial institutions take its name off of transactions when
    processing them in the international financial system.
                Informal Measures
        Aside from these ``formal'' actions, the Treasury has engaged in
    unprecedented, high-level outreach to the international private sector,
    meeting with more than 40 banks worldwide to discuss the threat Iran
    poses to the international financial system and to their institutions.
    Secretary Paulson kicked off this effort last fall in Singapore, in
    discussions during the annual IMF/World Bank meetings, where he met
    with the executives from major banks throughout Europe, the Middle
    East, and Asia. Secretary Paulson, Deputy Secretary Kimmitt, Under
    Secretary for Terrorism and Financial Intelligence Stuart Levey, and
    Assistant Secretary for Terrorist Financing and Financial Crimes
    Patrick O'Brien have continued to engage with these institutions
    abroad, as well as in Washington and New York.
        Through this outreach, we have shared information about Iran's
    deceptive financial behavior and raised awareness about the high
    financial and reputational risk associated with doing business with
    Iran. Our use of targeted measures has aided this effort by allowing us
    to highlight specific threats. We share common interests and objectives
    with the financial community when it comes to dealing with threats.
    Financial institutions want to identify and avoid dangerous or risky
    customers who could harm their reputations and business. And we want to
    isolate those actors and prevent them from abusing the financial
    system.
        By partnering with the private sector, including by sharing
    information and concerns with financial institutions, we are
    increasingly seeing less of a tendency to work around sanctions.
        As evidence of Iran's deceptive practices has mounted, financial
    institutions and other companies worldwide have begun to reevaluate
    their business relationships with Tehran. Many leading financial
    institutions have either scaled back dramatically or even terminated
    their Iran-related business entirely. They have done so of their own
    accord, many concluding that they did not wish to be the banker for a
    regime that deliberately conceals the nature of its dangerous and
    illicit business. Many global financial institutions have indicated
    that they have limited their exposure to Iranian business. A number of
    them have cut off Iranian business in dollars, but have not yet done so
    in other currencies. It is unclear whether this is just a first step
    toward phasing out the business entirely. Regardless of the currency,
    the core risk with Iranian business--that you simply cannot be sure
    that the party with whom you are dealing is not connected to some form
    of illicit activity--remains the same. Scaling back dollar-business
    reduces, but does not eliminate, the risk.
        As further evidence of the change in tide, a number of foreign
    banks are refusing to issue new letters of credit to Iranian
    businesses. And in early 2006, the OECD raised the risk rating of Iran,
    reflecting this shift in perceptions and sending a message to those
    institutions that have not yet reconsidered their stance.
        Additionally, many other companies have scaled back on their
    investments or projects in Iran, concluding that the risks of expanding
    operations in the country are too great. Multinational corporations
    have held back from investing in Iran, including limiting investment in
    Iran's oil field development. These companies have done their risk
    analyses, and they have realized that the Iranian regime's behavior
    makes it impossible to know what lies ahead in terms of Iran's future
    and stability.
    Syria
        As in Iran, we have taken a combination of steps to address Syria's
    problematic behavior and the threats posed by Syria. Under Executive
    Order 13338, Treasury is applying targeted financial sanctions that
    provide for the blocking of the assets of individuals and entities
    that, among other things, contribute to Syria's support of
    international terrorism, military or security presence in Lebanon,
    pursuit of weapons of mass destruction and missile programs, and
    undermining of U.S. and international efforts in Iraq. E.O. 13399
    provides for the blocking of individuals and entities who were involved
    in the assassination of the former Lebanese Prime Minister Rafik Hariri
    or certain other bombings or assassination attempts in Lebanon since
    October 1, 2004
        In addition, four Syrian entities are subject to an asset freeze
    under the WMD proliferation sanctions program that was established in
    June 2005. The Scientific Studies and Research Centre (SSRC) was named
    by the President in the annex of Executive Order 13382. SSRC is the
    Syrian government agency responsible for developing and producing non-
    conventional weapons and the missiles to deliver them. While it has a
    civilian research function, SSRC's activities focus substantively on
    the acquisition of biological and chemical weapons. The three
    additional entities meet the criteria for designation under E.O. 13382
    because they are subordinates of SSRC.
        Second, we took action pursuant to the USA PATRIOT Act's Section
    311 to protect the U.S. financial system against the Commercial Bank of
    Syria (CBS). Criminals and terrorists have utilized CBS to facilitate
    or promote money laundering and terrorist financing, including the
    laundering of proceeds from the illicit sale of Iraqi oil and the
    channeling of funds to terrorists and terrorist financiers. In March
    2006, Treasury issued a final rule, pursuant to Section 311,
    designating CBS as a primary money laundering concern. This additional
    step required U.S. financial institutions to close correspondent bank
    accounts with CBS, which essentially halted U.S. business with CBS.
        As a result of these U.S. enforcement measures against Syria-based
    entities engaging in illicit financial activity, international
    financial institutions have reassessed their business relationships
    with Syria and a number of Syrian entities.
        Responding to the need for information technology systems, funding
    for Enterprise Content Management (ECM) will be used to implement a
    pilot enterprise-wide ECM project for the Department, initially meeting
    the critical and urgent business needs of the Office of Foreign Assets
    Contract (OFAC) and the Financial Crimes Enforcement Network (FinCEN).
    The project, which is under the oversight of the Department's Chief
    Information Officer, will be designed to meet Department-wide ECM
    requirements, thereby minimizing duplication of effort and
    infrastructure investments by capitalizing on Department and
    government-wide efforts.
        Treasury is also currently in the midst of a multi-year project to
    upgrade the Treasury Foreign Intelligence Network (TFIN), which is the
    Department's system authorized for both Top Secret and Sensitive
    Compartmented Information. Treasury has made significant progress in
    stabilizing the system and as a result, Treasury analysts are already
    using IT tools like Intellipedia and classified Instant Messaging to
    better cooperate with counterparts across the IC.
        Treasury's CIO is currently modernizing TFIN to enhance the
    analytical work flow and add additional analytic tools. In fiscal year
    2008, the Department has requested $3 million for operations and
    maintenance, to ensure the system is maintained and upgraded as
    necessary.
        Question. With the establishment of TFI, how are intelligence
    activities coordinated with other federal agencies and the Office of
    the Director of National Intelligence?
        Answer. The Department of the Treasury's analytic efforts are
    guided by its research and production plan, which was created to ensure
    that its analytic priorities were consistent with those of the DNI, the
    National Security Council (NSC), and the Treasury Department. This plan
    is also extensively coordinated throughout the IC. Because of this
    coordination and through other bilateral exchanges, opportunities for
    joint projects with IC partners have grown since OIA was created in
    2005.
      --In early 2006, Treasury and the Federal Bureau of Investigation
            (FBI) worked in concert to preserve the assets of Toledo-based
            NGO KindHearts, as the NGO and its officers faced allegations
            of terrorism finance.
      --Treasury co-founded and co-leads, with the Department of Defense,
            the Iraq Threat Finance Cell (ITFC) in Baghdad, Iraq. The
            ITFC's mission is to enhance the collection, analysis, and
            dissemination of intelligence to combat the financing of
            terrorist and insurgent groups in Iraq. ITFC participating
            agencies include other members of the IC, as well as FBI,
            Secret Service, and IRS Criminal Investigations.
      --Treasury collaborated with other IC agencies to identify and map
            Iranian Weapons of Mass Destruction (WMD) proliferation
            networks, while supporting the targeting of WMD proliferation
            entities for Treasury action.
        Question. What progress has been made on cross-border currency
    transactions, wire transfers, and effective oversight with other
    countries?
        Answer. Systems for the collection, storage, processing, analysis,
    and dissemination of cross-border electronic funds transfers are in
    place. Both the Australian and Canadian governments, through their
    financial intelligence units, have imposed cross-border electronic
    funds transfer reporting requirements on their financial services
    industries.
    Canada
        The Financial Transactions and Reports Analysis Centre of Canada
    (FINTRAC) is Canada's financial intelligence unit.
        FINTRAC first required the reporting of cross-border electronic
    funds transfers (``EFT'' reporting) in June 2002. Initially, FINTRAC
    required only reports of international funds transfers made using
    certain SWIFT messages. Effective March 31, 2003, FINTRAC expanded the
    international EFT reporting requirement to cover all forms of
    international EFT regardless of system or message format. FINTRAC
    receives almost all of its international EFT reports electronically;
    FINTRAC's regulations permit for paper filing where the reporting
    institution can certify that they lack the capability to file
    electronically, but FINTRAC officials noted that this rarely happens.
        To facilitate the electronic filing of these reports, FINTRAC
    established a ``batch file transfer format'' that informs financial
    institutions of the appropriate report content and form. In turn,
    reporting institutions must implement their own systems for converting
    the institutions' non-SWIFT data to the proper format prior to
    submission. For non-SWIFT EFTs, FINTRAC has also developed an online
    form that is generally used by smaller institutions. For both SWIFT and
    Non-SWIFT messages, FINTRAC has established minimum mandatory data
    fields (17 fields for outgoing SWIFT messages; 8 fields for incoming
    SWIFT messages; 11 fields for both outgoing and incoming Non-SWIFT
    messages) that must be included in the report (again, FINTRAC dictates
    the format of the batch submission, but distinguishes between mandatory
    fields and those fields).\1\
    ---------------------------------------------------------------------------
        \1\ See http://www.fintrac.gc.ca/publications/guide/Guide8/
    81_e.asp.
    ---------------------------------------------------------------------------
        More than 300,000 entities and persons are potentially subject to
    the EFT reporting requirement in Canada, but many do not conduct
    business that reaches the thresholds in the law and thus, need not
    report. In addition, not all types of regulated institutions are
    currently required to report. However, the Department of Finance has
    issued a public consultation paper recommending that Parliament amend
    existing law to require all regulated entities to report cross-border
    EFTs. As noted above, FINTRAC permits reporting institutions to report
    by batch file and by single report through either a web-based interface
    or client software distributed by FINTRAC. Currently 56 entities report
    via the batch process, with the others using the online reporting
    mechanism.
        In total, FINTRAC receives approximately 590,000 international EFT
    transaction records per month.
      --In 2003-04, FINTRAC received 2.7 million SWIFT EFT reports and 3.9
            million Non-SWIFT EFT Reports.
      --In 2004-05, FINTRAC received 3 million SWIFT EFT reports and 4.1
            million Non-SWIFT EFT Reports.
      --60 percent of all the FINTRAC reports are submitted by banks.
      --FINTRAC's international EFT data store contains approximately 15.6
            million records.
    Australia
        The Australian Transaction Reports and Analysis Centre (AUSTRAC) is
    the financial intelligence unit of the Australian government.
        AUSTRAC first required the reporting of cross-border electronic
    funds transfers (International Funds Transfer Instructions or ``IFTI''
    reporting) in 1992.\2\ Generally, AUSTRAC requires the institutions
    ``who are senders of IFTIs transmitted out of Australia; or who are
    receivers of IFTIs transmitted into Australia'' submit reports of those
    transactions.
    ---------------------------------------------------------------------------
        \2\ The IFTI reporting provisions are set out in section 3 and
    sections 17B to 17F of the FTR Act. The prescribed details in relation
    to IFTIs are contained in Regulation 11AA of the Financial Transaction
    Reports Regulations 1990 (FTR Regulations); see also AUSTRAC
    Information Circular No. 2, available at http://www.austrac.gov.au/
    text/guidelines/circulars/pdfs/
    AIC%2002%20%20International%20Funds%20Transfer%20Instructions.pdf.
    ---------------------------------------------------------------------------
        AUSTRAC accepts IFTI reports in one of two formats. First, AUSTRAC
    accepts reports containing properly formatted SWIFT instruction
    messages from those institutions that use the SWIFT system. Second,
    AUSTRAC established a batch file transfer format and requires the
    reporting institutions to implement their own systems for converting
    the institutions' non-SWIFT data to the proper format prior to
    submission. For both SWIFT and Non-SWIFT messages, AUSTRAC has
    established minimum mandatory data fields that must be included in the
    report.
        AUSTRAC permits reporting institutions to report by batch file and
    by single report through a web-based interface operated by AUSTRAC.
    This interface enables institutions to upload prepared files
    automatically, provides an interface for the manual upload of prepared
    batch files, and provides a form for extremely low volume reporting
    institutions to submit their data. In addition, AUSTRAC developed and
    distributes to financial institutions a Microsoft Excel macro that will
    convert certain electronic records to the prescribed data format for
    upload to the AUSTRAC systems. AUSTRAC officials told us that the
    largest four institutions in Australia account for approximately 80
    percent of the IFTI reporting, while a second tier of approximately 20
    institutions account for the majority of the remaining reports.
        In total, AUSTRAC receives approximately 9 to 10 million IFTI
    records per year.
      --In 2003-04, AUSTRAC received approximately 4 million inbound and
            approximately 4.5 million outbound IFTI reports.
      --In 2004-05, AUSTRAC received 4.2 million inbound IFTI reports and
            approximately 5.5 million outbound IFTI reports.
      --The most recent figures reveal that in the course of a year,
            approximately 78 percent of the IFTI reports are in SWIFT
            format and 22 percent in non-SWIFT format.
      --AUSTRAC's data store contains approximately 70 million records
            dating from 1995 to present; 55 million of those are IFTI
            reports.
        Question. I understand that the United States is near concluding
    negotiations on the ``Large Aircraft Sector Understanding,'' dealing
    with the financing terms of aircraft. I have been informed that the
    U.S. industry does not believe their concerns have been addressed in
    the context of the negotiations. They are troubled that agreeing to the
    provision put forward by the EU could hinder their ability to compete.
    Would you be willing to meet with the industry group to discuss their
    concerns?
        Answer. The United States Government negotiating team, led by
    Treasury, has been in continuous contact with industry throughout the
    negotiating process. That process has been underway for over two years.
    We will continue to consult intensively before reaching a final
    agreement. Over the past two months, the Deputy Secretary, Under
    Secretary, and Assistant Secretary have all met with industry
    representatives to gather their views.
        These consultations have occurred primarily through the Department
    of Commerce-led Aerospace Industry Trade Advisory Committee (ITAC) and
    the Aircraft Working Group (AWG--an international industry group for
    which Boeing serves as Vice Chairman). The AWG has met with OECD
    negotiators on a number of occasions, and has also provided formal
    written recommendations on the important competitive elements of an
    agreement. Treasury has followed appropriate procedures for reviewing
    the ITAC's recommendations, and the positions taken by the U.S.
    negotiators to date are in full accord with those recommendations.
        Treasury officials and substantive experts met several times with
    key industry representatives, including meetings as recently as the
    week of April 16th. In these meetings, the detailed industry-
    recommended text was thoroughly examined point-by-point, and U.S.
    negotiators worked with this text in discussions with other negotiators
    at the OECD the week of April 23.
        I can assure you that the provisions of this new agreement will
    ensure that U.S. industry will remain fully competitive. We will not
    support any agreement that does not provide a completely level playing
    field for our exporters. The agreement will also sharply limit the
    ability of foreign governments to provide subsidized financing for
    their aerospace industries' exports. By limiting these subsidies, we
    will also limit subsidies that are currently provided to foreign
    airlines and that disadvantage our domestic airline industry, which
    does not have access to such subsidies.
        Question. Treasury's Office of Intelligence Analysis was
    established in fiscal year 2005. Since that time, how has it
    contributed to overall intelligence collection?
        Answer. The Treasury's Office of Intelligence Analysis (OIA) is
    primarily an analytic component. Through its membership in the
    Intelligence Community (IC), OIA has also been instrumental in driving
    collection on financial issues in the intelligence requirements
    process. At the national level, OIA created and filled a dedicated
    collection requirements officer position. This individual ensures that
    Treasury equities in financial, economic, enforcement, and other areas,
    are reflected in national intelligence priorities and collection
    requirements. At the working level, OIA analysts actively provide
    feedback and direction on disseminated intelligence reports to ensure
    that information relevant to Treasury's mission is collected. OIA
    analysts regularly engage with counterparts in collecting offices
    across the IC.
        Treasury also is the program office for the Terrorist Financing
    Tracking Program (TFTP). Using its authorities, Treasury has access to
    certain very limited and targeted data streams that provide information
    about the financial activities of known terrorists.
        Additionally, Treasury co-founded and co-leads, with the Department
    of Defense, the Iraq Threat Finance Cell (ITFC) in Baghdad, Iraq. The
    ITFC's mission is to enhance the collection, analysis, and
    dissemination of intelligence to combat the financing of terrorist and
    insurgent groups in Iraq. ITFC participating agencies include other
    members of the IC, as well as FBI, Secret Service, and IRS Criminal
    Investigations.
        Question. What key ways is your Department proposing to employ to
    close the ``tax gap?'' You stated in a Finance Committee hearing that
    this is not a pot of gold. How big is the gap and what will it cost to
    close it?
        Answer. The tax gap is the difference between the amount of tax
    imposed on taxpayers for a given year and the amount that is paid
    voluntarily and timely. The tax gap represents, in dollar terms, the
    annual amount of noncompliance with our tax laws. Based in part on the
    results of a National Research Program (NRP) analysis of approximately
    46,000 individual tax returns for Tax Year 2001, the IRS has estimated
    that the gross tax gap for Tax Year 2001 was $345 billion. After
    collections and late payments, the net tax gap for that year is
    estimated to be $290 billion. Although the IRS will never be able to
    audit its way out of the tax gap, considerable progress has been made
    in improving compliance as indicated by growth in enforcement revenues
    in recent years.
        In September 2006, the Treasury Department released a document
    titled ``A Comprehensive Strategy for Reducing the Tax Gap.'' The
    strategy builds upon the demonstrated experience and current efforts of
    the Treasury Department and IRS to improve compliance. See http://
    www.treasury.gov/press/releases/reports/otptaxgapstrategy%20final.pdf
    for a copy of this report. This strategy includes detailed legislative
    proposals, along with new initiatives to reduce opportunities for
    evasion, a commitment to research, continual improvements in
    technology, enhanced enforcement programs and taxpayer service
    programs, increased outreach and education and enhanced coordination
    and partnering with stakeholders.
        The tax compliance strategy is reflected in the President's fiscal
    year 2008 budget request which includes sixteen legislative proposals
    to begin to address the tax gap with minimum impact on taxpayers. These
    proposals include requiring basis reporting on sales of securities;
    information reporting on merchant payment card reimbursements;
    increased information reporting for certain government payments for
    property and services; and implementing standards to clarify when
    employee leasing companies can be held liable for their clients'
    Federal Employment taxes.
        In addition, the fiscal year 2008 budget request provides:
      --$205 million to expand enforcement activities, a majority of which
            will go to improve compliance among small business and self-
            employed (SB/SE) individual taxpayers. It will also fund
            implementation of the legislative proposals described above.
      --$20 million to enhance taxpayer service, including expansion of
            volunteer tax assistance and research to determine the effect
            of service on taxpayer compliance.
      --$41 million for research that will update estimates of reporting
            compliance. Unlike the past, the IRS will conduct an annual
            study of compliance among 1040 filers that will provide fresh
            compliance data each year, and by combining samples over
            several years will provide a regular update to the larger
            sample size needed to keep the IRS' targeting systems and
            compliance estimates up to date.
      --$143 million for information technology that includes upgrades for
            critical infrastructure to prevent business operation
            disruptions and upgrades of IT security.
        The IRS and Treasury Department will continue to work with OMB on
    future funding needs to support the implementation of its tax gap
    strategy.
        Question. If we simplified our tax code with, for example, a flat
    income tax, what effect would there be on revenue receipts and revenue
    collection?
        Answer. There are at least three potential effects on receipts from
    substituting a flat income tax for our current income tax. First,
    initial receipts under a flat tax could differ from those under the
    current income tax due to estimation error. There is some flat tax rate
    that initially would bring in the same amount of revenue as our current
    income tax. Depending on how much the flat tax base differs from the
    tax base of the current income tax, however, there may be more or less
    significant error in estimating the revenue-neutral flat tax rate. This
    error could be positive or negative. Second, a greatly simplified
    income tax could reduce the so-called ``tax gap.'' Taxpayers who fail
    to understand the highly complex provisions of the current tax code are
    unlikely to be compliant with those provisions. While this
    noncompliance could result in overpayment or underpayment of taxes,
    there is strong belief that, on net, it results in underpayment. The
    complexity of our current tax code also is thought to provide
    opportunities for some taxpayers to intentionally underpay their taxes.
    Hence, a dramatically simplified income tax could result in a higher
    level of tax compliance, contributing to revenue collections. Third,
    under a truly flat income tax--that is, a tax with a single tax rate--
    revenues likely would grow more slowly than under our current income
    tax. As real incomes increase, our current progressive income tax taxes
    the higher real incomes at higher effective tax rates, resulting in tax
    receipt growth that exceeds income growth. Under a true flat tax, tax
    receipt growth would be more likely to equal, or nearly equal, income
    growth.

                              SUBCOMMITTEE RECESS

        Senator Durbin. The subcommittee hearing is recessed.
        Thank you.
        [Whereupon, at 5:01 p.m., Wednesday, March 28, the
    subcommittee was recessed, to reconvene subject to the call of
    the Chair.]

      FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL
                                   YEAR 2008

                                  ----------

                           WEDNESDAY, APRIL 11, 2007

                                           U.S. Senate,
               Subcommittee of the Committee on Appropriations,
                                                        Washington, DC.
        The subcommittee met at 3:12 p.m., in room SD-192, Dirksen
    Senate Office Building, Hon. Richard J. Durbin (chairman)
    presiding.
        Present: Senators Durbin, Nelson, Brownback, and Allard.

                        OFFICE OF MANAGEMENT AND BUDGET

    STATEMENT OF ROBERT J. PORTMAN, DIRECTOR
    ACCOMPANIED BY ROBERT SHEA, ASSOCIATE DIRECTOR FOR MANAGEMENT

                     STATEMENT OF SENATOR RICHARD J. DURBIN

        Senator Durbin. Welcome to this meeting of the Senate
    Appropriations Subcommittee on Financial Services and General
    Government. We continue our budget hearings today with the
    Office of Management and Budget (OMB).
        We welcome Director Rob Portman to the hearing along with
    his staff and associates.
        I welcome my colleague, Senator Nelson of Nebraska, who has
    joined me and others who may arrive.
        This budget request is for OMB, which serves as the
    President's eyes and ears on the budget. It's the executive
    branch agency responsible for putting together the President's
    budget, and all agency budget requests come through OMB.
        It operates no programs of its own, but has great influence
    over programs as to how they're funded. OMB is responsible for
    preparing the President's budget, examining agency programs,
    analyzing legislation, preparing the Government's Financial
    Management Status Report and 5-year plan, reviewing and
    coordinating agency plans to implement or revise Federal
    regulations and information collection requirements, and
    providing overall direction of Government-wide procurement and
    outsourcing.

                    OFFICE OF MANAGEMENT AND BUDGET REQUEST

        The administration's fiscal year 2008 request is for $78.8
    million, an increase of $2.1 million, or 2.7 percent over
    fiscal year 2007 levels. No additional personnel are requested,
    but additional funds are needed to annualize the costs of
    Federal pay adjustment. The current number of personnel is 489,
    down from previous years.

                               PRESIDENT'S BUDGET

        With respect to the overall budget, the President's budget
    documents indicate that you plan to hold nonsecurity-related
    spending growth to 1 percent in fiscal year 2008. To do that,
    you're proposing terminations and reductions in discretionary
    programs totaling $12 billion.
        Since the President's budget came out before the fiscal
    year 2007 spending levels were finalized, we believe that you
    are essentially proposing level funding in fiscal year 2008 for
    nonsecurity-related spending.
        The budget assumes dramatic reductions in many programs.
    The Center on Budget and Policy Priorities estimates that your
    budget for 2012 implies a cut of nonsecurity funding of nearly
    8 percent in real terms below the 2007 level.
        So-called mandatory spending, or entitlements, represent
    about two-thirds of the budget. These programs don't require
    congressional action on an annual basis. We'll be interested in
    discussing with you what proposals are in the President's
    budget regarding entitlements.
        I look forward to discussing your budget proposal,
    exploring a few other areas, and I turn to Senator Nelson, if
    you'd like to make an opening statement.
        Senator Nelson. Thank you, I'll just turn to questions, Mr.
    Chairman.
        Senator Durbin. Thank you. Mr. Director, the floor is
    yours.

                     OPENING STATEMENT OF ROBERT J. PORTMAN

        Mr. Portman. Thank you, Mr. Chairman, very much, and I
    appreciate your taking the time to have me here with you today.
    Also, thank you, personally, for being willing to meet with me
    and talk about some of the issues that are of concern to you
    and the subcommittee. Mr. Brownback, the ranking member, also
    agreed to meet with me, which I appreciate.
        As you noted, OMB has submitted a disciplined fiscal year
    2008 budget request. When rent and other costs are included,
    the total budget--as you noted--amounts to about $79 million,
    which is a 2.7 percent increase, compared to 2007.
        As the subcommittee knows well, we've been operating under
    relatively tight budgets, annual increase of about 1.8 percent
    per year since 2001. Our budget, as you know, is almost
    entirely made up of salaries and expenses, so the only
    significant means to achieve savings is through reductions in
    staffing. And we've done that, to accommodate our funding
    levels, we've reduced OMB staff from 527 positions in fiscal
    year 2001 to 510 in 2004, and today, 489.
        The budget we proposed to you, as the chairman and I had a
    chance to discuss, does allow us to maintain our high-caliber
    workforce of 489 employees going forward, incidentally, over 90
    percent of whom are career civil servants, not political
    appointees.
        We believe OMB can continue to deliver high-quality
    performance, and fulfill our many core responsibilities at
    these staff levels, or full-time equivalents (FTE), of 489.
        The best known of our responsibilities is the preparation
    of the budget, but as the chairman has noted, we also have
    responsibility for a lot of other things, including oversight
    of the agencies regarding budgets, management, legislative
    proposals, regulatory reforms, procurement policies, and other
    issues. I believe our dedicated staff are performing their
    responsibilities in an outstanding manner, within the
    constraints of a tight budget.
        If I could, just briefly, draw your attention to the
    management side of our responsibilities, because I know the
    subcommittee has an interest here--we are focused in making
    Government more effective through five specific initiatives:
    strategic management of human capital, competitive sourcing,
    improved financial performance, enhanced and expanded
    electronic governance, or e-Gov, and finally, budget and
    performance integration.
        And that last one, integrating budget and performance,
    we've made some interesting progress recently to ensure greater
    Government accountability. Last year, we launched a website
    called ExpectMore.gov. It provides information on programs that
    have been assessed for effectiveness, using what we call the
    PART, the program assessment rating tool. With this website,
    Congress and the public now have an unprecedented view into
    which agencies and programs are working, which are not, what
    steps are being taken to improve them--it's part of an ongoing
    effort to provide greater transparency, hold ourselves
    accountable, and demand results.
        With the new and improved version of this website launched
    with the 2008 budget a couple of months ago, we now have
    program-level information on about 1,000 Federal programs,
    representing about 96 percent of Federal spending, $2.5
    trillion worth of spending.
        It's a really great resource. And, I encourage members and
    staff who haven't already checked it out to do so,
    ExpectMore.gov.
        Unfortunately, in recent years, Congress has included
    provisions in appropriations bills that slow our ability to
    make continued progress on the President's management agenda,
    particularly in the area of competitive sourcing, and in e-
    Government. Next week, Mr. Chairman, we plan to submit to you
    and others who have an interest, a report that updates you on
    how competitive sourcing is working from our perspective, I'll
    give you a couple of highlights of the report.
        One, new efficiencies and performance improvements that
    have resulted from competitive sourcing are expected to produce
    more than $6 billion in savings over the next 5 to 10 years.
    Second, we have only competed activities considered commercial,
    and not inherently governmental, and incidentally, we've only
    competed about 3 percent of governmental activities. Third--and
    this surprises some folks who have not kept up to speed on how
    this works, Federal employees have fared well in these
    competitions. If you look at the 2003-2006 data, 83 percent of
    the work competed, Federal employees have received, they've won
    the competition. This last year, the number's even a little
    higher than that. So, for the most part, it's Federal employees
    who are winning these competitions, and again, we've only
    competed about 3 percent of governmental activities.
        With regard to the overall budget, the chairman talked
    about, the President's fiscal year 2008 budget shows how
    working together with Congress, we can continue to reduce the
    deficit, in fact, we reduce it every year in our budget,
    balancing the budget by 2012, while keeping taxes low, and
    meeting our Nation's top priorities. It builds on the progress
    we've made the last couple of years where, as you know, we've
    actually had a $165 billion reduction in the deficit--working
    with Congress on restraining spending, and continuing to have a
    strong economy.
        One part of the 2008 budget, I think is particularly
    interesting to this subcommittee is its jurisdiction, which is
    a very interesting jurisdiction as I've looked at it, is in the
    tax gap area. I know this is something the Finance Committee is
    also looking at, but, if you're interested, I would be pleased
    to talk to you more about enhanced compliance efforts, and
    legislative changes that we put in our budget this year to deal
    with the tax gap.
        A balanced budget by 2012 would be a major accomplishment,
    but it would be short-lived without addressing the long-term
    budgetary challenge. And, the chairman just mentioned it, and
    that's the unsustainable growth in entitlement programs. As
    appropriators, you are well aware that mandatory spending is
    overwhelming the rest of the budget. In the space of four
    decades, mandatory spending has grown from about 25 percent of
    our budget, to over one-half the budget. And again, the
    chairman used the figure of two-thirds, when you include
    interest on the debt, it's getting up toward that level, so
    it's the fastest growing part of our budget, and it's an area
    we need to focus on, as Republicans and Democrats.

                               PREPARED STATEMENT

        So, Mr. Chairman, thank you very much for having me before
    this important subcommittee. I believe OMB is staffed with some
    of the highest quality and most dedicated people I've ever
    worked with, and the most dedicated professionals in the
    Federal Government. As noted, we are recommending a disciplined
    budget for OMB that continues to provide the necessary
    resources to serve the President and meet our duties to
    Congress and to the American people. I look forward to working
    with members of the subcommittee as we move forward with the
    appropriations bill. Again, I thank the subcommittee for its
    time, and I look forward to your questions.
        [The statement follows:]
                    Prepared Statement of Robert J. Portman
        Chairman Durbin, Ranking Member Brownback, and distinguished
    members of the Subcommittee, I am pleased to be here today regarding
    the President's fiscal year 2008 budget request for the Office of
    Management and Budget.
                                  omb's budget
        The Office of Management and Budget has submitted a disciplined
    fiscal year 2008 request for our agency. When rent and other costs are
    included, OMB's total budget request amounts to $78.8 million--a 2.7
    percent increase compared to the fiscal year 2007 continuing
    resolution.
        To achieve spending restraint, I have asked OMB to pursue cost
    savings wherever possible. As the subcommittee is aware OMB has been
    operating under very tight budgets. Over the past 6 years, our budget
    has increased by an average of 1.8 percent per year and over the past
    four years it has increased by an average of only 1.2 percent. Our
    budget is nearly entirely comprised of salaries and expenses and our
    only significant means to achieve savings is through reductions in
    staffing. To accommodate lower funding levels, we have reduced OMB
    staff from 527 positions in fiscal year 2001, to 510 positions in 2004,
    to 489 positions in 2007.
        The budget we have proposed for OMB will allow us to maintain a
    workforce of 489 positions, well below the levels we had in 2001. We
    believe OMB can continue to deliver high-quality performance and
    fulfill our many important responsibilities at these staff levels.
        The best known of OMB's responsibilities is the preparation of the
    President's annual budget. In addition, our responsibilities include
    oversight of the other agencies regarding budgetary matters, management
    issues, the Administration's legislative proposals, regulatory reforms,
    procurement policies and other important matters. We work to ensure
    that all the Administration's proposals in these areas are consistent
    with relevant statutes and Presidential objectives. I believe our
    dedicated staff are performing their responsibilities in an outstanding
    manner within the constraints of a tight budget.
                           management/expectmore.gov
        I want to briefly draw your attention to one of our important
    responsibilities, implementing an aggressive management agenda. This
    effort, led by the OMB deputy for management, Clay Johnson, is making
    the government more effective by focusing on five initiatives. Those
    initiatives, all launched in 2001, are (1) strategic management of
    human capital, (2) competitive sourcing, (3) improved financial
    performance, (4) expanded electronic government (e-gov), and (5) budget
    and performance integration.
        To ensure greater government accountability, last year we launched
    a new website: ExpectMore.gov. This site provides information on
    programs that have been assessed for effectiveness using the Program
    Assessment Rating Tool, commonly referred to as the PART. With this
    website, Congress and the public now have an unprecedented view into
    which programs work, which do not, and the steps being taken to improve
    them. It's another way we are providing greater transparency, holding
    ourselves accountable--and demanding results.
        With the new and improved version of this website launched with the
    2008 budget, we now have program-level information about the
    performance of nearly 1,000 Federal programs representing about 96
    percent of government and $2.5 trillion of federal spending. I urge
    Members and staff to check out ExpectMore.gov.
        Unfortunately in recent years, Congress has included provisions in
    appropriations bills that slow our ability to make continued progress
    on the President's Management Agenda, particularly in the area of the
    competitive sourcing and E-government. We would like to work with you
    to address your concerns and to avoid provisions that would restrict
    the progress of the management reforms.
                            fiscal year 2008 budget
        I would also like to take a moment to review the President's entire
    fiscal year 2008 budget, which we submitted for your review five weeks
    ago. Our 2008 budget proposal shows how working together we can reduce
    the deficit every year and balance the budget by 2012, while keeping
    taxes low and meeting our nation's priorities. It builds on the
    progress we've made over the past two years, which has led to a $165
    billion reduction in the deficit.
        We have been able to make progress for two primary reasons: first,
    because we have been blessed with a strong economy that has generated
    record revenues and, second, because the Congress, working with the
    President, has done a better job of restraining spending, especially
    keeping non-security spending under inflation for the past three years.
    It is exactly these elements--a solid economy and restraint on
    spending--that can now lead to balance.
        The 2008 budget continues to support growth, innovation, and
    investment by making permanent the President's tax relief, which would
    otherwise expire in 2010. Since the tax relief took full effect in
    2003, we have seen strong and steady job growth--with the creation of
    more than 7.6 million new jobs. After 2003, Federal revenues also
    surged--hitting record levels over the past two years. With solid
    economic growth, our total receipts are now slightly above the
    historical average of 18.3 percent--as a share of the economy--and we
    project receipts remain at or above the historical average for the
    five-year period.
        The 2008 budget demonstrates we can achieve balance by 2012 without
    raising taxes. In addition, we plan to more effectively and efficiently
    collect the taxes owed through new initiatives to address the tax gap.
    First, we improve the effectiveness of the IRS' activities with a $410
    million package of new initiatives to enhance enforcement and taxpayer
    service and to improve the IRS' information systems. Second, we include
    in the budget 16 carefully targeted tax law changes that promote
    compliance while maintaining that important balance between the burden
    being imposed on taxpayers and our shared interest in collecting taxes
    owed. The budget also includes other investments in program integrity
    efforts to generate additional savings.
        While restraining spending overall, the President's budget also
    provides new resources for key priorities. It increases funding for our
    national security to combat terrorism and protect the homeland. It
    includes new policies to address issues of concern to America's
    families, including educating our children, access to affordable health
    care, and reducing energy costs. The 2008 budget also proposes to hold
    the rate of growth for non-security discretionary spending below the
    rate of inflation. We believe we can address our nation's top
    priorities at this level of funding.
        A balanced budget by 2012 will be a major accomplishment, but will
    be short-lived without addressing our long-term budgetary challenge:
    the unsustainable growth in Medicare, Medicaid, and Social Security.
    Mandatory spending is overwhelming the rest of the budget. In the space
    of four decades, mandatory spending has grown from 26 percent of our
    budget in 1962 to 53 percent of our budget in 2006. We must begin the
    reform of these programs now in order to protect those commitments.
    Addressing entitlement spending is the right thing to do because small
    changes now have a big impact later.
                                   conclusion
        Mr. Chairman, thank you for having me before this important
    subcommittee today. As noted, we are recommending a disciplined budget
    for OMB that still provides the necessary resources for this agency to
    serve the President and meet its duties to the Congress and the
    American people. I look forward to working with the members of this
    Subcommittee as we move forward with the appropriations bills.
        I thank the Committee for its time, and I look forward to your
    questions.

                                    STAFFING

        Senator Durbin. Thank you, Mr. Director, and let me ask you
    a few questions about staff. Have you had any difficulties
    recruiting, hiring or retaining staff at OMB?
        Mr. Portman. We have not had a difficult time recruiting.
    As you may know, OMB was determined by a magazine entitled
    Partnership for Public Service, as one of the best places to
    work in the Federal Government. And, I sometimes wonder about
    that, since the hours are long, and the work is hard. But, it's
    a good place to work, people like working at OMB----
        Senator Durbin. Is that your brother-in-law's publication,
    or is that----
        Mr. Portman. Actually, I've told people it really is
    reviewing the year before I got there, because I've been there
    for 1 year. We'll see what happens next year.
        But, our FTEs are down a little bit right now, which is
    typical. After the budget cycle, we tend to have a drop off.
    We're about 5 percent down right now, from our budgeted FTE
    level, that enables us to do our work. We're down to about 470,
    instead of 489. So, we're down a little bit.
        We just finished our recruiting, we broadened our
    recruiting this year, as you and I talked about. We had very
    good luck, so we're hoping to be able to, once again, attract a
    lot of high-caliber young people to OMB.
        Senator Durbin. What percentage of your employees are
    eligible to retire in the next 5 years?
        Mr. Portman. It's growing. I don't know what the percentage
    is. We do have our baby boom generation, of which I am a part,
    and I think you are, Mr. Chairman. Our workforce is getting to
    that point where they can look at retirement. We'll get you
    that number.
        [The information follows:]

        There are a total of 101 OMB employees eligible to retire
    by December 2012.

        Mr. Portman. It concerns me, though. And, again, we're not
    having trouble recruiting good people. I'm very impressed with
    the young people we've brought in over the last year since I've
    been there, and we've had good luck on the college tour and
    graduate school tour, most recently, but it does concern me
    we're going to lose a lot of great talent.
        Senator Durbin. Does your agency use student loan repayment
    programs for recruiting and retention?
        Mr. Portman. We don't--we haven't had to. But, because of
    the prodding by a certain Senator from Illinois, we are now
    looking into that and that may well be something that I'll be
    able to report to you on very soon.
        Senator Durbin. It is a program to use if you need it. The
    point was, we feel that we can attract and retain many young
    people who are burdened with student debt to public service and
    to the Federal Government. We use it in the Senate, pretty
    extensively, so, I don't want to impose this on you, this is
    not a requirement to get approved budgets through this
    Appropriations subcommittee, but----
        Mr. Portman. We think it's an interesting option, and we
    are looking at it very seriously.

                                 CONSOLIDATION

        Senator Durbin. There's a proposal in the President's
    budget to consolidate a number of appropriation accounts within
    the Executive Office--the actual number of accounts to be
    consolidated is eight--into one large account called, The White
    House. This was proposed last year and was not accepted by
    Congress.
        Why do you think it's a good idea to eliminate the separate
    accounts, and consolidate funding in one large account?
    Wouldn't Congress lose budgetary control and transparency? And,
    I might add, the Executive Office of the President has
    appropriations transfer authority in the annual appropriations
    bill, that allows transfers up to 10 percent. So, would you
    retain authority? In your 2008 bill proposal?
        Mr. Portman. Well, we--as you know--this has been a
    difference we've had with Congress. I think it's a good idea
    just for the efficiency and the best practices you can get by
    consolidating functions. I don't know how to answer your
    question in terms of the congressional impact, because I don't
    think--from what I know about it, and I must confess, I have
    not had the ability to talk to you or others about what you
    view as your current ability to influence some of these
    functions, but I don't think it will make a key difference.
    And, I think, the key difference is, your level of interest,
    and oversight. And, I think the White House Executive Office of
    the President would be very responsive to you.
        But, it's an effort to consolidate, it's an effort to gain
    efficiencies, and again, to focus on best practices, and all of
    the different elements within the Executive Office of the
    President.
        Senator Durbin. My colleague, and ranking member Senator
    Brownback of Kansas has arrived. I know he had a bill pending
    on the floor, so I'm going to give him an opportunity now if he
    would like to either make a statement or ask a question, if
    it's all right with Senator Nelson.
        Senator Brownback. Thank you very much, Mr. Chairman for
    doing that, thank you for allowing that.
        Thank you to my colleague from Nebraska for allowing me to
    step forward.

                                BALANCED BUDGET

        Mr. Director, thanks for being here at the subcommittee
    today. We've had a chance to visit on some of these issues in
    the past. I do want to get a thought on record from you, if I
    could. Your comments would be helpful about ways to be able to
    get us to a balanced budget, and change the system in a way
    that will produce more balanced budgets in the future.
        You and I have both been in the House of Representatives,
    and working on these issues in previous times, and we were able
    to get to a balanced budget in the past. It seems like to me,
    we were able to do that mostly by producing growth in the
    economy, and less by restraining spending. Yet, now we're at a
    time, we're getting some growth in the economy, although that
    economy appears to be slowing, we certainly don't want to
    increase taxes at this point in time. But, how would you
    systematically put in place programs or systems that would
    restrain the growth of Federal spending? If you had a chance to
    look at that as OMB Director, and I'd really like to get your
    thoughts on how you view that, and then I want to run an idea
    by you that I've been pushing on this issue as well.
        Mr. Portman. Well, thank you, and again, I--before you got
    here, I said that I appreciate the fact that you and the
    chairman were willing to meet with me and talk about some of
    the subcommittee issues individually. This is one of the issues
    you raised then, and you and I talked a little about your
    legislation, which I'm happy to address in a moment.
        Let me make a bigger point, if I could, though. You and I
    also talked about the growth of the entitlement programs, and
    the fact that they are becoming a bigger part of our overall
    budget, and to get to balance, in my view, it's necessary--not
    so much short term--where we can get to balance, working
    together, restraining domestic discretionary spending, looking
    at the economic pro-growth policies. But, over the longer haul,
    10, 15, 20 years, the way to stay in balance, as you say, must
    include looking at the unsustainable growth rate, because it is
    6, 7, 8, 9 percent growth rate of these important programs,
    like Medicare, Social Security, and Medicaid. Otherwise, it's
    very difficult to imagine us being able to stay in balance
    without huge tax increases which would result, I think, in a
    detriment to the economy.
        Within the roughly 19 percent of the budget that is the
    discretionary spending on the domestic side, particularly,
    there are things we can do. And, I think, looking at the
    performance measures that I talked about before you arrived
    that we're doing now with ExpectMore.gov, which is our website
    where we put up the assessments of 1,000 Federal programs,
    about 96 percent of our spending. We're making progress, we
    think, in determining which programs work, which don't, and
    spending the Federal dollar in the most efficient way possible.
        We also have, as you know, proposals for a commission that
    would look at waste, fraud, and abuse in our budget, and then
    we have a commission called the Sunset Commission, which
    actually has a lot in common with your CARFA proposal, the
    Commission on Accountability and Review of Federal Agencies.
        Senator Brownback. If I could, the CARFA bill was included
    in the budget resolution that the Senate approved before the
    Easter break, and I hope it's something that the administration
    could come out supporting in an official position. It takes the
    BRAC process--the military base closing commission process--and
    applies it to the rest of Government. And it's my conviction
    that we will not be able to restrain the growth of Federal
    spending if we use the current system, and just keep the
    current system in place. So, we need a systems change.
        You have a sunset proposal that you put forward--and I
    think that's a good idea, and a good way to go as well, so that
    there regularly is a sunsetting of bills.
        And, Mr. Chairman, I might note, I think this is a
    Republican and a Democrat proposal. Under either scenario,
    either party in control, we really need to be able to cancel
    programs that aren't performing. And, we've not been able to
    find a successful way of doing that. And, it's a great
    frustration to all Americans--whether you're liberal or
    conservative--I get people raising a number of programs that
    have been seen as conservative programs that they're saying,
    ``Well, they're not producing.''
        Well, here would be a systems way that you could cancel
    programs that aren't producing results on an objective basis,
    and then force the Congress to vote.
        And, that's what I'm after, is getting that systems change,
    because I think we're just showing that the system is built to
    spend, and we need it to be built to save, particularly in
    entitlement programs.

                             MEDICARE AND MEDICAID

        Before my time runs out--on Medicare and Medicaid, in
    particular--what is it that you want to target to be able to
    get into more sustainable growth patterns, as you look at those
    two big entitlement expenditure programs?
        Mr. Portman. It's a great question, and probably the most
    critical budget question is healthcare and the entitlements,
    that combination. Not that Social Security isn't a priority, it
    is, but the fastest growth is actually in the healthcare side,
    and that's where--as you and I talked about--you see the
    greatest unfunded obligation, $32 trillion in Medicare alone
    over the next 75-year period.
        Two things, I guess, one is the cost of healthcare.
    Because, we know more and more about how healthcare drives
    Medicare and Medicaid, and vice versa, that's such a big part
    of our healthcare system. And this--as you know, the
    President's proposed in the budget some changes, with regard to
    the standard deduction, with regard to litigation in the
    healthcare area, and other things that are focused on getting
    the costs down, and keeping the quality up, in terms of
    healthcare.
        Second, is with regard to the programs themselves. We have
    some specific proposals in our budget, they tend to focus on
    two things. One is rightsizing the amount of Federal
    reimbursement to providers, the so-called market basket change
    that we have, a 0.65 percentage point change--it's relatively
    small--but it has larger out-year impacts.
        And then, second, is more income relating, which is a
    technical term for means testing. Telling seniors that if they
    are in part B or part D, that their subsidy under those
    programs, if they make over a certain income, would be, over
    time, effectively reduced. Right now, if you make over $80,000
    a year, $160,000 as a couple, you begin in part B to see that
    Federal subsidy reduced. We would like that in place under our
    budget proposal, and also apply it to part D.
        This has been a controversial proposal in the past--I'm
    sure it still is controversial--but actually, I've found in
    talking to Republicans and Democrats alike--that Members are
    willing to look at this, to listen to come of these ideas.
    These are our ideas, we're eager to hear ideas from other
    folks. By the way, those two proposals alone reduce that
    unfunded obligation by $8 trillion over the 75-year period. And
    again, we do not have a monopoly on good ideas, here, they're
    tough to come by. It's a difficult area politically, as well as
    substantively.
        But, we look forward to working with Congress on that,
    because you're right--those are key elements to not just
    getting to balance, which I believe we can do, working
    together, and I think we can do it in the next 4 or 5 years.
    But how do you sustain that over time without a huge tax burden
    on the economy?
        Finally on CARFA, your proposal, we do share your goals on
    this, and we want to work with you to get it enacted, we think
    it's good policy.
        Senator Brownback. Thank you.
        Thank you, Mr. Chairman.
        [The statement follows:]
                  Prepared Statement of Senator Sam Brownback
        Good afternoon. I want to thank you, Chairman Durbin, for your
    leadership of this new subcommittee. I look forward to working together
    with you during this coming year as we make funding decisions and
    provide oversight to the various agencies within this subcommittee's
    jurisdiction.
        Director Portman, thank you for appearing before our subcommittee
    today. I look forward to hearing the details of your fiscal year 2008
    budget request and the key efforts that your agency will be undertaking
    this year.
        Looking at the President's budget, I am pleased that it assumes the
    continuation of the recent tax cuts, which have helped our economy
    rebound from recession to its current robust health. I am also
    encouraged that the President is projecting a balanced budget by 2012.
    I believe that the only way we can continue on a course toward balanced
    budgets is by growing the economy through lower taxes and by
    restraining federal spending.
        Lower taxes spur economic growth, which means more jobs, healthier
    businesses, and a better fiscal outlook for all Americans. Although the
    economy is strong and jobless numbers are down, I believe we have more
    work to do. We should continue to reduce the deficit and make the
    recent tax cuts permanent, especially the death tax which overly hurts
    small businesses and family farms.
        Mr. Portman, you note in your testimony that the Administration
    plans to direct additional resources to close the so-called ``tax
    gap.'' Certainly, we must ensure that taxes which are owed are
    collected. However, I remain concerned that our tax system is overly
    complex, complicated, and burdensome. Americans spend roughly $157
    billion each year in tax preparation to ensure they do not run afoul of
    the IRS. The system is in desperate need of reform. And as tax day is
    right around the corner, I must reiterate that I support a flat tax
    concept which simplifies tax preparation, applies a low tax rate to all
    Americans, and respects the special financial burden carried by
    American families raising children. One reason we have a ``tax gap''
    may be that our tax system is so complex and convoluted that taxpayers
    cannot even figure out what they owe.
        Mr. Portman, I look forward to hearing your testimony this
    afternoon. Your agency has a key role in prioritizing how federal
    discretionary funds will be allocated. This is no small task. There are
    many programs and activities worthy of federal support. But we must
    always temper those funding needs with the goal of a balanced federal
    budget. We must be prudent stewards of American's tax dollars and not
    pile up debt for our children and grandchildren to pay. Just as
    American families must make difficult budget decisions about their
    hard-earned dollars, we must ensure that we are spending the people's
    money wisely. I will have some questions for you about how the federal
    government is spending taxpayers' dollars and how we can improve
    efficiency in government. From personal experience, I can tell you that
    few things are more upsetting to my Kansas constituents than to see
    wasteful government spending. Kansans often say to me, ``I don't mind
    paying the taxes I owe, but it is infuriating to see my hard-earned
    money being wasted. If I am going to work hard to earn money, I want
    what I have to pay in taxes to be spent wisely.''
        So thank you for appearing before this subcommittee today, Mr.
    Portman. And thank you, Mr. Chairman, for your leadership of this
    subcommittee. I look forward to working with you this year.

        Senator Durbin. Senator Nelson.
        Senator Nelson. Thank you, Mr. Chairman.

                             ADMINISTERING EARMARKS

        Director Portman, thank you for coming before the
    subcommittee today. Earlier we talked about the earmark issue,
    and the way in which they are administered by agencies. And, as
    you know, I am interested in this, and more than 1 month ago,
    before the database was finalized, I communicated with you, my
    ongoing interest in collecting information on the degree to
    which agencies assess fees on congressionally directed funds
    before they're allocated to the congressionally direct
    recipient. In which I stated my desire to see this information
    posted on OMB's website.
        I think the information would be useful, not only to OMB,
    but to Congress and the American taxpayer, in the spirit of
    transparency, to provide the full picture of exactly how this
    money is expended. Unfortunately, I only received a short
    response to my letter 2 months after I sent it, and I know we
    just visited about that, but the sense I got from your letter
    is that it hasn't really come down before others, other
    decisionmakers at OMB for consideration, and I'm wondering if
    you can give me your thoughts about developing information
    about what the agency's charge for the administering of
    earmarks, and where they have authority to do it, and where
    they don't have authority to do it, but they just have assumed
    authority.
        As a former Governor, I can tell you, my agencies never
    assumed any authority they didn't have, and get by with it.
    But, we're seeing agency after agency, ostensibly, based on the
    information they've reported to us, skimming or marking down
    earmarks before they are actually directed out to the
    congressionally mandated recipient. Earmarks being skimmed or
    marked down to the tune of 1 percent, up to 5 percent, or who
    knows what percent? Department of Defense said they couldn't
    even give us an answer. This is unacceptable. You cannot run a
    Government if you can't control the Government, and these
    appear to be--at least to me--in many cases, absolutely outside
    the budget, off-budget, if you will. And, it's unacceptable. I
    wonder if you might give me a response.
        Mr. Portman. Well, first, as I have said to you, I think
    it's a very helpful addition to the transparency that we're now
    providing in terms of earmarks. Also, as you know, we're in the
    process of working with the agencies on another challenge,
    which is implementing what we strongly support, which is the
    Coburn-Obama transparency on grants and contracts. In theory, I
    think, the difference between our earmark database, which has
    just gone up recently, and the new database we're working on,
    which would be the grants and contracts, should be the
    administrative expenses, there may be some other issues there,
    technical issues we have to work through. But, that should be
    very interesting information, we're eager to work with you to
    supply that information.
        As you know, some of these agencies have a statutory
    requirement to provide for some administrative expense as they
    deliver the funds. So, for instance, in the research area, it's
    a 4 percent number. I don't know that that's inappropriate--
    that's something Congress has determined is appropriate. I
    don't know what the right number is, but for an agency not to
    take on any administrative expenses when there's a number of
    earmarks in an area, does provide a hardship for them and in
    fulfilling their other responsibilities Congress has given
    them.
        So, there probably is, in some cases, a number that is
    appropriate, that is statutory. In other cases, that may be
    something Congress wants to look at. And, in some cases, as you
    say, there is no statutory requirement. So, agencies have used,
    past practice has been to, for certain agencies to establish a
    certain number for a certain type of program, that's something
    that we would like to look at. So, I'm glad you brought it to
    our attention.
        Senator Nelson. Well, I might bring something to your
    attention too, just, in one case, the administration on aging
    program innovations, said that they withheld up to 1.3 percent
    to cover costs related to grant peer reviews, as well as
    unexpected costs--whatever those would be--payments for
    cancelled obligations, secretarial transfers, cited statutory
    authority left blank, other explanation of authority or reasons
    for a fee assessment, left blank. Food and Drug Administration
    (FDA), food technology evaluation--they say there's none by the
    FDA, the Army, which handles the payment for FDA, charges a 6-
    percent administrative fee. I think we really do need to get a
    handle on this. As I say, you can't really budget effectively,
    if you don't know what your agencies are charging, and/or if
    they don't have any authority--statutory authority, or as part
    of the earmark, receive authority for withholding some amount
    for the administration of that earmark.
        This is something that, generally, is budgeted, because a
    number of the agencies went through and said they don't--they
    budget this in their overall budget, and they don't take
    anything for the administration of earmarks. And, it's
    skimming, if there's no authority, well-intentioned as it may
    be, or it's marking down, well-intentioned though it may be,
    but it's without apparent control, or under the authority or
    control of OMB. And yet, their budget comes out for a lower
    amount than what they're actually receiving in terms of money
    coming in. And, I don't know that that would create a slush
    fund within an agency, but one has to wonder how they match
    their expenditures to what they charge for that fee for
    administering the earmark.
        Mr. Portman. No, I think it's a very good point, the
    agencies, as you know, over the last 10 years have had almost a
    quadrupling of earmarks. And, so probably for some of these
    agencies, this was not a very big deal, in terms of their
    overall budget, 10 years ago, and they are making that
    adjustment. The House and Senate have come forward with new
    rules for increased transparency,. Chairman Obey has proposed
    that earmarks be cut in half. There will be fewer earmarks, I
    believe, just as there were this year as compared to last year,
    and 2006 as compared to 2005. But this is an issue that I do
    want to get on top of, try to figure out, again, as we're
    asking the agencies to go to this next level on the Coburn-
    Obama grants and contracts, if we can also get this very
    specific information. And, thank you for your willingness to
    share the Congressional Research Service (CRS) report that was
    provided to you. I think that'll be very helpful to us, as
    well.
        Senator Nelson. Well, thank you. It sounds like things
    happen a little faster if there are a couple of names on a
    bill, so I'll get one of my colleagues, and we'll get something
    ``Nelson-so and so'' to help you have the authority to do it.
    And/or the urgency might be expressed.
        Thank you very much, Director Portman.
        Thank you, Mr. Chairman.
        Senator Durbin. Thank you, Senator Nelson.

                                    EARMARKS

        Director, let me ask you about earmarks. You sent out a
    memorandum to agencies and departments on February 15 about
    earmarks and how they were to be treated. Would you tell us
    what you were trying to accomplish with this memo, and what is
    your policy going to be about congressional earmarks in the
    future? Do you plan on maintaining an ongoing database on
    earmarks, and tell us a little bit about your new website,
    FederalSpending.gov.
        Mr. Portman. Well, thank you, Mr. Chairman. Let me
    distinguish, if I could, between the February 15 instruction,
    and the January instruction--I believe it was on January 25, so
    it preceded Senator Nelson's letter to me. We gave instructions
    to the agencies to compile earmarks for the purpose of the
    database, that was to be sure that the cut in half goal had a
    basis that was fair, frankly, that we were accountable, so that
    when Congress came to us with future appropriations bills, we
    had a basis that people could agree upon. It's also an
    opportunity for Congress to look at our definition, which it
    turns out, is very close to your definition in the Senate-
    passed bill and the definition in the rules in the House, and
    to look at the individual earmarks, to see if you think they're
    appropriate or not.
        So, that is up--that database is based on the January
    guidance that we sent out to the agencies. To your question as
    to whether we plan to continue the database, the idea was to
    establish a database as a benchmark. We chose 2005. We thought
    that was the fairest year. It happened to have been the peak of
    earmarks. It also happened to be the year in which all of the
    agencies were represented. As you recall, in 2006, the Labor/
    HHS bill did not include the earmarks it had previously
    included. From a congressional appropriations point of view, we
    thought 2005, frankly, was the fairest and the most
    comprehensive benchmark to use.
        We'll continue to monitor this, now, going forward. With
    regard to the guidance on February 15, that was with regard to
    the 2007 spending. And, what we were trying to do there, was
    not to establish any new guidance from OMB over and above what
    was in your 2007 continuing resolution. That was an attempt on
    our part, simply to take your 2007 guidance that you had
    provided us, through your continuing resolution, and make it
    very clear to the agencies what it meant in terms of their
    interaction with Congress for 2007. And, I think that's been
    fairly well-received by the agencies. Incidentally, I think the
    agencies have done a pretty good job on the earmarks. They
    didn't get everything into us on a timely basis, but it was a
    huge project, and we think this transparency will be helpful
    going forward.
        Senator Durbin. So, what is this new website?
        Mr. Portman. FederalSpending.gov is the name of the site
    where the Coburn-Obama database will be posted, so that's a
    third transparency issue, in addition to ExpectMore.gov and the
    database on earmarks, that will be up and going, by law, by the
    end of this year. We're making pretty good progress on it, and
    we're hoping to be able to have some preliminary data available
    before that time. But we believe at this point, Mr. Chairman,
    and you should hold us accountable for this, that we will be
    able to do this in a timely manner, per the statutory
    requirement.
        The database on earmarks is on OMB.gov and if you go to
    OMB.gov, and then you go to ``earmarks'' that's where you will
    find that database.

                  OFFICE OF INFORMATION AND REGULATORY AFFAIRS

        Senator Durbin. One of my favorite agencies in OMB is the
    Office of Information and Regulatory Affairs (OIRA). This is
    kind of like freakenomics to the 10th power, and it apparently
    holds a very high place in the pantheon of your administration.
    So much so, that the President would make a recess appointment
    of Ms. Susan Dudley to follow, I believe, John Graham, who was
    one of the earlier people appointed.
        It seems that, from an outsider's point of view, that
    you're attempting to take away the regulatory authority of
    agencies, or circumscribe it, by vesting that authority in this
    office. That regulatory authority was created by legislation in
    each of these agencies, and it would seem that your goal is to
    supersede, or at least monitor, that authority, as it's being
    exercised.
        It also seems that there's--God forbid--politics involved
    here. I'm wondering if you could explain to me why it's a good
    idea to put a political appointee in charge of a regulatory
    office in each agency, as you have proposed. Why do you want to
    further centralize regulatory power in OIRA, and shift it away
    from individual agencies?
        Mr. Portman. First of all, with regard to OIRA, you're
    right, it's a very important entity, they have an important
    responsibility, because they do look at the regulations and
    rules--this has been true in previous administrations, as you
    know, as well as this one. They apply a benefit/cost analysis,
    ensuring that the agencies have gone through the proper process
    that Congress, incidentally, has asked them to do. In some
    cases, a risk assessment, depending on the kind of regulation
    or rule.
        When I first got to OMB, as you know, there was no
    Administrator of that Office, because John Graham had left, and
    it was open. We then nominated Susan Dudley who, I believe, is
    very well-qualified for this position. She has worked, among
    other places, at OMB, other agencies, and has a good
    background. I think six of the former OIRA Administrators,
    Republican and Democrat alike, had very kind things to say
    about her in their letter to you as someone who was
    professional, and someone who could do the job in a fair,
    nonpolitical way.
        We did try to go through the normal process, she was not
    able to be confirmed. So, for the first time in 1 year, since
    I've been there, we do now have, as of the recess appointment,
    a head of the Office who is a political appointee. I think
    she'll do a very good job, and I hope you get a chance,
    Senator, to meet her and look at her work. I think you'll find,
    as you look at it objectively, that she will do a fair,
    balanced job. That's certainly our idea.
        In the meantime, Steve Aiken, who is a career civil servant
    at OMB, who previously was in the General Counsel's Office,
    served in an acting role there, and he did a terrific job. And,
    so it's my hope that the good work Steve was doing continues.
    In other words, I don't view this as a political
    responsibility, I view it as OMB's role to look at regulations
    and rules, and make sure they are consistent with both the
    congressional dictates that we live under, including coming up
    with the right analysis of their impacts on both the benefits
    side and the cost side, but also consistent with the
    President's policies.
        Senator Durbin. Are you familiar with Ms. Dudley's
    background? Spending the last 3 years as director of regulatory
    studies for the Mercatus Center on the campus of George Mason
    University? Mercatus Center, founded by corporate interests,
    endowed by large corporations, free market-oriented
    foundations, and leaders of the corporate world?
        Mr. Portman. Yeah, I'm familiar with her background,
    generally, and her resume. Again, she was actually nominated
    about 1 year ago to Congress. I think the formal announcement
    to Congress was a little more than 8 months ago.
        Senator Durbin. And were you aware of the fact that in that
    capacity she opposed improved standards for airbags in
    passenger vehicles?
        Mr. Portman. I'm not aware of that specific issue.
        Senator Durbin. This is where this obscure little agency
    starts worrying me. Because someone from her background is now
    going to judge issues about health and safety. And, make
    calculations on cost benefits that seem like they're very
    scientific and very mathematic, which time and again always
    tend to hurt the consumer and help those who are, frankly,
    pretty well off in this country. It's a mindset that seems to
    drive this view toward regulation. So, I hope you'll understand
    why some of us were a little bit upset that she was put in by
    recess appointment, into this critical area and we're going to
    be watching it carefully.
        Senator Brownback.
        Senator Brownback. Thank you very much, Mr. Chairman.

                                SOCIAL SECURITY

        Director, I want to ask a couple of specific questions on
    areas of funding that portend on big policy issues coming up.
    We're considering a major immigration bill. I hope we're going
    to be able to move one forward. The President talked a lot
    about it. My colleague and I are both serving on the Judiciary
    Committee and hopefully this is one we're going to be
    considering, and moving forward with.
        There was an article that appeared March 29 this year in
    the Washington Times talking about uncredited earnings into
    Social Security. And, they put a big number on the amount of
    money going into Social Security from uncredited, or what would
    probably be undocumented people working in the United States.
    They said, ``In 2004, uncredited earnings Social Security tax
    payments that can't be matched to valid Social Security numbers
    totaled $65 billion or about 10 percent of the programs' total
    income.''
        They lead the story by saying, ``Uncredited contributions
    to Social Security grew by nearly $300 billion, from 2000 to
    2004.'' The article says, ``A giant increase attributable
    mostly to illegal aliens using erroneous Social Security
    numbers.''
        I wanted to ask you about this because if these numbers are
    accurate, there's a significant policy issue, financially,
    that's going to be happening to the country. Either we get the
    situation under control on undocumented workers, or nothing
    happens. Either way, you've got a big number that's involved
    here in Social Security and Social Security's future.
        Are you able to put your finger on these numbers? Are you
    looking at these, in particular, relative to the policy debate
    we're having on immigration?
        Mr. Portman. It's an interesting question and there has
    been analysis by the Congressional Budget Office (CBO), as you
    know, of the costs of the program and it takes into account
    some of these payroll tax potential surpluses as well as the
    fees that would be paid and what the impact on the budget's
    going to be. And, in some cases it's been analyzed to be close
    to a wash. In other words that there be additional income
    coming in to the Government through fees and yet maybe some
    increase in some social service costs or some changes in some
    of these Social Security earnings.
        On the specific report you're talking about, which I think
    is the Senior Citizen's League. Is that the group?
        Senator Brownback. It's a private group and I just, when I
    saw, these are eye-popping numbers and I wondered if these, if
    this is accurate or not?
        Mr. Portman. We don't know. You and I talked about this
    briefly at a previous meeting and I am trying to get more
    information about it. What I do know, at this point, is that
    the estimate is probably not accurate as to undocumented work.
    And, why do we say that? We say it because there are a lot of
    reasons that the name and the Social Security number (SSN) may
    not match SSN's file, the Social Security Administration's
    files, which is how they base the $65 billion figure.
        My own sense is, there are probably a lot of undocumented
    workers in that group. But, to be able to determine which are
    undocumented workers, which are there because there's a
    typographical error, a name change due to marriage or divorce,
    or some other issue, is just impossible for us to determine
    with precision.
        But, we are looking at it thanks to your raising it with
    me. I think it should be an important part of this debate. I
    tend to share your sense that this is, in large measure, due to
    undocumented workers who aren't claiming their Social Security.
        Senator Brownback. Well, it's a big number and it's going
    to have a big impact on this policy debate because it's a key
    part of the future funding of Social Security. And so, I would
    hope we could get tied down what that actual number is and what
    the amount there is.

                                WAR SUPPLEMENTAL

        Mr. Portman, the President has stated that he will veto the
    supplemental if it contains a deadline for pulling out of Iraq.
    I'm curious to get your comments on the additional funding in
    this supplemental. Would you recommend that the President veto
    the supplemental over the level of additional funding that's in
    the bill?
        Mr. Portman. Yes, I would. And, the President has
    actually--in regard to the Senate bill as it came to the floor
    and the House bill--that the excessive and extraneous spending
    that's not related to the war effort would be the basis for a
    veto.
        That number is, as you know in the Senate bill, I think
    just under $20 billion and the House bill over $20 billion.
    Some of that funding is nonemergency domestic spending that is
    not related in any way to security. Other aspects of the
    additional money is related to security in the broadest sense
    at least, because it has to do with returning war veterans,
    some of the Veterans Administration (VA) funding or DOD health
    money. Still other spending is related to Katrina where we do
    have, in our proposal as you know, a $3.4 billion request for
    the DRF, the Disaster Relief Fund, which is necessary for our
    ongoing commitment to Katrina.
        So, there are various categories of funding in here, Mr.
    Brownback, but I do believe that it is excessive and
    extraneous. And, I believe that it is troubling, in the sense,
    that it is a big increase in domestic spending on top of the
    budget proposals from the majority in the House and the Senate,
    which have now been passed in their respective Chambers, which
    also increase spending in some of these same areas.
        Senator Brownback. Well, I agree. I think it's too much and
    it's something that the President should stand his ground on.
    Both on the amount as well as on the war timetable. That's not
    a wise decision and not a move that should be put in the
    supplemental bill, but I wanted to get your specific view.

                                MEDICARE PART D

        Finally, and just if you have the quick numbers on this I
    would appreciate it, on the cost of Medicare part D. There was
    a lot of discussion when this policy issue passed that it was
    going to cost $400 billion and then there was some discussion
    that the numbers were cooked, and it actually should have grown
    to $600 billion and some even projecting it would be $800
    billion. What has been the cost to the Government of this
    Medicare part D, the drug benefit program? I think in my State
    it has been very well received by senior citizens and people
    that are receiving this benefit. There was some problems in
    getting the program up and going, but overall it's been a very
    positive benefit. But, I want to know what the cost figure has
    actually come in at.
        Mr. Portman. It's good news. And, incidentally, to your
    customer satisfaction, looking here at a number of 80 percent
    customer satisfaction with part D, that's an average number,
    which is relatively high for Federal programs, as you might
    imagine. The actual costs are far lower than we thought they'd
    be. You recall when you and I were both serving in the House
    that there was dispute between the actuaries at Health and
    Human Services (HHS) and the Congressional Budget Office. And,
    we were relying on the Congressional Budget Office estimate.
    Others were saying, that in fact, HHS actuaries were more
    accurate and that number was far higher. It turns out the costs
    are a little below CBO's estimates. So the actuary estimate, I
    think it was $634 billion over the 10-year period, was
    relatively high. It's come in at closer to $445 billion, we
    believe, and that number shifts. In fact, it's gone down a
    little in the last year, that estimate. So, not only is the
    cost of the drug program down about 30 percent from our
    estimates when the President signed the Medicare Modernization
    Act, but it is even below where CBO was at the time.
        Second, and I think this is more significant to your
    constituents, is that the beneficiary premiums are lower, about
    40 percent lower than we projected. I remember at the time we
    said it would be $39 a month. Right now, we're at about $23 a
    month on the average monthly premium cost.
        So, this is some good news. It's good news for taxpayers
    and the budget. From my perspective as OMB Director, it's good
    news in terms of our outlays, but it's also good because, as
    you say, most importantly it's a program that people are
    finding meets their needs and their costs are lower than
    projected.
        Senator Brownback. Thanks for mentioning that. And, it
    seems like it's one too, that we don't need major policy design
    changes at this point in time, that some of the cost control
    features are working, generally.
        Mr. Portman. The competition model seems to work because
    it's forced companies to compete for the business of millions
    of seniors.
        Senator Brownback. Thank you, Mr. Chairman.

                                WAR SUPPLEMENTAL

        Senator Durbin. Mr. Director, let's take a little walk
    through the supplemental. Because I think the standard that you
    wanted to use was whether or not the supplemental spending
    request supported the war effort. Is that what you said?
        Mr. Portman. What I was trying to do is be balanced in my
    response, saying that I would advise the President to veto over
    the excessive and extraneous spending. Some of the spending is
    purely domestic. You've heard about a lot of this. If you
    listen to the media, they talk about the peanut storage and
    they talk about the spinach growers and so on. It's hard to
    justify any of that either as an emergency, in my view, or
    certainly as related to the war. Other spending is though, at
    least broadly defined, security spending in the sense that it
    relates, for instance, to VA.
        Senator Durbin. So, let's take peanuts and spinach off the
    table and take a little walk through the supplemental, as I can
    remember it. I don't have the litany here, but I can remember a
    lot of it.
        We put in $2 billion over what the President requested,
    directly for the troops. And, a vote on the floor, an amendment
    offered by Senator Biden, supported on a bipartisan basis for
    the procurement of new vehicles that are safer for our troops
    when it comes to these improvised explosive devices (IEDs) and
    mines. So, would you consider that $2 billion to be extraneous
    and a reason for the President to veto the bill?
        Mr. Portman. I don't know. I'd have to look at the specific
    request. We, as you know, included funding for that in the
    original request and then in our amendment, which came about 3
    weeks after the February 5 request, we actually amended it to
    include more funds for the so-called MRAPs, which are the
    vehicles that have been more successful in avoiding injury to
    our troops with roadside bombs.
        So, we do think there's a need for more of those armored
    vehicles. The question has been how many can be produced, as I
    understand it. And, DOD has come up with their estimate of what
    the production possibility would be.
        Senator Durbin. But, would you call that wasteful pork-
    barrel spending, $2 billion for safer vehicles for our troops
    in Iraq?
        Mr. Portman. Not if it can be spent productively to provide
    the vehicles for our troops.
        Senator Durbin. Good. And, about $2 billion in there for
    the Veterans Administration, to put more people processing the
    paperwork for some of the veterans who are waiting over 1 year
    for disability evaluations. Put more money into hospitals for
    traumatic brain injury units, upgrade the para-trauma units,
    poly-trauma units across the board, more money for post-
    traumatic stress disorder (PTSD) for returning veterans where
    one out of three are suffering from this. Would you consider
    that $2 billion, roughly $2 billion for the Veterans
    Administration a reason for the President to veto the bill?
        Mr. Portman. Well again, I'd have to answer it by saying
    that we have worked closely with the Department of Veterans
    Affairs to come up with what is a fair number in our
    supplemental request. And, with regard to our amendment, we
    actually added more for DOD health after the Walter Reed
    incident because----
        Senator Durbin. Well, there's another line item for that.
        Mr. Portman. Yes, we believe that there might be a need for
    additional funding even in this 2007 emergency supplemental and
    pending the results of the commission, wanted to be sure that
    funding was available.
        But, I will refer you to VA's own analysis. And, their
    analysis is that the additional funding we're providing already
    is adequate to meet the very needs that you address. We have,
    as you know, about a 7-percent increase in VA funding for
    health, again, in our 2008 budget, over an 80 percent increase
    since 2001.
        Senator Durbin. I'm afraid the VA is notorious and the OMB
    is complicitous in low-balling the amount of money they need.
    It wasn't that long ago we came up with an additional $1
    billion, after we'd been assured over and over again, it was
    unnecessary. It turned out it was necessary. I spent the last
    10 days visiting VA hospitals, three separate hospitals. I can
    tell you what they need. They need resources and they need them
    now. These soldiers are pouring through the doors. They need
    help. They need specialists who aren't there. There's a lot
    more that we need to do. So, I hope you'll take a look at it.
        Now, we have about $1 billion or more for military
    hospitals like Walter Reed. And, do you think that that $1
    billion add-on to the President's budget request is reason for
    the President to veto this bill?
        Mr. Portman. Again, what we've done with regard to DOD
    health is added more funding, I think about $1 billion in our
    own request and then in the amendment added another $50
    million, in relation to the Walter Reed issue to be sure that
    was, there was adequate funding available.
        And, I would simply say, again, we need to have the
    adequate amount of funding to meet the needs of our returning
    veterans, our returning warriors. We're now in the process of
    an inter-agency group, that I happen to be part of, looking at
    this very issue. We're also, as you know, working with a
    commission co-chaired by Donna Shalala and Bob Dole. And, then
    finally DOD has started their own internal process. So, we do
    have some additional information coming forward that may change
    the administration's view on this. But, we have looked at this
    and that's why we included additional funds.
        Senator Durbin. You're very busy, and I don't want to hold
    you to this, but I've taken the time to visit these hospitals,
    in fact, Walter Reed within the last 10 days, to meet with the
    people there who I think are doing a wonderful job in their in-
    patient care. But, then to meet with some of these veterans,
    soldiers who've been there for long periods of time. And, I
    will tell you, if you want to go to war with Congress over
    whether we need more money for Walter Reed, we're ready. I
    think we need it for Walter Reed and military hospitals across
    this country. We are not prepared for what this war is sending
    back home.
        Now, there's $3.1 billion in there for the Base Realignment
    and Closure Commission (BRAC). Do you think we should use the
    money in this supplemental to pursue the stated goals and
    objectives of the Base Realignment and Closure Commission?
        Mr. Portman. Well, as you know, we felt strongly that
    should have been included in the 2007 bill and that's why we
    proposed it, and Congress chose not to deal with that in the
    long-term continuing resolution. In fact it's, really when you
    think about it, the only exception that was made. As a result,
    when we saw that it was reemerging as part of the emergency
    supplemental, and we don't believe that was the appropriate
    place for it, because it's not an emergency, it's something
    that should be handled in the regular course. We did send, as
    you know to you all, some offsets that totaled $3.1 billion to
    be able to cover that expense and to have it be within the
    emergency supplemental, but paid for. And, that's our hope. We
    think it's very important that it be done. In fact, we think it
    should have been done in the 2007 process.
        Senator Durbin. So, now I'm up to about $10 billion out of
    the $20 billion, and I've never mentioned peanuts and spinach.
        We've talked about additional spending for the troops, to
    keep them safe, Veteran's Administration to deal with the
    hospitals, military hospitals, and BRAC. So, taken as a
    package, that $10 billion, do you think that's a good reason
    for the President to veto the supplemental appropriation?
        Mr. Portman. Again, it would depend on what the funding was
    for; we believe that we have funded a lot of these priorities
    already. We believe with regard to BRAC, it ought to be offset,
    we don't believe it's appropriate as an emergency. I don't
    think most Members of Congress do, either, incidentally,
    including the Appropriations Committees.
        Senator Durbin. Veteran's Administration is not an
    emergency?
        Mr. Portman. I'm talking about BRAC.
        Senator Durbin. Oh, okay.
        Mr. Portman. I'm talking about the BRAC funding.
        On those other issues, we'd want to look at them. We'd want
    to look at, again, where we have already addressed those
    issues, what has changed in the interim time period. As I said,
    there is an ongoing commission on the DOD health, VA health
    issue because that is--as you know--an issue where there's
    overlap, and there's a legitimate concern about the handover
    from DOD to VA.
        Senator Durbin. There's about $1 billion in there for the
    9/11 Commission recommendations for security at chemical
    plants, communications systems and the like--is this what you
    consider peanuts and spinach?
        Mr. Portman. Some of that, as you know, is in our 2008
    appropriations request, in other words, it's in our budget
    request that we would hope you would deal with in the regular
    process. We don't view that as appropriate to be part of the
    emergency supplemental----
        Senator Durbin. Homeland security, not an emergency?
        Mr. Portman. Huge priority, and a huge priority for the
    President. And that's why we've increased funding fairly
    dramatically. The question is, whether this is the time and
    place to add to the needed funding for the troops for their
    protection, for their equipment, for their training. Frankly,
    items that are more appropriately handled through the normal
    process--where you have oversight, where we have the ability to
    work through with other priorities, and where we have some
    rules applied.
        Emergency spending--as you all know--is something that this
    Congress has, and the new majority indicated, they wanted to
    avoid, because it is not paid for, it is not subject to the
    rules, including the caps on domestic discretionary spending
    that you may well want to enforce. And the only question is,
    you know, why should this be done as part of this emergency
    funding request for the war?
        Senator Durbin. So, the President----
        Mr. Portman. I'm not saying it's a bad idea to proceed with
    pandemic funding for HHS for flu, or to proceed with funding
    for BRAC--we think these are all good things. They're actually
    in our budget. In the case of pandemic, I think we have roughly
    the same number you do--which is $100 million less than the
    House. But, we think this is an appropriate expenditure to be
    in the budget, and part of your normal appropriations process.
        Senator Durbin. So, the President has asked for funding for
    this war as an emergency spending item each year, which kind of
    belies the argument that we need more congressional oversight,
    but let's step aside from that.
        Can you tell me, in previous years when these emergency
    spending requests for the war have been submitted to Congress,
    whether the Congress has added things that the President didn't
    include in his original request?
        Mr. Portman. I'm familiar--having come to this job about 1
    year ago with last year's supplemental from an administration
    perspective. When I served on the Budget Committee prior to
    that, I'm also familiar with the fact that there's always
    additional pressure from Congress to add to any emergency
    supplemental--whether it's connected with, in this case,
    Afghanistan and Iraq, or not.
        I'm also aware--as you know--that last year, by threatening
    a veto, as the President has done again this year, we were able
    to reduce the amount--in that case--by almost $15 billion under
    Republican majority. And, many of the items that were taken out
    of the bill were items that we're spending that the
    administration didn't oppose, but didn't believe were
    appropriate to be in an emergency supplemental, and were later
    dealt with in the regular appropriations process, that would be
    our hope.
        This year, as you know, we submitted our war supplemental
    request earlier, and with far more detail, in response to the
    concern that you, and others, had expressed to us about
    timeliness and level of detail. So, with the budget itself, we
    sent a supplemental request--not just for 2007, but for 2008--
    we also provided account-level detail and for the first time,
    provided the justifications with that, hoping that 65 days ago
    when we did that, that Congress would have the ability to do
    the kind of oversight that I believe the Appropriations
    Committee has done.
        Senator Durbin. In previous years, has Congress added more
    money to the President's requested supplemental for the war in
    Iraq and Afghanistan?
        Mr. Portman. Has the----
        Senator Durbin. Congress added?
        Mr. Portman [continuing]. Added additional funding? Yes.
        Senator Durbin. And has the President signed the bill?
        Mr. Portman. Last year the President refused to sign it
    over his level, as you know. And his negotiations with Congress
    were successful, in the sense that the $15 billion in addition
    to what he requested was not included.
        Senator Durbin. So, you're saying the President has never
    signed an emergency supplemental bill for the war in Iraq that
    included any congressional add-ons?
        Mr. Portman. I think the situation last year was that the
    level of funding the President requested was maintained, and
    not a penny more. I'm not sure about the year before, or the
    year before.
        In terms of the quality, you know, what was in the bill,
    the substance of the bill, I'm sure there were some changes, as
    there would be any year, in terms of the President's request
    that came from the Appropriations Committees.
        Senator Durbin. The administration's opposed to the
    additional funds for Hurricane Katrina that are included in the
    supplemental?
        Mr. Portman. We included additional $3.4 billion, which we
    think is adequate to make good on our commitments, in addition
    to the roughly $110 billion that you all have already
    appropriated for Katrina and Rita and the aftermath. We think
    that's adequate to meet the needs.
        Some of the additional funding, in fact, the biggest part
    of it, as you know, is for levees--we do believe there's a need
    there, and a concern. We think it can be handled in the normal
    process. Most of that funding we don't believe can be spent in
    2007, in fact, we don't think much--if any--of it can be spent
    in 2007. So, it would be more appropriate for us to deal with
    that as part of the regular appropriations process, but we're
    going to work with Congress on that.
        Senator Durbin. So, you would recommend the President veto
    the bill if there's additional Hurricane Katrina relief?
        Mr. Portman. Well, again, I don't know that I can answer
    that question without knowing which parts of that--there are
    three general parts of the Katrina add-ons as we look at it
    with regard to the levee funding. We don't think it's
    appropriate in the emergency context. Again, if Congress were
    to offset that funding with other reductions elsewhere, we
    would certainly be much more likely to be supportive.
        Senator Durbin. And as far as agriculture disasters, we
    haven't had an agriculture disaster bill for 2 years, and--as
    you know, having served in Congress--it was a traditional
    program, funded program, it was a program that was used
    whenever something happened of a disastrous nature, affected
    farming across America. So, do you believe that adding
    agriculture disaster funds in this bill is a reason for the
    President to veto it?
        Mr. Portman. Well, you were much more involved in the 2002
    farm bill than I was, Senator. But, my recollection was that we
    were going to try to avoid these emergency supplementals by
    putting in place, not just the programs--marketing loan
    counter-cyclical programs--but also the Crop Insurance Program.
    And, I know you've heard from Secretary Johanns on this, but,
    you know, we believe that it is working, as intended, and we
    believe it is being responsive to the concerns in farm country,
    and that would be the preferred approach for us.
        Senator Durbin. Senator Allard.
        Senator Allard. Thank you, Mr. Chairman.

                               PROGRAM EVALUATION

        You've had an opportunity to show up before me a couple of
    times, I think, already this year, Director Portman, and I have
    complimented you on your efforts on implementing the
    legislation we passed from the Government Performance and
    Results Act (GPRA). In fact, as the various agencies show up in
    front of us, I look at your scorecard and ask about the
    programs that are rated ineffective, and ask them about those
    programs that are rated as ``results not demonstrated.''
        I think it helps add to budget transparency, at least as
    far as I'm concerned, when we ask these questions. Sometimes
    it's legitimate reasons, perhaps, that they're terminating the
    program, and they just started in the process, and it's
    understandable. They've recognized the problem, so they're
    getting rid of it.
        And then, in other instances, they just seem very
    defensive, and so, we kind of pick up on that, too.
        Do you feel that this has added to the transparency in the
    budgeting process?
        Mr. Portman. I do, I feel strongly about it, and I know
    you've made a decision to leave the Senate, I hope you will
    pass along your GPRA and your scorecard interest to some of
    your colleagues, because it's an important part of the
    transparency that leads us to better Government.
        I talked earlier with the chairman and other members who
    are here about the website, that I know you're very familiar
    with--ExpectMore.gov--and the fact that we now have 1,000
    programs up that are subject to this scorecard, and we're
    looking at 96 percent of Federal spending now, which is an
    amazing resource, and so I thank you for raising it with the
    agencies. I do think it adds to the transparency. I think, as
    you say, sometimes there's a good reason for not scoring well
    on the scorecard, getting a red rather than a yellow or a
    green. Sometimes there's not. And one thing that we do is try
    to determine not just, whether they have met the standards--
    which we lay out, by the way, we ask the Agency, ``What are
    your goals?'' And then we judge them based on their goals. And
    that's all transparent.
        As we develop the proposed funding level for the budget, we
    look at whether it's an appropriate governmental activity. In
    some cases the program could get all greens, but it isn't an
    appropriate Federal governmental expense or activity.
        In other cases, you could have a lower score, but it's such
    an important program that we want to re-double our efforts to
    make sure it's working well for your constituents.
        Senator Allard. I found it fascinating to look down through
    that ExpectMore.gov and I asked my question, well, what
    agencies are not on there? And, I notice there's nothing on
    OMB. Do you apply the assessment that you give to the----
        Mr. Portman. That surprises me, actually.
        Senator Allard [continuing]. Other agencies to yourself,
    and do you have measurable goals and objectives?
        Mr. Portman. The ExpectMore.gov website includes PART
    analyses of programs. OMB does not have programs, which the
    chairman noted at the outset, so we don't have programs that
    are up there, but we do apply the President's management agenda
    to ourselves, which you can find on results.gov.
        Senator Allard. But, you do spend taxpayer dollars.
        Mr. Portman. We do. And we apply all five categories of the
    President's management agenda to ourselves.
        Senator Allard. But they're not public?
        Mr. Shea. Yes, they're public.
        Senator Allard. Okay, so can we get a report from OMB?
        Mr. Shea. We grade ourselves on the scorecard----
        Mr. Portman. All right, I'm going to ask the Associate
    Director for Management, Robert Shea, to answer your question,
    if that's all right.
        Mr. Chairman, is that okay if I have Mr. Shea----
        Mr. Shea. Yes, sir. OMB is assessed on the President's
    management agenda scorecard each quarter. So, we're assessed on
    our personnel management, financial management, information
    technology (IT) management, competitive sourcing, and
    performance management. We do have annual goals that collect
    data on and use to manage the agency. We don't manage programs,
    so we haven't assessed ourselves with the program assessment
    rating tool.
        Senator Allard. So, how--if you were under that rating
    tool--how would you grade yourselves?
        Mr. Shea. We'd have to do that assessment first.
        Senator Allard. Okay.
        Mr. Shea. And, we could show you how we're performing
    against our goals, and using the President's management agenda,
    how well we're managed.
        Senator Allard. Well, Director Portman is liable to show up
    before me again. Will you have an answer when I ask that
    question?
        Mr. Shea. Yeah, we can give you a much detailed report on
    the quality of our management.
        [The information follows:]

        Senator Allard. Well, I think that--we want to make sure
    that everybody applies under that. Are there other programs
    that we are not evaluating that perhaps we should?
        Mr. Portman. The PART we're using to assess all programs
    over time--we've assessed 96 percent and we're making progress
    assessing the rest.
        Senator Allard. Okay, well, if you happen to pick up on any
    that we're not assessing, I'd like to know why, if you would,
    please. Maybe the subcommittee would be interested in that, as
    well. I will be anxious to get your own evaluation back on
    this, Director. Thank you.
        Mr. Portman. One of the things I'm doing as Director is
    ensuring that we are meeting what we ask other agencies to do.
    And, I can tell you it's sometimes difficult, and, you know, we
    are going for the green like everyone else is. So, it's
    something we do drive through the agency, just as other agency
    heads, too. Even though we do not have programs, we assess
    ourselves based on those five categories.
        Senator Allard. I think it's helpful for other agencies to
    know you're doing the same, you know, everybody's living under
    the same rules, and what you expect of others, you're willing
    to live under, too.
        Mr. Portman. Right. I agree.
        Senator Allard. I think that helps add credibility, and I
    just ask that question in a positive vein, by the way.
        And, also, Mr. Chairman, that concludes my questions, I'd
    just ask that my introductory remarks be made part of the
    record.
        Senator Durbin. Without objection.
        [The statement follows:]

                   Prepared Statement of Senator Wayne Allard

        I would like to thank Chairman Durbin and Ranking Member
    Brownback for holding today's hearing to review the fiscal year
    2008 budget request for the Office of Management and Budget
    (OMB). This is a very important agency, and I appreciate having
    the opportunity to review the agency's budget.
        OMB's primary role is to prepare the federal budget and to
    supervise its administration in Executive Branch agencies. So
    although the size of their actual budget might be somewhat
    small in Washington terms, the agency has enormous power and
    influence. This has been especially true over recent decades as
    OMB has taken a much stronger role in policy coordination.
        The federal government has thousands of programs designed
    to meet various needs. Yet, while the needs in this country
    might be virtually limitless, the resources to meet those needs
    aren't. We can never forget that each dollar we spend as a
    federal government is a dollar that was taken from a taxpayer
    in this country. Accordingly, we must exercise great care in
    choosing how to invest those dollars. I say ``invest'' rather
    than ``spend'' quite deliberately. To spend simply indicates an
    outflow of resources. By contrast, to invest indicates that the
    outflow was made strategically with the expectation of a return
    on the investment.
        To help make determinations between the many competing
    priorities, OMB has devised the PART assessment, which is a
    result of the Government Performance and Results Act (GPRA).
    The PART assessment holds agencies accountable for devising
    meaningful, outcome based measures for their programs. Programs
    that provide a good investment for taxpayer dollars should see
    that reflected in their budget, whereas inefficient programs
    should also see the status reflected in their budget.
        I have been a bit puzzled recently by those who are
    increasingly resistant to the PART program. As I said earlier,
    given that taxpayer dollars are much more limited than needs,
    we must view allocations as investments. Would those same
    critics invest in a stock, bond, mutual fund, hedge fund, or
    other investment vehicle without ever asking about the return
    it has produced? Of course not. It would be irresponsible for
    us to not ask similar questions of federal programs.
        I am pleased that we have Director Portman here with us
    today. I always enjoy hearing from him as part of the Budget
    Committee, but I look forward to this opportunity to delve more
    into the workings of OMB as an agency.
        Director Portman, I know you have a very busy schedule, so
    I sincerely appreciate your time today, and I look forward to
    your testimony.

                         ADDITIONAL COMMITTEE QUESTIONS

        Senator Durbin. I'd like to say that there are other
    questions for the record that will be submitted for your
    consideration, I hope you can provide us with prompt responses.
    The hearing record will remain open for a period of 1 week
    until Wednesday, April 18 at noon for subcommittee members to
    submit statements and/or questions for the record.
        [The following questions were not asked at the hearing, but
    were submitted to the Office for response subsequent to the
    hearing:]
                Questions Submitted by Senator Richard J. Durbin
    competitive sourcing: inherently governmental vs. commercial activities
        Question. Circular A-76 states that agency personnel shall use the
    circular's definition of ``inherently governmental'' in preparing their
    justifications. Is any other guidance provided to agencies as to what
    type and scope of information constitutes sufficient justification?
        Answer. Since the Circular was revised in May 2003, OMB has not
    issued additional guidance regarding the development of justifications
    to explain the inherently governmental nature of an activity. We expect
    justifications to include sufficient information about the function
    performed to enable a reasonable person to understand why the function
    was categorized as inherently governmental.
        Question. What happens if OMB does not agree with an agency's
    justifications for inherently governmental activities? Who has final
    authority over the agency's list of inherently governmental activities
    and accompanying justification?
        Answer. Pursuant to the requirements of the Federal Activities
    Inventory Reform Act, OMB reviews agency inventories prior to their
    publication. OMB may offer comments on the inventory during the
    consultation process, but does not make final determinations on whether
    specific agency positions are inherently governmental or commercial.
    All final determinations regarding the classification of activities are
    made by the agency.
        Question. Have consultations between OMB and agencies ever resulted
    in shifting activities from an inherently governmental list to a
    commercial inventory or vice versa? How many functions and FTEs have
    been shifted, for each agency and each year, from one list to another?
    What has been the net result government-wide?
        Answer. Over the years, there has been some shifting between the
    inherently governmental and commercial lists as agencies gain a clearer
    understanding of their activities and make incremental improvements to
    more clearly and accurately identify the functions performed by their
    workforce. In 2005, 43.1 percent of activities were identified as
    inherently governmental and 57.9 percent of activities were identified
    as commercial. In 2004, the figures were nearly identical--i.e., 42.5
    percent inherently governmental and 57.5 percent commercial. We expect
    the same general figures for 2006.
        Since 2003, there has been a slight shift in overall figures with
    an increase in commercial activities. However, this shift has had only
    a negligible impact in terms of work being shifted from agency to
    contract performance. After revisions were made to Circular A-76 in
    2003, no work has been converted from public to private sector
    performance unless a public-private competition was conducted, and
    competitions have been applied only to a small fraction of the entire
    workforce--less than 3 percent of all activities since fiscal year
    2003. Moreover, Federal employees have won 83 percent of all
    competitions conducted during this time period.
        Equally important, agencies have carefully tailored their use of
    competition to highly commercial support activities that the private
    sector is well equipped to perform. According to agencies' 2005
    inventories, a substantial number of commercial activities (more than
    40 percent of all commercial activities) are excluded from
    consideration for competition. These exclusions are largely based on a
    need to preserve in-house core capabilities. Some commercial positions
    are excluded from consideration for competition for other business
    reasons (e.g., private sector interest unlikely).
        Question. Currently, OMB devises for agencies competitive sourcing
    plans that cover three out-years. It is my understanding that OMB has
    now determined to devise competitive sourcing plans that cover eight
    out-years.
        Is this true? If so, why is a longer period necessary? What would
    this mean practically for agencies? Would agencies, for example, be
    required to review for privatization additional employees? What does
    this mean for the current ``green'' plans? Will they all have to be
    revised?
        Answer. Agencies--not OMB--develop competitive sourcing plans that
    are tailored to the mission and workforce needs of their agencies. OMB
    has not asked agencies to develop new plans or significantly modify
    their existing plans. However, since 2003, when OMB first developed
    guidance on ``green'' competition plans, we have asked agencies to
    continually update plans based on changed conditions, improved insight
    into their programs, and results achieved in conducting competitions.
    This approach has helped agencies focus their attention where
    competition makes the best sense. As a result, projected savings are
    significant despite the small percentage of the workforce competed. In
    fiscal year 2006, for example, agencies competed only 0.4 percent of
    the workforce. Yet these competitions are expected to generate savings
    of $1.3 billion for taxpayers over the next 5-10 years.
                                    staffing
        Question. How is your staff allocated among the various offices and
    organizational units within the agency? How many are in each?
        Answer.

                  EXECUTIVE OFFICE OF THE PRESIDENT, OFFICE OF MANAGEMENT AND BUDGET--PERSONNEL SUMMARY
                          [Distribution by Program Activity for Full-time Equivalent Positions]
    ----------------------------------------------------------------------------------------------------------------
                                                                                                            Fiscal
                                                                        Fiscal      Fiscal      Fiscal     year 2007
                       Program Activity Structure                      year 2006   year 2007   year 2008   to fiscal
                                                                      FTE actual      FTE         FTE      year 2008
                                                                                   estimate    estimate   difference
    ----------------------------------------------------------------------------------------------------------------
    National Security Programs......................................          62          65          65  ..........
    General Government Programs.....................................          51          64          64  ..........
    Natural Resource Programs.......................................          57          61          61  ..........
    Human Resource Programs.........................................          66          67          67  ..........
    Office of Federal Financial Management..........................          17          18          18  ..........
    Information and Regulatory Affairs..............................          50          50          50  ..........
    Office of Federal Procurement Policy............................          11          14          14  ..........
    OMB-wide Offices................................................         152         150         150  ..........
                                                                     -----------------------------------------------
          Total Direct Program......................................         466         489         489  ..........
    ----------------------------------------------------------------------------------------------------------------

        Question. What is the percentage of OMB employees who will be
    eligible for retirement over the next five years?
        Answer. As of 2012, 21 percent of OMB's current employees will be
    eligible for retirement.
                         enterprise services initiative
        Question. Within the Executive Office of the President (EOP), there
    is an initiative known as the Enterprise Services Initiative. This
    involves EOP agencies, including yours, transferring their space rental
    costs and some other costs to the Office of Administration to be paid
    by that office.
        Why is this a good idea?
        Answer. The intent of the Enterprise Services Initiative is to gain
    administrative efficiencies by having only one single manager and payer
    for common services that cut across the EOP, thereby making more
    efficient use of the OA financial staff, component financial managers,
    and representatives from supporting servicing agencies. Specifically,
    the net result will consolidate over 28 relatively small service
    agreement accounts into six service agreement accounts with a
    corresponding significant reduction in the processing of over 180
    payment transactions between multiple staffs. Further, agencies outside
    the Executive Office of the President will have a single point of
    contact in coordinating and negotiating service agreements vice having
    to work individually with each of the separate EOP components included
    in the fiscal year 2008 Enterprise Services Initiative.
        Question. What are the benefits?
        Answer. Specifically regarding the consolidation of space rent,
    most EOP components have already successfully consolidated space rent
    costs in the OA appropriation. Completing this consolidation initiative
    for OMB and ONDCP will provide consistency in managing rent across the
    EOP while facilitating the oversight of office space allocation.
    Currently, managing space rent allocation and corresponding rent costs
    between OA, ONDCP and OMB is complex, especially in light of the
    ongoing EEOB modernization program entailing frequent office moves
    within the EOP complex. (Note: OMB rent was included in the Enterprise
    Services initiative in fiscal year 2005 but was subsequently returned
    to OMB's appropriation in fiscal year 2006.)
        Question. How much of your budget would be transferred to the
    Office of Administration?
        Answer. OMB's fiscal year 2008 budget request proposes to move
    $7.903 million to the Office of Administration as part of the
    Enterprise Services Initiative.
        Question. The Office of Administration budget includes about $12
    million for a Capital Investment Plan. Does OMB benefit from those
    funds?
        Answer. Yes, OMB benefits. The Capital Investment Plan is used for
    system lifecycle replacements for OMB's desktop computers, printers,
    and laptop replacements. Additionally, these funds support the
    Executive Office of the President's network infrastructure upgrades.
    This includes e-mail upgrades, HSPD-12 implementation, network and
    server regular upgrades, network storage upgrades, enterprise software
    licenses, and server ``virtualization.'' These are improvements made to
    the systems supporting the entire EOP, as such OMB is a beneficiary.
        Question. Do you receive funds from that source for IT projects?
        Answer. No, the Office of Management and Budget does not receive
    funds from the Office of Administration's Capital Investment Plan.
                  privacy and civil liberties oversight board
        Question. The Privacy and Civil Liberties Oversight Board was
    established by the Intelligence Reform and Terrorism Prevention Act of
    2004. It consists of five members appointed by and serving at the
    pleasure of the President. The Board advises the President and other
    senior executive branch officials to ensure that concerns with respect
    to privacy and civil liberties are appropriately considered in the
    implementation of all laws, regulations, and executive branch policies
    related to efforts to protect the Nation against terrorism. This
    includes advising on whether adequate guidelines, supervision, and
    oversight exist to protect these important legal rights of all
    Americans.
        What is the current 2007 budget for the Privacy Board and what is
    the request for 2008?
        Answer. For fiscal year 2007, the Privacy and Civil Liberties
    Oversight Board (PCLOB) budget is $1.5 million. As for fiscal year
    2008, funding for PCLOB is funded within the White House Office program
    as are other offices within this program.
        Question. In which account in the Executive Office of the President
    is the Board funded?
        Answer. The Privacy and Civil Liberties Oversight Board is funded
    within the White House Office program.
        Question. Why shouldn't this Board be funded through its own
    account?
        Answer. The Privacy and Civil Liberties Oversight Board operates
    similarly to other offices within the White House Office program where
    staff and supporting infrastructures are routinely shared and networked
    within the White House as they provide direct support to the office of
    the President. Accordingly, it would be impractical and add additional
    administrative costs to segregate and track responsibilities between
    the Board and other offices operating within the White House Office
    program.
        Question. How many staff members does the Board have?
        Answer. The 5 member, part-time board, as appointed by the
    President, is in place with the exception of one member who recently
    resigned. Additionally, there are 3 staff members supporting the Board.
        Question. Many civil libertarians and others believe that this
    Board lacks the independence it needs to do its job and believe that it
    should be removed from the Executive Branch and be independent.
        What are the Administration's views on this?
        Answer. As the Administration has recently explained in its
    Statement of Administration Policy (SAP) on S. 4, Improving America's
    Security Act of 2007, ``The Board's present structure is in full accord
    with not only the spirit but also the letter of the 9/11 Commission's
    recommendation.'' In addition, the SAP explained that the Board ``has
    integrated itself into the Administration's policy formulation and
    implementation processes and has moved to integrate its operations with
    those of the many other privacy and civil liberties offices that exist
    within the Executive Branch.'' Therefore, the Administration ``supports
    the work and structure of the existing Privacy and Civil Liberties
    Oversight Board.'' To change the structure of the Board, as S. 4
    proposed to do, ``would thrust unwarranted disruption onto a structure
    that is operating effectively to fulfill its statutory mission.''
        In addition, the Board recently issued its first annual report to
    Congress in which it detailed its stand-up activities and advisory and
    oversight initiatives. The report further outlines the Board's plans
    for the year ahead and demonstrates its commitment to fulfilling its
    statutory responsibilities. As explained in the report, ``By empowering
    the Board with broad access to records, the Intelligence Reform and
    Terrorism Prevention Act of 2004 has created a Board that can offer a
    distinctly independent perspective to the President, along with
    oversight of executive agencies.''
                     program assessment rating tool (part)
        Question. Can you tell the Committee how you can ensure the
    objectivity of PART so that it is not influenced by political
    considerations?
        Answer. The Program Assessment Rating Tool (PART) is designed to
    provide credible, objective assessments of program performance to
    inform resource decisions and actions to improve program effectiveness.
    The PART asks basic questions about program design, management, and
    execution and requires evidence to document affirmative answers. The
    explanation for each question and the supporting evidence are made
    available to the public at www.ExpectMore.gov, making them subject to
    public scrutiny. The PART is a comprehensive assessment of a program
    that draws from available data; reports from the Government
    Accountability Office and Inspectors General are common sources of
    evidence for PART answers.
        In addition, the process for completing the PART--a collaborative
    one where agency and OMB staffs cooperate to review the program--also
    helps ensure the assessment is fair. A key aspect of this collaboration
    is identifying appropriate performance measures for the program that
    focus on the outcomes that are important to the American people. Each
    year there is a centralized review of all PARTs to ensure they are
    being completed consistent with the guidance and to review the quality
    of performance measures. Finally, agencies have the opportunity to
    appeal any disagreements to high level interagency panel of deputy
    secretaries.
        While these controls are meant to ensure PART questions are
    answered objectively, users of the instrument can and should make their
    own judgments by assessing the evidence on which answers to PART
    questions are based, all of which is available at www.ExpectMore.gov.
        Question. If a program has a low PART score, does that
    automatically mean that its budget will be cut?
        Answer. Program performance, as assessed with the PART, is an
    important factor in budget decisions, but it is not the only factor. We
    should work to invest taxpayers' dollars into programs that produce the
    greatest results, but we also need to meet all the nation's priorities,
    including improving the performance of key programs. A good PART rating
    does not guarantee a specific level of funding. A program may be
    effective, but if it has completed its mission, if it is unnecessarily
    duplicative of other programs, or if there are higher priorities, its
    funding may be reduced. Likewise, an Ineffective or Results Not
    Demonstrated (RND) rating does not guarantee decreased funding. An
    program rated Results Not Demonstrated may receive additional funding
    to address its deficiencies and improve its performance.
        PART is a factor, though rarely the only factor, in determining a
    program's funding.
        Question. How is a program's PART score determined? What is the
    process?
        Answer. With the PART assessment, agencies and OMB answer
    approximately 25 common-sense questions about each program's
    performance and management. These include:
      --Is the program's purpose clear and is it well designed to achieve
            its objectives?
      --Does the program have clear, outcome-oriented goals?
      --Is the program well managed?
      --Does the program achieve its goals?
        The answers to specific questions in the PART translate into
    section scores which are weighted to generate an overall score. Because
    reporting a single weighted numerical rating could suggest false
    precision, or draw attention away from the very areas most in need of
    improvement, numerical scores are combined and translated into
    qualitative ratings: Effective, Moderately Effective, Adequate and
    Ineffective. Regardless of overall score, programs that do not have
    acceptable performance measures or have not yet collected performance
    data generally receive a rating of ``Results Not Demonstrated.''
        The Results Not Demonstrated rating suggests that not enough
    information and data are available to make an informed determination
    about whether a program is achieving results. On the other hand, a
    program earns an Ineffective rating when there is clear evidence that
    is not achieving its intended outcomes. For instance, there may be data
    showing the program has failed to meet its goals and has external
    evaluations documenting its ineffectiveness.
        Ineffective programs have been unable to achieve results due to a
    lack of clarity regarding the program's purpose or goals, poor
    management, or some other significant weakness.
        Once each assessment is completed, the agency and OMB develop a
    program improvement plan so we can follow up and improve the program's
    performance.
        Assessing and improving how programs are working is a key part of
    OMB's statutory mission. Our conclusions about program performance and
    management are based on the Program Assessment Rating Tool (PART), a
    diagnostic tool that helps us make budget decisions, but also drive
    program improvements.
        Question. GAO has recommended extending the Program Assessment
    Rating Tool to tax expenditures, many of which are just programs run
    through the tax side. What are your plans for moving forward to develop
    a framework and set a schedule for conducting performance reviews of
    tax expenditures?
        Answer. The PART has been used to assess tax expenditures, like the
    New Market Tax Credit and the Earned Income Tax Credit. Although there
    are no plans to examine tax expenditures with the PART this year, we
    will look for opportunities to apply this assessment to other tax
    expenditures in the future.
        Question. I would ask that for the record you provide examples of
    programs in the fiscal year 2008 budget that: (1) received additional
    funding due to strong PART scores; (2) received additional funding to
    correct deficiencies, as measured by PART; and (3) received less
    funding due to poor PART scores.
        Answer. While PART and other performance information are an
    important factor in developing the President's Budget, these proposals
    are not based just on the overall PART rating. Instead, resource
    allocations consider specific aspects of program performance that
    suggest how taxpayer dollars could be most effectively invested.
        Refugee Transitional and Medical Services (rated Effective) in the
    Department of Health and Human Services is recommended for additional
    funding in the fiscal year 2008 President's Budget for additional
    caseload support. A PART review conducted by HHS and OMB found that the
    program is focused on achieving meaningful performance outcome goals,
    works well with its partners, including State Refugee Coordinators,
    voluntary agencies, and ethnic organization partners; and has
    demonstrated improved efficiencies since fiscal year 2000. In addition,
    the program is working with grantees to improve data collection and
    monitoring.
        The fiscal year 2008 President's Budget recommends an increase in
    funding for the National Parks Service Facility Maintenance (rated
    Adequate) so that it can continue improvement the quality of park
    facilities. The condition of park facilities has not been at acceptable
    levels, but the Parks Service now has a comprehensive inventory and is
    working systematically to improve its facilities and monitor results
    using a Facility Condition Index.
        The fiscal year 2008 President's Budget proposes to eliminate the
    Supplemental Education Opportunity Grants (rated Results Not
    Demonstrated) in the Department of Education. Program funds are
    distributed using a formula that benefits more established institutions
    and results in proportionally less funding going to institutions that
    educate the largest proportion of low income students. In addition, a
    higher proportion of program funds support administrative costs, as
    compared to Pell Grants. The savings from this termination and other
    student aid reforms are directed to better-targeted programs, such as
    Pell Grants.
                            e-government initiative
        Question. For the past several years, you have had an initiative
    that you call e- government, or ``egov''. This is an attempt to make
    government more efficient through the increased use of information
    technology to perform some of the basic functions of government.
        Can you give us a status report on the e-gov initiative? How much
    progress has been made?
        Answer. Marking the 4th anniversary of the E-Government Act of
    2002, OMB recently released a report highlighting the progress and
    future goals of the Administration to make government more effective
    and citizen-centered through improved utilization and management of
    information technology. The report identifies the successes and
    aggressive goals set by agencies under the President's Management
    Agenda (PMA) E-Government Initiative to improve information resources
    management, enhance customer service, and for the first time, measure
    the impact, utilization, and effectiveness of programs on the users of
    these services.
        Also, in February 2007, OMB submitted to Congress the second annual
    ``Report to Congress on the Benefits of the E-Government Initiatives''.
    The report outlines the purpose of the E-Government and Line of
    Business Initiatives and highlights the benefits agencies receive from
    the initiatives to which they provide funding contributions. The report
    is available at www.egov.gov.
        Five years ago, OMB and agencies launched the Presidential E-Gov
    Initiatives for improved government services. Operated and supported by
    agencies, these Presidential initiatives are providing high-quality and
    well-managed solutions throughout the Federal government. In 2005, the
    Lines of Business (LoB) task forces were initiated with the intention
    of identifying common solutions and methodologies to increase
    operational efficiencies, improve services and decrease duplication.
    During fiscal year 2006, agencies successfully completed major
    development milestones and are showing greater adoption and use of
    these services from citizens, businesses and government agencies.
        In the past few years, we have worked with agency managing partners
    of the E-Gov initiatives to specifically identify clear and measurable
    goals to achieve the maximum use and benefit. The metrics with
    descriptions and type to address adoption/participation, customer
    satisfaction and usage are now available on our website, http://
    www.egov.gov.
        Highlights include:
      --Government to Citizen Portfolio.--To date, GovBenefits.gov receives
            more than 301,875 visits per month by citizens and provides
            more than 118,579 referrals per month to agency benefits
            programs. In the 2006 tax filing season, over 3.9 million
            citizens filed taxes online for free using IRS Free File.
      --Government to Business Portfolio.--As of August 2006, the Expanding
            Electronic Tax Products for Businesses initiative made
            electronic forms available for business to electronically file
            Employment Taxes, Corporate Income Taxes, Employer
            Identification Number and Wage Reporting, with these 9 percent
            of corporate income tax forms were filed electronically.
      --Government to Government Portfolio.--Since 2006, all 26 grants
            making agencies use Grants.gov to post the over 1,000 grant
            programs they make, with an overall customer satisfaction of 56
            percent.
      --Internal Efficiency and Effective (IEE) Portfolio.--Federal job
            seekers have continued to use USAJobs.gov to look for
            employment opportunities and create resumes online, with an
            overall customer satisfaction of 77 percent.
      --Lines of Business (LoB) Efforts.--Federal agencies continue to work
            on implementations in the areas of Financial Management and
            Human Resources. The other LoBs; Health, Case Management,
            Grants Management, Cyber Security, Infrastructure, Budget
            Formulation and Execution and Geospatial, continue to
            facilitate collaboration amongst agencies.
        Question. What are the main functions of government that lend
    themselves to an e-gov approach?
        Answer. E-Government uses policy and technology to ensure security
    and privacy of data within the Federal government while working to
    improve government efficiency and effectiveness supporting the delivery
    of citizen-centric services. With the increasing use of technology
    throughout all aspects of the public and private sectors, the ``E-Gov
    approach'' is applicable government-wide. For example:
      --Grant Management.--There are many agencies in the government that
            perform this functionality. Working as a group the grant making
            agencies can save money by investing in technology solutions
            together and foster interoperability by using joint standards.
      --Geospatial.--There are many emerging technologies in this area.
            Agencies can work together to evaluate and select technologies
            that are best suited for the federal government, rather than
            independently doing evaluations duplicating the process and
            cost to the federal government.
        Question. What is OMB's role in the e-government initiative?
        Answer. OMB works with agencies and the CIO Council to establish
    strategic direction and performs ongoing oversight to assist agencies
    in achieving results through government-wide solutions including the E-
    Gov initiatives and the Federal Enterprise Architecture (FEA). This
    oversight includes ensuring the E-Government initiatives follow their
    agencies' capital planning and investment control (CPIC) processes and
    adhere to all applicable policies and law, including privacy, security,
    and earned value management. Also, OMB has provided leadership in the
    area of governance processes to assist agencies in working
    collaboratively.
        Question. How much money is budgeted for e-gov initiatives in
    fiscal year 2008?
        Answer. In fiscal year 2008, agencies will contribute $150 million
    towards E-Gov initiatives.
        Question. Do you have any new e-gov initiatives planned for the
    coming year?
        Answer. Currently, there are no new E-Gov initiatives planned,
    however, as an opportunity/need arises we will certainly consider the
    addition.
                             information technology
        Question. The Management Watch List and the High Risk List are
    tools used by OMB to help agency officials monitor agency Information
    Technology (IT) planning, as well as improve project performance. These
    lists are updated quarterly to ensure that agencies are effectively
    managing their IT investments and improving the ability of the Federal
    government to deliver information and services to the public.
        First, tell us specifically what the Management Watch List is and
    how it is used.
        Answer. The President's fiscal year 2008 budget reported 263 major
    investments representing about $10 billion on the ``Management Watch
    List.'' Investments on the ``Management Watch List'' need overall
    improvement in capital planning and investment activities--including,
    but not limited to: performance measurement, earned value management or
    system security. Before the start of the fiscal year, agencies were
    directed to remediate the shortfalls identified prior to expending
    additional funds. The agencies work to remediate the weaknesses and
    monitor the progress of the IT investment. If an investment is still on
    the ``Management Watch List,'' agencies must describe their plans to
    manage or mitigate risk before undertaking or continuing activities
    related to that investment, and the investment is placed on the High
    Risk list.
        Question. How does it differ from the High Risk List?
        Answer. The Management Watch List (MWL) is based on planning
    documentation presented in the exhibit 300 (or ``business case''). The
    High Risk List is based on agency execution of IT projects. The
    Management Watch List is for the upcoming fiscal year while the High
    Risk is based on the current fiscal year. Therefore, items on the High
    Risk List are not necessarily based on past performance--rather, they
    are projects requiring additional monitoring due to the size and
    complexity of the project, or the nature of the risk for the project.
    Conversely, items on the Management Watch List appear to require
    additional planning and/or implementation of controls based on
    documentation available. Finally, the Management Watch List is based on
    IT investments while the High Risk List is based on IT projects.
        Question. What are the criteria that are used to decide whether to
    put an IT project on one of these lists?
        Answer. Investments are placed on the Management Watch List if
    their investment justification needs improvement in various stages of
    the capital planning and investment control process, including, but not
    limited to areas such as: project management, performance measurement,
    earned value management or system security.
        A project is placed on the high risk if it meets the following
    criteria per OMB memo, M05-03, ``Improving Information Technology (IT)
    Project Planning and Execution,'' http://www.whitehouse.gov/omb/
    memoranda/fy2005/m05-23.pdf. High risk projects as defined in OMB
    Circular A-11 include those requiring special attention from oversight
    authorities and the highest levels of agency management because--
      --the agency has not consistently demonstrated the ability to manage
            complex projects;
      --of the exceptionally high development, operating, or maintenance
            costs, either in absolute terms or as a percentage of the
            agency's total IT portfolio;
      --it is being undertaken to correct recognized deficiencies in the
            adequate performance of an essential mission program or
            function of the agency, a component of the agency, or another
            organization; or
      --delay or failure would introduce for the first time unacceptable or
            inadequate performance or failure of an essential mission
            function of the agency, a component of the agency, or another
            organization.''
        Question. Is the number of projects on these lists increasing each
    year?
        Answer. The number of projects for the High Risk List and the
    number of investments on the Management Watch List are dynamic.
        The High Risk List OMB published in April 2007, includes 549
    projects determined to be high risk due to different factors, such as
    the complexity, risk, or the level of importance. The President's
    budget reported in February identified 477 projects on the High Risk
    List. The increase on the High Risk List is attributable to increased
    management oversight reported by agencies.
        The number of investments on the Management Watch List varies.
    While an investment might be initially placed on the Management Watch
    List, agencies have an opportunity to remediate these planning
    documents prior to the fiscal year. When the President released his
    fiscal year 2007 budget, there were 263 investments initially placed on
    the Management Watch List; however, by the end of the fiscal year 2006
    there were just 84. When the President released his fiscal year 2008
    budget there were 346 investments placed on the Management Watch List.
    However, agencies are able to continue to remediate these deficiencies
    and as of March 31, 2007, there are 183 investments on the Management
    Watch List. OMB continues to work with agencies to remediate the
    deficiencies in the remaining investments.
        Question. Does OMB have the resources to adequately follow up on
    the Management Watch List projects? If not, what plans, if any, do you
    have to seek assistance from others (e.g. IG offices and other
    oversight bodies) in tracking the resolution of projects with weak
    business cases?
        Answer. Yes, OMB has the resources to adequately follow up on the
    investments on the Management Watch List. Additionally, OMB works with
    the President's Council on Integrity and Efficiency (PCIE), as well as
    agency Inspector Generals (IGs), to assist with independent
    verification and validation for areas of concern. OMB also works in
    partnership with agencies and GAO to address deficiencies in several
    high-risk programs.
        The so-called exhibit 300s are essentially business cases that OMB
    requires agencies to develop to justify funding requests for their
    major IT projects.
        Question. In a review conducted about a year ago, GAO found that
    agencies' exhibit 300s were not always reliable or accurate. What
    actions have OMB and agencies taken since that time to address this
    issue?
        Answer. OMB and agencies took a number of actions to address this
    issue. OMB made significant changes to both the guidance and the actual
    exhibits 53 and 300 for agencies' fiscal year 2008 IT Budget request.
    The changes were intended to improve the quality and accuracy of the
    data. OMB met with agencies to discuss the changes to the exhibits and
    answer questions from the agencies. As part of this year's budget
    review, OMB also increased its requests for the underlying
    documentation referenced in the exhibit 300. At OMB's request, the PCIE
    and Executive Council on Integrity & Efficiency (ECIE) also conducted
    an assessment to ascertain the reliability of agencies' Exhibit 300s.
    This review was completed in March, 2007. OMB will continue to work
    with the PCIE and ECIE on areas identified for improvement. Finally,
    OMB continues to work with the agencies and the CIO Council to help
    improve agency employee understanding of their IRM responsibilities
    including the planning for information technology projects.
                               regulatory policy
        Question. On January 18, President Bush issued amendments to
    Executive Order 12866, which further centralize regulatory power in the
    Office of Information and Regulatory Affairs (OIRA) in OMB and shift it
    away from the federal agencies given this power by legislative
    enactments.
        Three aspects of the amendments seem troubling: (1) the
    identification of ``market failure'' as the first principle in
    promulgating regulations, (2) the designation of a presidential
    appointee as the Regulatory Policy Officer in each agency covered by
    the Executive Order, and (3) the requirement that significant guidance
    documents undergo nearly the same OIRA review process required of
    significant regulations.
        Why were these changes made in the Executive Order?
        Answer. The primary purpose for the issuance of Executive Order
    (EO) 13422 was to amend EO 12866 in order to establish an interagency
    review process for significant guidance documents, which would serve as
    a complement to OMB's issuance of the Final Bulletin on Agency Good
    Guidance Practices (the Bulletin). The Bulletin and EO 13422 are aimed
    at ensuring that significant agency guidance documents are developed
    through procedures that ensure quality, transparency, public
    participation, coordination, and accountability. As EO 12866 was being
    amended to establish the interagency review process for significant
    guidance documents, this provided an opportunity to make additional
    (non-guidance) amendments to EO 12866 that reflect good-government
    practices.
        The review process for guidance documents is quite different from
    that of regulations. First, pursuant to EO 12866, OIRA reviews an
    agency's significant regulations. Pursuant to EO 12866, as amended,
    however, agencies will provide advance notice of significant guidance
    documents to OIRA and OIRA will notify the agency if additional
    consultation will be necessary before the issuance of the significant
    guidance document; OIRA will not review all significant guidance
    documents. Second, under EO 12866, an agency must prepare a formal
    cost-benefit analysis for an economically significant regulation. By
    contrast, under EO 12866, as amended, while agencies must make basic
    estimates to determine if a guidance document is economically
    significant, there is no requirement for the agency to prepare a formal
    cost-benefit analysis. Accordingly, guidance documents will not undergo
    the same review process as do regulations.
        EO 12866, as amended, provides that agencies must identify in
    writing the specific market failure or other specific problem that they
    intend to address. As an initial matter, the reference to market
    failure is not a new concept; it was referenced in the ``Statement of
    Regulatory Philosophy and Principles'' in the first section of EO 12866
    as it was issued by President Clinton in 1993. It was also discussed
    extensively in other OMB documents issued under President Clinton (in
    then-OIRA Administrator Katzen's 1996 ``Memorandum re: Economic
    Analysis of Federal Regulations Under Executive Order No. 12866'') and
    President Bush (in the 2003 proposed and final versions of OMB Circular
    A-4 for Regulatory Analysis). EO12866, as amended, includes reference
    to the classic examples of market failure including externality
    (environmental problems being the classic example), market power, and
    inadequate or asymmetric information. Second, EO 12866, as amended,
    does not make the identification of a market failure the only basis on
    which a Federal agency can justify regulatory action. The revised
    section also encourages agencies to identify any ``other significant
    problem that it intends to address.'' Finally, this revision does not
    impose a new requirement on rulemaking agencies as agencies should
    already have been identifying in writing the precise nature of the
    problem that the agency is seeking to remedy through regulatory action
    to demonstrate to the public, Congress, and the courts that the agency
    has exercised its regulatory authority in a reasonable and well-
    considered manner.
        EO 12866, as amended, provides that each agency head shall
    designate one of the agency's Presidential Appointees to be its
    Regulatory Policy Officer and advise OMB of such designation. However,
    many of the Regulatory Policy Officers had already been Presidential
    appointees (and most of these Presidential appointees held Senate-
    confirmed positions) prior to the issuance of EO 13422. The chief
    advantage of having a Presidential appointee serve as the Regulatory
    Policy Officer is that it ensures accountability with respect to this
    role.
        Question. Have you estimated the number of guidance documents OMB
    will be expected to review in fiscal year 2008?
        Answer. Under EO 12866, as amended, after agencies provide advance
    notice of significant guidance documents to OIRA, OIRA will notify the
    agency if additional consultation will be necessary before the issuance
    of the significant guidance document. As EO 13422 was issued in January
    of 2007, OMB does not yet have much experience in its implementation,
    and OMB has not determined how many significant guidance documents it
    will review in fiscal year 2008. The number of significant guidance
    documents selected by OIRA for additional consultation will likely vary
    from year to year, depending on a variety of factors, one of them being
    the types and number of significant guidance documents that agencies
    develop from one year to the next.
        Question. How many additional staff, with what sets of skills, will
    be needed to accomplish these reviews? Were the revised regulatory
    review requirements considered in formulation of OMB's budget request
    for fiscal year 2008? If not, why not?
        Answer. It is not expected that additional staff will be necessary
    as it is OMB's plan to utilize OIRA s existing staff in the
    implementation of EO 12866, as amended, and the Bulletin. OIRA staff
    currently review draft rules pursuant to EO 12866, draft information
    collections pursuant to the Paperwork Reduction Act, and some drafts of
    guidance documents. These same staff will review significant guidance
    documents selected for review by OIRA pursuant to EO 12866, as amended.
    The submitted budget request documents do not contain requests for
    additional funding because it is expected that EO 12866, as amended,
    and the Bulletin can be implemented with existing resources.
            outsourcing--``competitive sourcing'' omb circular a-76
        Question. Recently, OMB Associate Administrator Matthew Blum was
    reported to have said that the Administration would soon publish new
    guidance relating to the public-private competitions that federal
    agencies conduct. (Government Executive article, dated 4/4/07)
        Can you tell me more about what you will be proposing and why?
        Answer. On April 13, 2007, OMB issued a memorandum to the
    President's Management Council providing guidance to help agencies
    substantiate that savings are achieved and performance is improved
    through public-private competition. The guidance includes a requirement
    for all PMA agencies to develop plans for the independent validation of
    a reasonable sampling of competitions. The guidance is available at
    http://www.whitehouse.gov/omb/procurement/comp_src/
    cs_validating_results.pdf.
        Question. Do you expect this guidance to result in more federal
    employee jobs being privatized?
        Answer. No. The purpose of the guidance is to ensure agencies and
    taxpayers receive the expected benefits from competition. OMB hopes
    these efforts will further strengthen accountability for results--
    irrespective of who the selected provider is--and reinforce public
    trust and confidence in the competitive sourcing initiative.
        Question. Currently, federal employees do not have the same rights
    that contractors possess to appeal contracting-out decisions to GAO and
    the Court of Federal Appeals. A senior procurement official whose job
    is not among those being considered for contracting-out can appeal on
    behalf of affected employees in very narrow circumstances. In order for
    there to be any confidence in the integrity of the ``competitive
    sourcing'' process, it is understood that both sides should have the
    same appeal rights.
        What approach would the Administration prefer the Congress to take
    to rectify this imbalance: giving appeal rights to federal employees
    actually being reviewed for privatization or taking away appeal rights
    from contractors, so that there can be a level playing field?
        Answer. OMB believes protest rights are more balanced than
    described above. For example, contractor employees, like federal
    employees, do not have an independent right to protest to the GAO.
    Although the law limits the representative for agency protests to the
    agency tender official (ATO), the law also requires the ATO to notify
    Congress whenever the ATO fails to pursue a protest to the GAO on
    grounds requested by a majority of the employees engaged in the
    performance of the competed function. There is no similar reporting
    requirement for companies that do not pursue protests requested by
    their employees.
         are political activities being encouraged at federal agencies?
        Question. Recent reports have discussed potential improprieties by
    the GSA Administrator and the activities of the top aide to political
    advisor Karl Rove. That aide and the GSA Administrator apparently met
    with GSA political appointees about the 2006 election results and
    Republican goals for 2008.
        To what extent are the White House and OMB engaged with the
    political appointees at federal agencies about election outcomes?
        Answer. OMB regularly circulates Hatch Act guidance to its
    employees. First, OMB includes Hatch Act information in its annual
    mandatory ethics training for employees. OMB senior staff receive live
    ethics training each year, in compliance with Office of Government
    Ethics regulations; other OMB staff receive live ethics training every
    third year and paper ethics training in the ensuing years. All training
    sessions, whether live or paper, include Hatch Act guidance. Secondly,
    OMB circulates specific Hatch Act guidance to all employees every two
    years, which coincides with the federal election cycle. OMB last
    circulated its specific Hatch Act guidance on September 25, 2006.
    privacy and security of personal information role of omb in government
                             computer data breaches
        Question. Personal data security breaches are being reported with
    increasing regularity. These breaches occur not only because of illegal
    or fraudulent attacks by computer hackers, but often because of
    careless business practices, such as lost or stolen laptop computers,
    or the inadvertent posting of personal data on public websites.
        Federal agencies are not immune from this unsettling problem. In
    May 2006, 26.5 million veterans and their spouses were in danger of
    identity theft because a Veterans Affairs data analyst took home a
    laptop computer containing personal data which was later stolen in a
    burglary. Other incidents of potentially compromised data in 2006
    involved the Departments of Agriculture, Commerce, Defense, Energy,
    State, and Transportation, the Federal Trade Commission, the Internal
    Revenue Service, the Government Accountability Office, the National
    Institutes of Health, and the Department of the Navy.
        Director Portman, it appears some steps have been taken to address
    this disturbing problem of data breaches involving personal and
    sensitive information in government computers, but are they the right
    ones?
        Answer. Yes, and we are continuing our efforts in this area. As
    recommended by the President's Identity Theft Task Force in their
    interim recommendations issued by Clay Johnson on September 20, 2007
    titled, ``Recommendations for Identity Theft Related Data Breach
    Notification'' (www.whitehouse.gov/omb/memoranda/fy2006/
    task_force_theft_memo.pdf), agencies use a risk-based approach when
    analyzing and responding to data breaches of sensitive information.
        Question. Are we doing enough?
        Answer. Although there is continued progress toward the
    establishment of appropriate safeguards, most Federal agencies are
    still at risk for improper access and disclosure of personally
    identifiable information and other sensitive information, as described
    by the IGs evaluations completed in October 2006. There is continued
    need for agencies to identify and properly categorize sensitive
    information; refine organizational policy, and implement comprehensive
    solutions to protect sensitive information being transported or stored
    offsite, or remotely accessed.
        Question. Can we achieve ``zero tolerance'' in this arena? What
    tools and resources would it take?
        Answer. A significant factor in data breaches is human error, which
    results from failure to successfully implement security and privacy
    policies. ``Zero tolerance'' would only be possible when agencies focus
    beyond compliance and manage the risk through the use of an integrated
    and comprehensive privacy and security awareness training of all
    personnel, responsibility-specific training when appropriate, and
    successful implementation of privacy and security policies. However, we
    cannot guarantee these incidents will not happen, but rather the
    agencies will have the ability to properly respond to minimize the risk
    of our citizen's data.
        Question. In addition to the directives on encryption, access,
    timely reporting, and management response issued last year, what other
    initiatives is OMB considering to help resolve this problem or mitigate
    the risk?
        Answer. OMB is focused on implementing existing law and policies,
    and following the recommendations identified in the report submitted to
    the President by the Identity Theft Task Force on April 23, 2007.
        Question. Are you contemplating issuing any further directives that
    compel agencies to enhance IT inventory controls, including the
    creation of comprehensive databases for all departmental property?
        Answer. We rely on the information agencies provide in the annual
    report on security under the Federal Information Security Management
    Act (FISMA) and the assessment by the agencies' Inspectors General for
    the quality of agency system inventories. Additionally, the E-
    Government Act requires agencies to report on their privacy program,
    and agencies report to us on the number of completed privacy impact
    assessments (PIAs) and system of records notices (SORNs).
        Question. Are there special or unique challenges that Federal
    departments and agencies face when it comes to tackling this problem?
        Answer. The public and private sectors are faced with similar
    security and privacy issues, and would benefit by exchanging lessons
    learned and best practices. Because Federal agencies provide the public
    services requiring we maintain significant amounts of information
    concerning individuals, we have a special duty to protect that
    information from loss and misuse.
        Question. Are the funding amounts agencies are requesting
    sufficient?
        Answer. The budget submitted by the President requests the
    appropriate funding amount to address the Administration's initiatives
    for security and privacy.
        Question. How do you know whether agencies are complying with your
    July directive to timely report within one hour? Are there any
    consequences for delays or failures to report?
        Answer. We have seen an increase in the amount of reports submitted
    through US CERT, which would suggest increased compliance with the
    directive. Individual agencies are responsible for establishing
    consequences for failure to follow agency policies. However, it is
    important to recognize reporting in and of itself is not a failure, but
    rather, a necessary procedure to help agencies respond to incidents in
    a timely and effective manner, and protect citizens to the maximum
    extent possible when a situation does arise.
        Question. Did all agencies meet the August 7, 2006 deadline for
    encryption requirement as directed in OMB's Memorandum issued last
    June? If so, how do you know? If not, why not?
        Answer. Memorandum 06-16 presented four recommended actions for
    agencies to implement to provide better protection for information
    accessed remotely--one of which is to encrypt all data on mobile
    computers/devices which carry agency data unless the data is determined
    to be non-sensitive, in writing, by the agency's Deputy Secretary or
    designee--to be implemented through the existing framework provided
    within current law and policy. As of October 2006, most agencies were
    still in process of implementation. The public results of the
    Inspectors General assessment of Departments' and Agencies' status in
    meeting the recommendations of OMB memo 06-16, as of October 2006, are
    published on Internet at www.ignet.gov/pande/faec/summarypiireport.pdf.
    We have been working with the PCIE IT Committee to formulate an
    additional evaluation to measure agency progress.
        Question. Should OMB play a stronger role in checking on agency
    compliance with your directives to date?
        Answer. OMB provides the appropriate amount of oversight to the
    federal agencies; however, it is the responsibility of the agencies to
    manage the risk of their services and data in accordance with existing
    laws and policies.
        Question. Should we heighten employee accountability standards? Is
    there a need to expand training?
        Answer. Agencies provide employees with clearly defined policies
    addressing expected rules of behavior and accountability for failure to
    follow those rules, reinforced with training to ensure employees
    understand the standards and practices for which they will be held
    accountable. To help agencies administer effective training programs,
    the Information Systems Security Line of Business (ISS LoB) identified
    three agency training programs to serve as a common baseline for other
    agencies to use.
        Question. Are there any legislative reforms that would be
    beneficial?
        Answer. Legislative reform is not necessary at this time. We are
    focused on moving agencies towards better implementation of existing
    laws and policies and managing their risk levels--so that we can move
    ``beyond compliance'' to achieve improved security and privacy outcomes
    for our citizens to ensure trust in our services.
    privacy and security for information systems: omb directives on budget
                                    requests
        Question. Privacy and security of data are important elements of
    planning, acquisition, and development of Federal information
    technology systems. The E-Government Act of 2002 and the Federal
    Information Security Management Act (FISMA) provide significant privacy
    and security responsibilities for federal information technology system
    operators.
        Seven years ago, OMB issued instructions to agencies on how to
    integrate security into the funding for information technology
    (``Incorporating and Funding Security in Information Systems
    Investments,'' Memorandum M-00-07, issued 2/28/00 and incorporated in
    OMB Circular A-11 on budget preparation policy).
        Under OMB's guidance requirements, agencies are required to: (1)
    Integrate security into and fund it over the lifecycle of each system
    undergoing development, modernization, or enhancement; and (2) Ensure
    that steady-state system operations meet existing security requirements
    before new funds are spent on system development, modernization, or
    enhancement.
        Last July, OMB's Administrator of E-Government and Information
    Technology reminded agencies of the requirement to incorporate and fund
    security and privacy requirements within their IT investments as part
    of the fiscal year 2008 budget process. Agencies were specifically
    directed to provide additional detail on resources they devote to
    fixing security weaknesses. Furthermore, agencies with significant
    isolated or widespread weaknesses identified by the agency Inspector
    general or GAO were directed to identify the specific funds they were
    requesting to correct the security weaknesses.
        Did all agencies comply with the directive on incorporating
    security funding in submitting their fiscal year 2008 budget requests?
        Answer. Yes. All agencies submit an Exhibit 53 identifying the
    percentage of the agency's IT spending used for security. In addition,
    the Exhibit 300 submitted as part of the budget submission includes
    details on IT security spending.
        Question. How can we be assured that all agencies across the
    federal government are adhering to this directive?
        Answer. As part of the budget process, agency CIOs and IGs, as well
    as OMB, review agency Exhibit 53s and Exhibit 300's.These documents
    show agencies are planning for, and incorporating, security spending
    over the course of the investment lifecycle.
        Question. What did OMB's review of the agency submissions show? Did
    all agencies identify the funding needs to address system security
    vulnerabilities as expected?
        Answer. We review agency budget requests to ensure agencies
    identify the costs for securing their investments. When agencies submit
    budget requests without information about the costs for securing their
    investments, the Investments are placed on the Management Watch List.
    We also analyze agency FISMA reports and other information to help
    determine whether agency budget requests are justified.
        Question. Can you cite some examples of budget submissions for
    fiscal year 2008 in which a federal agency identified specific funding
    requirements to address privacy and security vulnerabilities?
        Answer. All agency budget submissions identify the costs for
    securing their investments to address privacy and security
    vulnerabilities.
        Question. Has OMB ever substantially reduced or denied an agency's
    request for funding to address security weaknesses?
        Answer. Agencies identify the costs for securing their investments
    as part of their budget request, and we use this information when
    determining whether agency requests are justified.
        Question. Do you believe all agencies have adequate resources to
    address this problem of information security? Why or why not?
        Answer. We believe that agencies have adequate resources to address
    information security. They request the funding they need in their
    annual budget submission, based on their assessment of security control
    needs and remediation of weaknesses. To determine this amount, we rely
    on agencies to use their plan of action and milestone process, capitol
    planning, and the associated information to prioritize and determine
    the adequate amount of resources to request in order to mitigate any
    weaknesses that exist.
        Question. What checks are in place to assess agency systems
    acquisition projects to ensure that security is an integral part? Are
    there any consequences for non-compliance, or for proceeding to spend
    new funds despite not meeting existing security requirements?
        Answer. The Federal Acquisition Council published a Federal
    Acquisition Register clause outlining the requirement for agency
    acquisitions to follow the requirements of federal security policies.
    FAR clause 52.239-1(b) includes a broad reference to programs,
    including security, which includes FISMA. Compliance with this clause
    is enforced through the FAR process. On April 25, 2007, OMB issued a
    memorandum regarding the Federal Acquisition Certification for Program
    and Project Managers. This memorandum establishes a structured
    development for program and project managers that will improve the
    partnership and collective stewardship of taxpayer dollars.
        Question. What role does OMB play in reviewing IT spending plans to
    ensure that the security and privacy components are appropriately
    addressed?
        Answer. Besides oversight from reviewing Exhibit 300s and Exhibit
    53s, and other budget documents, OMB works with agencies throughout the
    year to assist in their project planning and implementation.
        Question. Has OMB (or any agency head that you are aware of) ever
    halted a systems procurement due to the failure to include IT security
    funding in the project?
        Answer. OMB views this activity as an internal agency procurement
    matter, and therefore, we would not necessarily know of any specific
    projects that have been halted. However, information related to
    procurement and security is submitted to OMB through the budget process
    in Exhibit 300 planning documentation, and it is considered as we
    review agency budget requests. It is important to also note agencies
    apply a methodology called ``Earned Value Management'' to regularly
    assess whether IT project implementation is on schedule, and within
    cost and performance expectations. When projects deviate significantly
    from established expectations, agencies have to determine whether the
    project should be halted, adjusted, and/or terminated.
                                     ______

                  Questions Submitted by Senator Sam Brownback
        Question. Mr. Portman, I have introduced a bill that would
    establish a ``Commission on the Accountability and Review of Federal
    Agencies.''--CARFA.
        CARFA would: (1) evaluate executive agencies and their programs;
    and (2) submit to Congress a plan recommending agencies and programs
    that should be realigned or eliminated.
        Are you supportive of this bill?
        Answer. Yes. The Administration is strongly supportive of
    legislation that would enhance scrutiny and improve performance of
    programs.
        Question. Do you believe that it would eliminate wasteful
    government spending and improve government agencies' performance?
        Answer. Yes.
        Question. Could you help me analyze taxpayers' savings that this
    legislation could realize by reducing government waste?
        Answer. I cannot now give an accurate estimate of the amount of
    waste, fraud, and abuse that inflicts government today. The President's
    Council on Integrity and Efficiency reported $9 billion in potential
    savings that could result from recommendations Inspectors General made
    in fiscal year 2006. While eliminating government waste is a priority
    of the Administration, even more can be gained by making programs more
    effective and efficient. We are using the PART process to identify and
    pursue opportunities for agencies to get the taxpayers more for their
    money and eliminate unnecessary duplication of services. Based on
    agency and OMB assessments of program performance, we can say that
    proposed fiscal year 2008 spending on programs rated Ineffective or
    Results not Demonstrated exceeded $140 billion.
        Question. What is the current level of uncredited contributions to
    Social Security by undocumented persons working in this country?
        Answer. The Social Security Administration (SSA) does not know how
    much undocumented workers are contributing to Social Security.
    Uncredited contributions to Social Security are captured in the
    Earnings Suspense File. Employers report wages to SSA, and SSA uses the
    SSN to record the employees' earnings histories. The Earnings Suspense
    File captures all wage reports where SSA cannot verify the name and SSN
    of the worker against SSA s records. If SSA later resolves the
    mismatch, SSA removes the item from the suspense file and credits the
    wages to that person's record.
        There are many reasons that a name and SSN may not match Social
    Security's records, including typographical errors and name changes. A
    mismatch may also occur is if a worker is using an SSN obtained
    fraudulently, and their name does not match the SSN in SSA s records.
        SSA has no way of estimating the percentage of the Earnings
    Suspense File that represents work done by undocumented workers using
    fraudulent SSNs. The primary challenge in producing such an estimate is
    that SSA does not have a basis for estimating how many of the
    undocumented workers currently in the United States are paying payroll
    taxes.
        Question. What would be the affect on Social Security if illegal
    aliens were to gain legal status?
        Answer. The effect on the Social Security Trust Funds would depend
    on the number of undocumented immigrants receiving an adjustment in
    their status, and whether they were paying payroll taxes prior to that
    time. Under current law, individuals illegally present are not eligible
    to receive Social Security benefits. The effect on Social Security
    would also depend on how work completed prior to receiving legal status
    is treated for benefit eligibility and benefit calculation purposes.
        The 2007 Social Security Trustees Report provides some illustrative
    figures regarding the effect of immigration on the Social Security
    program. The Trustees Report intermediate assumptions assume that net
    immigration will total 900,000 people per year. When net immigration is
    increased to 1.3 million a year, the long-range outlook improves. The
    75-year actuarial balance as a percentage of taxable payroll would
    improve from -1.95 under intermediate assumptions to -1.70 under the
    higher immigration scenario. In general, increasing the number of net
    immigrants by 100,000 would increase the 75-year actuarial balance by
    .07 percent of taxable payroll.
        Question. You express concern about the level of mandatory spending
    in the budget, how do you propose to reduce this?
        Answer. While the near-term outlook in the President's 2008 budget
    of smaller deficits and a surplus starting in 2012 is encouraging, the
    current structure of the Federal Government's major entitlement
    programs will place a growing and unsustainable burden on the budget in
    the long-term. Currently, spending on Medicare, Medicaid, and Social
    Security is approximately eight percent of the Nation's GDP. With the
    first of the baby boom generation becoming eligible for Social Security
    in 2008, Social Security spending will accelerate. Three years later,
    the problem will become more pronounced as these individuals become
    eligible for Medicare, under which program costs rise even faster due
    to health care inflation. By 2050, spending on these three entitlement
    programs is projected to be more than 15 percent of GDP, or more than
    twice as large as spending on all other programs combined, excluding
    interest on the public debt.
        The President's budget proposes a number of reforms in mandatory
    programs, particularly in Medicare, resulting in savings of $66 billion
    over five years and growing to $252 billion over 10 years. These
    proposals will not solve the Government's long-term fiscal challenges,
    but they are an important and meaningful step, producing a significant
    improvement over the long term. Under the President's budget policies,
    the deficit in 2050 is projected to be 4.7 percent of GDP. In contrast,
    if the Congress fails to adopt the President's mandatory proposals and
    permits current law to remain in force, the deficit in 2050 is
    projected to be 7.5 percent of GDP.
        Question. Director Portman, in your testimony you have requested
    $410 million for enhanced income tax enforcement, how much increased
    tax revenue would this yield?
        Answer. The budget proposes to improve the effectiveness of the
    IRS' activities with a $410 million package of new initiatives to
    enhance enforcement and taxpayer service and to improve the IRS'
    technology. Budget scoring rules do not permit CBO and OMB to ``score''
    the estimated revenue increase from IRS enforcement efforts. The IRS
    collects $51 billion per year (2007 estimate) in direct enforcement
    revenue, and its enforcement program helps maintain the more than $2
    trillion in taxes voluntarily paid each year. The budget's proposed
    funding levels for the IRS will help maintain the base revenue, and the
    proposed enforcement initiative should boost revenue further.
        Based on historical realization rates, the IRS estimates there is a
    4:1 return on expanded enforcement activities once new staff is fully
    trained. During 2008, the proposed enforcement initiatives are
    estimated to yield more than $300 million in new enforcement revenue,
    and once new staff are trained and become more experienced, the
    enforcement revenue impact of the work they complete each year is
    estimated to increase to approximately $700 million. However, this
    Return on Investment (ROI) estimate is likely understated because it
    does not reflect the indirect impact enhanced enforcement has on
    deterring non-compliance. Research suggests this indirect impact is at
    least three times as large as the direct impact on revenue.
        Question. Competitive sourcing is an integral part of the
    President's Management Agenda, as such, what is the expected benefit of
    this concept?
        Answer. The reasoned and strategic application of competition is
    helping agencies achieve greater efficiencies and better performance.
    By making commercial services that support programs more efficient,
    agencies have more resources to spend directly on their missions.
    Competition motivates agencies to become more efficient through the
    development of improved performance standards, the adoption of new
    technologies, workforce realignments, the consolidation of operations,
    and lower contract support costs. Projected savings are significant for
    the small percentage of the workforce competed. In fiscal year 2006,
    for example, agencies competed only 0.4 percent of the entire civilian
    workforce. Yet these competitions are expected to generate savings of
    $1.3 billion over the next 5-10 years. Competitions completed since
    2003 are expected to produce almost $7 billion in savings for taxpayers
    over the next 5-10 years. This means taxpayers will receive a return of
    about $31 for every dollar spent on competition. Annualized expected
    savings are around $1 billion.
        Question. What is precluding the full application of competitive
    sourcing?
        Answer. Despite impressive results, a number of legislative
    provisions limit agencies from taking full advantage of competition
    where it makes sense. Some restrictions prohibit agencies from
    competing certain activities or conducting competitions at certain
    organizations while others limit agency resources for competition or
    marginalize the consideration of quality, forcing agencies to choose
    between the government and the private sector solely based on lowest
    cost.
        Many legislative restrictions appear to be rooted in concerns that
    competitive sourcing will be used to weaken the workforce. In fact,
    agencies have carefully tailored their use of competition and given
    federal employees a full and fair opportunity to demonstrate their
    value to the taxpayer. Federal employees have fared well, receiving 87
    percent of the work competed in fiscal year 2006 and 83 percent of the
    work competed between fiscal years 2003-2006. OMB would welcome the
    opportunity to work with members of Congress to eliminate statutory
    restrictions so that competition may be used, where appropriate, to
    improve government operations and deliver the best results for the
    American taxpayer.
        Question. How much has the deficit declined the past two years and
    do you expect it to decline again this year?
        Answer. The size of the deficit and the debt is best assessed in
    relation to the economy as a whole, as measured by GDP. In his 2005
    budget, the President set a goal to cut the deficit in half by 2009
    from its projected peak in 2004. The President achieved his goal in
    2006, three years ahead of schedule. The deficit in 2006 was 1.9
    percent of GDP, or $248 billion. This was a reduction from the actual
    2004 deficit of 1.7 percent of GDP, or $165 billion. The 2006 deficit
    was below the 40-year historical average of 2.4 percent of GDP, and was
    smaller than the deficit as a percent of GDP in 18 of the previous 25
    years.
        In the 2008 budget, we project the deficit to decline even further
    for 2007 to 1.8 percent of GDP, or $244 billion. OMB will update these
    projections in the Mid-Session Review.
        Question. Would you recommend that the President veto the
    supplemental over the level of additional funding in the bill?
        Answer. The President vetoed this bill on May 2 based on the
    inclusion of an artificial deadline for troop withdrawal from Iraq, and
    the addition of billions of dollars in unrelated spending.
        Question. Last year OMB had its lowest staffing levels in over 30
    years, how are you able to complete the important work you do under
    such tight budget constraints?
        Answer. We have reduced staff levels over the past 6 years and
    attempted to be more productive with these lower staff levels. OMB has
    an extraordinarily dedicated and talented team of career professionals.
    OMB is consistently rated as the best or one of the best places to work
    in the federal government. We strive to recruit, train and retain the
    best staff we can at OMB. While the request for fiscal year 2008 is a
    disciplined budget, we believe it provides the resources necessary for
    OMB to maintain a staff of 489 and fully meet its mission.
                                     ______

                  Questions Submitted by Senator Wayne Allard
        Question. What are OMB's scores on the management scorecard?
        Answer. OMB's current progress score for Human Capital, Competitive
    Sourcing, Financial Performance, and Budget and Performance Integration
    is green. While our progress score for E-Gov is red, we are taking
    steps to improve that score. OMB is currently yellow in status on Human
    Capital, but red in status on Competitive Sourcing, Financial
    Performance, E-Gov, and Budget and Performance Integration.
        All current and past scores for all agencies on the President's
    Management Agenda can be found at results.gov.
        Question. Why hasn't OMB undergone a PART review?
        Answer. Early in the development of the PART, the Administration
    made a decision to focus our evaluation efforts on programs that most
    directly impact the government's services to the American people. We
    excluded from the PART process policy functions (e.g., Office of the
    Secretary), central administrative functions that are not associated
    with specific programs, and programs and activities with a limited
    impact. The central administrative functions are evaluated using the
    President's Management Agenda scorecard.
        OMB has not been assessed with the PART primarily because it serves
    in a policy role. This does not mean OMB has escaped oversight or
    scrutiny. In fact, OMB management has been held to the same standards
    as every other major agency with the President's Management Agenda
    Scorecard. That scorecard assesses the quality of OMB's personnel,
    financial, information technology, procurement, and performance
    management. Each quarter, OMB's progress and status on each of these
    initiatives is made available on Results.gov.

                              SUBCOMMITTEE RECESS

        Senator Durbin. Director Portman, I thank you for your
    testimony.
        Mr. Portman. Thank you, Mr. Chairman.
        Senator Durbin. This meeting of the subcommittee stands
    recessed.
        [Whereupon, at 4:19 p.m., Wednesday, April 11, the
    subcommittee was recessed, to reconvene subject to the call of
    the Chair.]

      FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL
                                   YEAR 2008

                                  ----------

                             WEDNESDAY, MAY 2, 2007

                                           U.S. Senate,
               Subcommittee of the Committee on Appropriations,
                                                        Washington, DC.
        The subcommittee met at 5 p.m., in room SD-192, Dirksen
    Senate Office Building, Hon. Richard J. Durbin (chairman)
    presiding.
        Present: Senator Durbin.

                              DISTRICT OF COLUMBIA

                                     Courts

    STATEMENT OF ERIC T. WASHINGTON, CHIEF JUDGE, DISTRICT
                OF COLUMBIA COURT OF APPEALS

                     STATEMENT OF SENATOR RICHARD J. DURBIN

        Senator Durbin. Good afternoon. The hearing will come to
    order and my apologies for the delayed start.
        Coincidentally this hearing was scheduled for the very
    moment that I was calling an amendment on the floor. The bad
    news is you had to wait patiently for over an hour and the good
    news is the amendment passed.
        So, I'm happy to be with you and welcome you to the session
    before the Financial Services and General Government
    Appropriations Subcommittee.
        Our focus today is on the budget request for four federally
    funded agencies which deliver vital services within the
    District of Columbia. I welcome my Senate colleagues who may
    join me now that the rollcall has been completed.
        Appearing before the subcommittee this afternoon is an
    extraordinary panel of key officials, who devote their careers
    to fairly administering justice, protecting public safety, and
    improving the livelihood and potential for the citizens of our
    Nation's capital.
        As I looked over their resumes, it's significant that
    collectively these leaders have delivered a century of
    distinguished public service and from my vantage point, appear
    to show no signs of fatigue or waning commitment. So, I thank
    you for that.
        I welcome the Honorable Eric T. Washington, Chief Judge of
    the D.C. Court of Appeals; the Honorable Rufus G. King III,
    Chief Judge of the District of Columbia Superior Court; Paul
    Quander, Jr., Director of the Court Services and Offender
    Supervision Agency (CSOSA); Avis Buchanan, Director of the
    Public Defender Service (PDS) of the District of Columbia; and
    Deborah Gist, State Education Officer, who administers the
    Resident Tuition Assistant Grant Program for the District of
    Columbia government. Thank you for joining us.
        I've had the privilege and pleasure of working on a host of
    important and successful legislative initiatives for the
    benefit of the District as part of my Senate responsibilities--
    having worn the hats of both authorizer and appropriator over
    the years. Today provides an opportunity to continue that work.
        The combined funding request for the operations of the
    agencies appearing before the subcommittee today constitute
    $515.5 million--86 percent of the President's total request of
    $597.6 million in Federal payments to fund a dozen diverse
    programs in the District of Columbia.
        Federal appropriations provide the sole financial resources
    for, not simply a contribution to, the operations of these four
    agencies. Three of the entities are wholly independent of any
    local control or oversight as a result of the Revitalization
    Act of 1997, which relieved the District of certain state level
    responsibilities and restructured several criminal justice
    functions.
        So, it's prudent to assess how effectively and efficiently
    these particular agencies are currently utilizing and managing
    Federal resources as we look forward to deliberating the needs
    for the ensuing year.
        For the District of Columbia Courts, the President's budget
    recommends a total of $213.9 million, a decrease of $2.9
    million from last year's appropriation. The President's
    recommendation for court operations is $24.5 million--18
    percent increase above the last fiscal year enacted level of
    $136.8 million. The President's proposed level of $52.5 million
    for capital improvements is $27.4 million below fiscal year
    2007.
        For CSOSA, the President requests $190.3 million. This is
    $10.7 million, or 6 percent, above the fiscal year 2007 enacted
    level of $179.6 million.
        Under the full year continuing resolution, Congress
    approved an additional $8.9 million to forestall critical
    setbacks CSOSA faced if forced to operate at the fiscal year
    2006 level. For the Public Defender Service, the President
    seeks $32.71 million to be provided as a direct appropriation.
    This is 5 percent above the fiscal year 2007 level.
        For the District of Columbia Tuition Assistance Grant
    Program, the President seeks $35.1 million, an increase of $2.2
    million, or 7 percent, above the fiscal year 2007 enacted
    level.
        I look forward to discussing these budget proposals in
    greater detail. At this point, we will take the testimony of
    those witnesses who appear before us.
        In the interest of providing ample opportunity to discuss
    your proposals with questions and answers, I hope you can limit
    your oral presentations to around 5 minutes. Your entire formal
    statement will be submitted for the record. Judge Washington,
    we will begin with you. Thank you for being here.
        Judge Washington. Thank you, Mr. Chairman. Good afternoon.
        Senator Durbin. There's a button on your microphone. There
    you go.
        Judge Washington. I hope that I've done this correctly.
        Again, good afternoon, Mr. Chairman, thank you for this
    opportunity to discuss the D.C. Courts' fiscal year 2008 budget
    request.
        As you noted, my name is Eric T. Washington and I'm here in
    my capacity as the Chief Judge of the District of Columbia
    Court of Appeals and Chair of the Joint Committee on Judicial
    Administration in the District of Columbia, the policy making
    body for the District of Columbia Courts.
        With me this afternoon are Chief Judge Rufus King III of
    the D.C. Superior Court; Ms. Anne Wicks, our Executive Officer;
    and several other key members of senior staff.

                                  INTRODUCTION

        As you know, the District of Columbia has a two-tier court
    system comprised of the District of Columbia Court of Appeals,
    our court of last resort, and the Superior Court of the
    District of Columbia, a trial court of general jurisdiction.
    Administrative support functions for our courts are provided by
    an entity known as the court system.
        The mission of the District of Columbia Courts is to
    protect rights and liberties, uphold and interpret the law, and
    resolve disputes peacefully, fairly, and efficiently in the
    District of Columbia.
        Our successes in fulfilling this mission are attributable,
    in large part, to the consistent support we have received from
    Congress and the President. With your continued support, we are
    confident that we will be able to continue to achieve many of
    the strategic goals we have set for ourselves and for our
    community.

                               BUDGET PRIORITIES

        The District of Columbia Courts serve approximately 10,000
    courthouse visitors each day, process more than 150,000 cases
    each year, and employ a staff of 1,200, who directly serve the
    public, process cases and provide administrative support. The
    number of filings and case dispositions in both courts rank
    among the highest in the Nation on a per capita basis. It is
    for these reasons that our two priority items in this fiscal
    year's budget concern our workforce and our space needs. More
    specifically, the courts' fiscal year 2008 budget priority
    requests are for full funding for all currently authorized
    positions and funding to complete the old courthouse
    restoration.
        Over the past several years increasing costs for
    healthcare, retirement benefits, and cost-of-living adjustments
    have outpaced appropriations, resulting in a significant
    funding shortfall in the courts' personal services budget. A
    sufficient workforce is essential for the D.C. Courts to meet
    our statutory obligations, fulfill our mission, and ensure that
    the public receives high quality justice and services from the
    judicial branch of Government. Because personal services costs
    make up 75 percent of the courts' budget, the shortfall has
    forced us to severely limit hiring.
        Today the courts have a 13-percent nonjudicial vacancy
    rate, a vacancy rate that is beginning to detrimentally effect
    court operations. The requested $8.4 million will fully fund
    the positions currently authorized for the courts.
        The courts continue to implement the facilities master
    plan, and this concerns our second priority issue, that was
    developed in 2002 and revised after passage of the Family Court
    Act. The plan covers the five buildings and 1.1 million gross
    square feet of space that comprise our campus in Judiciary
    Square; accordingly, resources for capital improvements remain
    critical.
        As you know, the D.C. Courts are renovating the old
    courthouse for relocation of the D.C. Court of Appeals. The old
    courthouse is an historic landmark and the centerpiece of
    Judiciary Square. A few years ago, that old courthouse was
    vacant and uninhabitable by modern health and safety standards.
    At that time, the D.C. Courts were facing space shortages in
    the 1970s era Moultrie Courthouse. The facilities master plan
    defined how the courts could best create space to operate and
    serve the public efficiently. It makes clear that the
    restoration of the old courthouse, an historic landmark in need
    of preservation, is also the key to meeting the space needs of
    the D.C. Courts.
        We are very pleased that Congress and the President have
    strongly supported this restoration project. From fiscal year
    2005 to 2007, $99 million was appropriated for the construction
    contract. Construction began just over 1 year ago, in March
    2006, and is scheduled to be completed in December 2008. We
    have provided your staff with pictures that show the progress
    that has been made to date.
        The final phase of the funding requested in fiscal year
    2008 is $30 million for costs not included in the construction
    contract, such as removal of hazardous materials, construction
    management, and contingency and management reserves.
        To maximize the efficient use of the facility once it
    opens, the court's budget request also includes $2.6 million
    for furniture, equipment, and technology necessary to outfit
    the restored building.

                         THE PRESIDENT'S RECOMMENDATION

        We're very pleased that the President's D.C. Court's
    funding recommendation for fiscal year 2008 supports these two
    priority budget items. The President's recommendation also
    finances another key capital project, electrical repairs in the
    Moultrie Courthouse and provides funds for emergency facility
    repairs. The Moultrie Courthouse is approximately 30 years old,
    and was not built to handle the expanded electrical load
    resulting from the use of computers and other modern office
    equipment. According to our energy consultant, the current
    electrical system in the Moultrie Courthouse is overburdened
    and poses a serious threat to the safety of workers and
    building occupants, and must be updated as soon as possible.

                                   CONCLUSION

        We have long enjoyed a reputation for excellence in the
    District of Columbia Courts. Adequate funding for our budget
    priorities is critical to our success. We appreciate the
    support this subcommittee has given us in the past and the
    present support for our budget initiatives. We look forward to
    working with you throughout this process.

                               PREPARED STATEMENT

        If there are any questions, we'd be happy to answer them at
    an appropriate time. Thank you very much, Mr. Chairman.
        Senator Durbin. Thank you, Judge Washington.
        [The statement follows:]
              Prepared Statement of Chief Judge Eric T. Washington
        Mister Chairman, Senator Brownback, Subcommittee members, thank you
    for this opportunity to discuss the fiscal year 2008 budget request of
    the District of Columbia Courts. I am Eric T. Washington, and I am the
    Chair of the Joint Committee on Judicial Administration in the District
    of Columbia, the policy-making body for the District of Columbia
    Courts. I also serve as Chief Judge of the District of Columbia Court
    of Appeals.
        As you may know, this jurisdiction has a two-tier court system
    comprised of the D.C. Court of Appeals, our court of last resort, and
    the Superior Court of the District of Columbia, a trial court of
    general jurisdiction. Administrative support functions for our Courts
    are provided by what is known as the Court System.
                                  introduction
        We live in a changing environment, facing new challenges to our
    nation, our Nation's Capital, and our court system. Whatever challenges
    we face, the fair and effective administration of justice remains
    crucial to our way of life. The District of Columbia Courts are
    committed to responding to the changing needs of our society and
    meeting these new challenges. We have been steadfast in our mission,
    which is to protect rights and liberties, uphold and interpret the law,
    and resolve disputes peacefully, fairly and efficiently in the Nation's
    Capital. Through our Strategic Plan, the D.C. Courts strive to enhance
    the administration of justice; broaden access to justice and service to
    the public; promote competence, professionalism, and civility; improve
    court facilities and technology; and build trust and confidence in our
    courts. We appreciate the support of Congress and the President, which
    makes possible the achievement of these goals for our community.
        To support our mission and goals in fiscal year 2008, the Courts
    budget submission requested $347,774,000 for court operations and
    capital improvements. Of this amount, $13,389,000 is requested for the
    Court of Appeals; $100,543,000 is requested for the Superior Court;
    $54,052,000 is requested for the Court System; and $179,790,000 is
    requested for capital improvements for courthouse facilities. In
    addition, the Courts requested $52,475,000 for the Defender Services
    account.
        The D.C. Courts are committed to fiscal prudence and sound
    financial management. The fiscal year 2008 budget request represents an
    operating budget increase of $31.2 million and 20 full-time equivalent
    (FTE) positions over the fiscal year 2007 appropriation. The two
    highest priorities in the Courts' operating budget request are (1)
    $8,432,000 to fully fund all authorized positions, a special request in
    the budget submission and (2) $2,589,000 to furnish and equip the
    restored Old Courthouse. These two requests account for 35 percent of
    the operating budget increase.
        As the Courts continue to implement the Facilities Master Plan for
    our five buildings and 1.1 million gross square feet of space,
    resources for capital improvements remain critical priorities. The
    fiscal year 2008 capital budget reflects an increase of $99,868,000
    over the fiscal year 2007 level to complete the restoration and
    occupancy of the Old Courthouse, support critical space and technology
    needs, and to maintain the Courts' infrastructure. The Old Courthouse
    restoration remains the most pivotal item in the capital budget, with a
    request for $30 million to cover project costs not included in the
    general construction contract.
                          operating budget priorities
    Special Request for Personal Services Funding
        Over the past several years, increasing personal services costs for
    health benefits and cost of living adjustments have outpaced
    appropriations, resulting in a significant funding shortfall in the
    Courts' personal services budget. Like all organizations that serve the
    public, the greatest asset and resource of the D.C. Courts is our
    people. A sufficient workforce is essential for the D.C. Courts to meet
    statutory mandates, fulfill our mission, and ensure that the public
    receives high quality justice and services from the judiciary. As
    personal services costs make up 75 percent of the Courts' budget, the
    shortfall has necessitated limited hiring. Today, the Courts have a 13
    percent non-judicial vacancy rate, to the detriment of court
    operations. Staffing shortages have a profound negative impact on the
    fair and effective resolution of disputes and public safety. The
    Courts' budget request includes $8,432,000 to fully fund the positions
    currently authorized for the Courts to fulfill our mission. Unless this
    most critical issue facing the D.C. Courts is addressed, the Courts
    will be unable to fill mission-critical positions, and the quality of
    justice in the District of Columbia will be compromised.
    Furniture and Equipment for the Old Courthouse
        As discussed in detail below, the D.C. Courts are renovating the
    historic Old Courthouse for use by the Court of Appeals. The building
    not only will be restored in keeping with its historic and
    architectural significance, but it will also be returned to its
    original use as a courthouse to serve the people of the District of
    Columbia. Construction is scheduled to be complete at the end of 2008.
    To maximize the efficient use of space and technology, the Courts'
    budget request includes $2,589,000 for the furniture and equipment
    necessary to outfit the facility.
           capital budget priority: restoration of the old courthouse
        The Old Courthouse is an historic landmark that is the centerpiece
    of Judiciary Square. The cornerstone was laid with great fanfare in
    1820, and its neoclassical design embodies the democratic ideals of
    Ancient Greece. Originally constructed as a courthouse and City Hall,
    it has served as a courthouse for most of its 187 years. A few years
    ago, it was uninhabitable, with worn out mechanical systems, hazardous
    materials, and numerous other violations of modern health and safety
    standards. Yet, its proud history and aesthetic beauty remained. At the
    same time, the D.C. Courts were facing space shortages in the 1970's
    Moultrie Courthouse, and new mandates for the Family Court increased
    our space requirements. A Facilities Master Plan was developed to
    determine how to provide enough space to operate and serve the public
    efficiently. It was clear that restoration of the Old Courthouse, badly
    needed for historic preservation, was also the key to meeting the space
    requirements of the D.C. Courts.
        We are very pleased that Congress and the President have strongly
    supported this restoration. As you may know, Congress elected to
    finance the restoration in phases. From fiscal year 2005 though fiscal
    year 2007, Congress has provided $99 million for the construction
    contract. The final phase of the funding is $30 million for costs not
    included in the construction contract, such as removal of hazardous
    materials; wiring for security, technology and telecom equipment;
    construction management; and contingency and management reserves.
                         the president's recommendation
        I am very pleased that the President's recommendation for fiscal
    year 2008 supports our most important priority items: personal services
    funding and restoration of the Old Courthouse. In addition, the
    President's recommendation finances two key capital items: electrical
    repairs in the Moultrie Courthouse and emergency facility repairs. The
    Moultrie Courthouse is approximately 30 years old and, due to its age
    and the expanded electrical load from computers and other modern office
    equipment, the electrical system poses a serious threat to the health
    and safety of workers and building occupants.
        The Courts' budget request includes several initiatives needed to
    keep our capital projects on the schedule established by our Facilities
    Master Plan that are not supported this year in the President's
    recommendation. These projects, such as the renovation of the Moultrie
    Courthouse and Building C (the old juvenile court), will need to be
    addressed in future years. As we have learned, any delay in
    construction projects significantly increases their cost.
                              recent achievements
        As the Courts approach the tenth year of direct federal funding in
    fiscal year 2008, we look forward to building on past reforms that
    enhanced our services to the community and demonstrated our commitment
    to fiscal responsibility. We are proud of the Courts' recent
    achievements that all enhance public trust and confidence and that
    include the following:
      --construction to restore the Old Courthouse, a building of historic
            and architectural significance that is critical to meeting the
            long term space needs of the Courts and to urban renewal in the
            District, following approval by the National Capital Planning
            Commission, Commission of Fine Arts, and Historic Preservation
            Board;
      --development and approval by the National Capital Planning
            Commission of a Master Plan for Judiciary Square, an urban
            design and renewal plan to revitalize this historic area of the
            District of Columbia that dates to the original L'Enfant Plan
            for the Nation's Capital;
      --initiation of our second five-year strategic plan, Committed to
            Justice in the Nation's Capital, to ensure that the Courts'
            goals, functions, and resources are strategically aligned to
            our budget and our operations for maximum efficiency and
            effectiveness through 2012;
      --adoption of 13 courtwide performance measures which will enhance
            the Courts' ability to monitor and assess case management
            activities and, ultimately, to inform the public about our
            performance;
      --comprehensive space renovation, including mechanical, electrical
            and security upgrades; new space for the Landlord Tenant and
            Small Claims courts and juvenile probation (the Social Services
            Division of the Family Court) in Building B; and renovated
            space in Building A for the Crime Victims Compensation Program
            and the Multi-Door Division, as the Courts' Facilities Master
            Plan is implemented.
      --Full implementation of the Family Court Act, including a newly
            constructed, family friendly facility on the JM level of the
            Moultrie Courthouse in fiscal year 2004, which houses the new
            Central Intake Center to provide one-stop public service;
            implementation of the one family-one judge principle;
            development of attorney practice standards and creation of
            attorney panels for neglect and juvenile cases; establishment
            of a Family Treatment Court for mothers with substance abuse
            issues and their children; creation of a Self-Help Center for
            unrepresented litigants; opening the Mayor's Services Liaison
            Center in the courthouse to coordinate the provision of needed
            social services; transferring all required children's cases to
            Family Court judges; and installation of a family sculpture at
            the reconfigured entrance to the Family Court;
      --establishment of the District of Columbia Access to Justice
            Commission, by the Court of Appeals, to enhance access to civil
            justice for all persons without regard to economic status;
      --inauguration of Court of Appeals Education Outreach Initiative,
            which includes oral arguments in the community at law schools
            located in the District of Columbia followed by opportunities
            for students to ask the judges questions about appellate
            advocacy;
      --initiation by the Court of Appeals of web-streaming oral arguments,
            giving the public real-time access, on the Internet, to oral
            arguments before the Court;
      --implementation by the Court of Appeals of a comprehensive revision
            of its rules of practice to reduce expenses associated with
            record preparation, the first such revision since the mid-
            1980's;
      --development and implementation of a appellate mediation program to
            assist parties in reaching satisfactory case outcomes more
            expeditiously, thereby saving the public and the Court of
            Appeals time and money;
      --installation and conversion to a new case management system in the
            Superior Court, CourtView, through the Integrated Justice
            Information System (IJIS) project which consolidates 19
            distinct automated databases into one comprehensive system,
            thereby ensuring complete information on all cases pertaining
            to one individual or family to enhance case processing and
            judicial decision-making;
      --revision of the Criminal Justice Act Plan to improve quality legal
            representation for indigent criminal defendants in the Court of
            Appeals;
      --continued enhancements to the Courts' website, designed to increase
            public information and access, including implementation of on-
            line juror services and recognition by Justice Served as one of
            the top ten court websites worldwide;
      --implementation of two community courts, the D.C. and Traffic
            Community Court and the East of the River Community Court, to
            enhance responsiveness to the community and to address quality
            of life crimes through a blend of therapeutic justice and
            restorative justice;
      --creation of a Landlord Tenant Resource Center and a Small Claims
            Resource Center to provide free legal information to
            unrepresented parties and referrals to legal and social service
            providers;
      --promulgation of draft probate attorney practice standards and
            creation of the Probate Review Task Force, to enhance service
            to incapacitated adults and other parties in probate cases;
      --disposition of 1,443 cases and receipt of 1,541 filings in the
            Court of Appeals, and disposition of 136,413 and receipt of
            128,468 filings in the Superior Court (fiscal year 2005
            statistics), continuing operation as one of the busiest
            courthouses in the nation (Superior Court judges hear more
            cases, on average, than judges in all but eight states, and
            case filings per capita in both the trial and appellate courts
            rank at or near the highest in most categories, as examined by
            the National Center for State Courts).
                           d.c. courts infrastructure
        The Courts' capital budget has been a primary focus of our budget
    request for several years. The District of Columbia Courts serve
    approximately 10,000 courthouse visitors each day, process more than
    150,000 cases each year, and employ a staff of 1,200 who directly serve
    the public, process the cases, and provide administrative support. As
    noted above, the District of Columbia Courts are among the busiest and
    most productive court systems in the United States.
        The Courts' capital needs are significant because we are
    responsible for 1.1 million gross square feet of space in Judiciary
    Square and five buildings, including the Moultrie Courthouse, one of
    the busiest and most heavily visited public buildings in the District
    of Columbia. The ages of the Courts' buildings ranges from 30 years to
    200 years. Our funding requirements include projects critical to
    maintaining, preserving, and building safe and functional courthouse
    facilities essential to meeting the heavy demands of the administration
    of justice in our Nation's Capital. To effectively meet these demands,
    the Courts' facilities must be both functional and emblematic of their
    public significance and character.
        Facilities that provide adequate and efficiently designed space are
    essential to enhance the administration of justice, simplify public
    interaction with courts, and improve access to justice for all. In
    contrast, facilities with inadequate space for employees to perform
    their work, with evidence of long-deferred maintenance and repair, and
    with inefficient layouts can detract from the public perception of the
    dignity and importance of a court and impair its ability to function in
    the community. This negative perception impacts public trust and
    confidence in courts, a nationally recognized critical requirement for
    the effective administration of justice. The National Center for State
    Courts succinctly states the relationship between courts and their
    facilities:

        ``Court facilities should not only be efficient and comfortable,
    but should also reflect the independence, dignity, and importance of
    our judicial system . . . It is difficult for our citizens to have
    respect for the courts and the law, and for those who work in the
    court, if the community houses the court in facilities that detract
    from its stature.'' \1\
    ---------------------------------------------------------------------------
        \1\ Don Hardenbergh with Robert Tobin, Sr. and Chang-Ming Yeh, The
    Courthouse: A Planning and Design Guide for Court Facilities, National
    Center for State Courts, 1991, p. xiii.

        Deferred maintenance forced by limited financial resources over
    many years left these buildings in a state that may be perceived to
    detract from the stature of the Courts. We are beginning to see
    improvements, thanks to your support in recent years, but much work
    remains to be done. The Courts' fiscal year 2008 budget request seeks
    resources to meet health and safety building codes and to provide
    secure facilities for the public. For example, adequate ventilation
    must be provided in the courthouse buildings. Electrical systems must
    be upgraded, both to meet modern office needs and to limit risk of
    fire. Safety hazards posed by disintegrating flooring materials must be
    remedied. The halls of justice in the District of Columbia must be well
    maintained, efficient, and adequately sized to inspire the confidence
    of the members of the public who enter our buildings. The Courts'
    facilities plans will, over a ten-year period, meet the well-documented
    space needs of the Courts and return the buildings to a condition that
    inspires trust in the justice system of the Nation's Capital.
        The Courts' facilities plans will also enhance the efficient
    administration of justice and improve public access to justice in this
    jurisdiction by co-locating related functions. The restoration of the
    Old Courthouse for the Court of Appeals, for example, will provide the
    public with a single location for services that are currently found on
    different floors and in different buildings from most Court of Appeals
    offices. Offices related to the Family Court, such as juvenile
    probation, will be consolidated in the Moultrie Courthouse, which will
    be made possible only as we renovate space in other buildings,
    converting usage to public court proceedings and relocating operations
    from Moultrie. More efficient location of these offices will not only
    facilitate public access to the Courts, but will also enhance the
    efficiency of operations.
        In addition, basic mechanical systems impact the administration of
    justice. A broken air conditioning or heating system, for example, can
    force suspension of trials when courtroom temperatures reach unbearable
    levels.
    Facilities in the Courts' Strategic Plan
        The capital projects included in this request are an integral part
    of the Courts' Strategic Plan, completed in fiscal 2003. I am pleased
    to have co-chaired the Strategic Planning Leadership Council, which,
    with broad input from the community, developed the Strategic Plan of
    the D.C. Courts, entitled Committed to Justice in the Nation's Capital.
    The Strategic Plan articulates the mission, vision, and values of the
    Courts in light of current initiatives, recent trends, and future
    challenges. It addresses issues such as implementation of a Family
    Court, increasing cultural diversity, economic disparity, complex
    social problems of court-involved individuals, the increasing presence
    of litigants without legal representation, rapidly evolving technology,
    the competitive funding environment, enhanced public accountability,
    competition for skilled personnel, and increased security risks.
        Facility improvements were identified as a high priority among all
    constituency groups surveyed by the Courts as the Strategic Plan was
    developed. Employees, judges, and stakeholders were asked to identify
    the most important issues the Courts must address in the coming years,
    and each ranked ``enhance court facilities'' among the highest
    priorities. In addition, approximately half of judges and 65 percent of
    employees reported inadequate light, heat, air conditioning, and
    ventilation in their workspaces.
        ``Improving Court Facilities and Technology'' is the Plan's
    Strategic Issue 4. The Strategic Plan states--

        ``The effective administration of justice requires an appropriate
    physical and technical environment. Court personnel and the public
    deserve facilities that are safe, comfortable, secure, and functional,
    and that meet the needs of those who use them. Technology must support
    the achievement of the Courts' mission.''
    Historic Judiciary Square
        The D.C. Courts are primarily located in Judiciary Square, with
    some satellite offices and field units in other locations. The
    historical and architectural significance of Judiciary Square lend
    dignity to the important business conducted by the Courts and, at the
    same time, complicate efforts to upgrade or alter the structures within
    the square. Great care has been exercised in designing the restoration
    of the Old Courthouse, the centerpiece of the square, to preserve the
    character not only of the building, but also of Judiciary Square. As
    one of the original and remaining historic green spaces identified in
    Pierre L'Enfant's plan for the capital of a new nation, Judiciary
    Square is of keen interest to the Nation's Capital.
        Buildings A, B, and C, dating from the 1930's, are situated
    symmetrically along the view corridor comprised of the National
    Building Museum, the Old Courthouse, and John Marshall Park and form
    part of the historic, formal composition of Judiciary Square. The
    Moultrie Courthouse, although not historic, is also located along the
    view corridor and reinforces the symmetry of Judiciary Square through
    its similar form and material to the municipal building located across
    the John Marshall Plaza.
                Judiciary Square Master Plan
        The National Capital Planning Commission (NCPC) required that the
    D.C. Courts develop a Judiciary Square Master Plan--essentially an
    urban design plan--before any construction by the Courts and others
    could be commenced in the area. The D.C. Courts worked with all
    stakeholders on the Plan, including the United States Court of Appeals
    for the Armed Forces, the National Law Enforcement Officers Memorial
    Fund (Memorial Fund), the Newseum, and the Metropolitan Police
    Department. The Judiciary Square Master Plan was approved in August
    2005.
        The Judiciary Square Master Plan resolves important technical
    issues related to access, service, circulation, and security within a
    rapidly changing and publicly oriented area of the District, while re-
    establishing the importance of this historic setting in the ``City of
    Washington.'' It provides a comprehensive framework for capital
    construction for all local entities, and it lays the groundwork for the
    regulatory approval process with the National Capital Planning
    Commission, the U.S. Commission of Fine Arts, the District of Columbia
    Office of Historic Preservation, the District of Columbia Office of
    Planning, and the District of Columbia Department of Transportation,
    among others. The Judiciary Square Master Plan will ensure the
    preservation of one of the last green spaces in the District of
    Columbia awaiting revitalization, incorporating areas where the public
    can gather and relax, and creating a campus-like environment where
    citizens can feel safe and secure.
                Master Plan for D.C. Courts Facilities
        The Courts worked with the General Services Administration (GSA) on
    a number of capital projects since fiscal year 1999, when the Courts
    assumed capital project responsibility from the District's Department
    of Public Works. In 1999, GSA produced a study for the renovation of
    the Old Courthouse to house the D.C. Court of Appeals. In 2001, GSA
    prepared Building Evaluation Reports that assessed the condition of the
    D.C. Courts' facilities. These projects culminated in the development
    of the first Master Plan for D.C. Courts Facilities, which delineates
    the Courts' space requirements and provides a blueprint for optimal
    space utilization, both in the near and long term.
        The Master Plan for D.C. Courts Facilities (Facilities Master
    Plan), completed in December 2002, incorporates significant research,
    analysis, and planning by experts in architecture, urban design and
    planning. During this study, GSA analyzed the Courts' current and
    future space requirements, particularly in light of the significantly
    increased space needs of the Family Court. The Facilities Master Plan
    examined such issues as alignment of related court components to meet
    evolving operational needs and enhance efficiency; the impact of the
    D.C. Family Court Act of 2001 (Public Law Number 107-114);
    accommodation of the Courts' space requirements through 2012; and plans
    to upgrade facilities, including, for example, security,
    telecommunications, and mechanical systems. The Plan identified a space
    shortfall for the Courts of 48,000 square feet of space in 2002, with a
    shortfall of 134,000 square feet projected in the next decade.
        The experts proposed to meet the Courts' space needs through three
    mechanisms: (1) renovation of the Old Courthouse for the District of
    Columbia Court of Appeals, which will free critically needed space in
    the Moultrie Courthouse for trial court operations; (2) construction of
    an addition to the Moultrie Courthouse, to include a separately
    accessible Family Court facility; and (3) the reoccupation and
    renovation of Building C, adjacent to the Old Courthouse. In addition,
    the Plan determined that all court facilities must be modernized and
    upgraded to meet health and safety standards and to function with
    greater efficiency.
    Overview of the D.C. Courts' Facilities
        The Courts currently maintain four buildings in Judiciary Square:
    the Old Courthouse at 430 E Street, the Moultrie Courthouse at 500
    Indiana Avenue, N.W., and Buildings A and B, which are located between
    4th and 5th Streets and E and F Streets, N.W. In addition, the District
    government has partially vacated Building C, which will soon return to
    the D.C. Courts' inventory.
                Old Courthouse
        The Old Courthouse, built from 1821 to 1881, is one of the oldest
    public buildings in the District of Columbia. Inside the Old
    Courthouse, Daniel Webster and Francis Scott Key practiced law and John
    Surratt was tried for his part in the assassination of President
    Abraham Lincoln. The architectural and historical significance of the
    Old Courthouse led to its listing on the National Register of Historic
    Places and its designation as an official project of Save America's
    Treasures. The unique character of the building, together with its
    compact size, makes it ideal for occupancy by the highest court of the
    District of Columbia. At the same time, the structure requires
    extensive work to meet health and safety building codes and to readapt
    it for modern use as a courthouse. The restoration of the Old
    Courthouse for use as a functioning court building will not only
    provide much needed space for the Courts, but it will also preserve a
    historic treasure of our nation and impart new life to one of the most
    significant historic buildings and precincts in Washington, D.C. It
    will meet the needs of the Courts and benefit the community through an
    approach that strengthens a public institution, restores a historic
    landmark, and stimulates neighborhood economic activity.
                Moultrie Courthouse
        The Moultrie Courthouse is uniquely designed to meet the needs of a
    busy trial court. It has three separate and secure circulation
    systems--for judges, the public, and the large number of prisoners
    brought to the courthouse each day. Built in 1978 for 44 trial judges,
    today it is strained beyond capacity to accommodate 59 trial judges and
    24 magistrate judges in the trial court and 9 appellate judges, as well
    as senior judges and more than 1,000 support staff members for the two
    courts. Currently, the Moultrie Courthouse provides space for most
    Court of Appeals, Superior Court, and Family Court operations and
    clerk's offices. Essential criminal justice and social service agencies
    also occupy office space in the Moultrie Courthouse. The Courts have
    clearly outgrown the space available in the Moultrie Courthouse. The
    space is inadequate for this high volume court system to serve the
    public in the heavily populated metropolitan area in and around our
    Nation's Capital.
                Buildings A, B, and C
        Buildings A, B, and C, dating from the 1930's, have been used
    primarily as office space in recent years and today are being renovated
    and modernized for court operations. The D.C. Courts have begun
    implementation of the Facilities Master Plan, relocating the Superior
    Court's two highest volume courtrooms, Small Claims and Landlord
    Tenant, into Building B. This move vacated space in the Moultrie
    Courthouse that was immediately renovated for the Family Court,
    permitting the construction of three new courtrooms, three new hearing
    rooms, a centralized case intake facility, a family-friendly waiting
    area, and District government liaison offices for Family Court matters.
    The first phase of restoration of Building A is complete; the Multi-
    Door Dispute Resolution Division moved late in 2006 and the Probate
    Court is scheduled to move to Building A later this year.
                        complete budget request summary
        To build on past accomplishments and to serve the public in the
    District of Columbia, the Courts require additional resources in fiscal
    year 2008 as outlined below. Without additional capital resources, the
    courthouse and the District's historic buildings will continue to
    deteriorate; without targeted investments in critical areas, the
    quality of justice in the Nation's Capital will be compromised. The
    fiscal year 2008 request addresses these requirements by:
      --Full Funding for Authorized Positions.--To ensure the level of
            staffing needed for the Courts to fulfill its mission, the
            budget includes a special request for $8,432,000. All Court
            personnel, from judges in courtrooms and clerks at public
            service counters to managers and support staff, play important
            roles in the administration of justice in the District. The
            Courts' mission and strategic goals rely upon highly skilled
            personnel in sufficient numbers to serve the residents of this
            jurisdiction and visitors in the Nation's Capital. Unless this
            most critical issue facing the D.C. Courts is addressed, the
            Courts will be unable to fill mission-critical positions, and
            the quality of justice in the District of Columbia will be
            compromised.
          Over several years, increasing personal services costs have
            outpaced appropriations, resulting in a significant funding
            shortfall in the Courts' personal services budget. Escalating
            benefit costs, particularly those for health insurance,
            underfunded cost of living adjustments (COLAs), and unfunded
            salary costs (e.g., overtime and night differential) all
            contribute to the personal services funding gap. The cost of
            benefits, for example, has increased by 43 percent from fiscal
            years 2001 to 2005 while personal services appropriations
            increased by only 13 percent. Cost-of-living-adjustments cost
            the Courts $8 million more than the funding provided, from
            fiscal years 2002 to 2006. Costs for salary components such as
            overtime have skyrocketed as well.
          Because 75 percent of the Courts' budget is comprised of personal
            services costs, the shortfall has resulted in increased staff
            vacancies and a hiring freeze. Without the requested funding,
            the Courts predict a non-judicial vacancy or lapse rate of 15
            percent in fiscal year 2008 compared to the government standard
            of 3 percent. Severe negative consequences on the
            administration of justice and disruptions to court operations
            would result from a reduction of nearly one in six persons.
          The Courts have taken several steps to address the personal
            services budget gap, including reengineering business
            processes, deferring the 2007 cost of living adjustment,
            implementing a hiring freeze, seeking legislation for buyout
            authority, limiting travel and training opportunities,
            curtailing employee incentive awards, and reprogramming funds
            as permitted by law. However, additional funding is required to
            permit the Courts to maintain adequate staff to carry out our
            mission.
      --Infrastructure Investments.--To ensure the health, safety, and
            condition of court facilities and to address operational space
            needs, the fiscal year 2008 capital request totals
            $179,790,000. The fiscal year 2008 capital request incorporates
            the significant research and planning comprising the Facilities
            Master Plan. In the master plan process, the General Services
            Administration (GSA) analyzed the Courts' current and future
            space requirements, particularly in light of the significantly
            increased space needs of the Family Court, and identified a
            134,000 occupiable square feet shortfall over the next ten
            years. In addition to improved maintenance and upgrade of
            existing facilities, the Facilities Master Plan recommended a
            three-part approach to meeting the Courts' space shortfall: (1)
            restoration of the Old Courthouse at 451 Indiana Avenue to
            house the D.C. Court of Appeals and to make additional space
            available in the Moultrie Courthouse for trial court
            operations; (2) an addition to the Moultrie Courthouse to
            accommodate fully consolidated and state-of-the-art Family
            Court facilities; and (3) reoccupation of Court Building C,
            adjacent to the Old Courthouse.
        --Old Courthouse.--The Courts' capital request includes $30,000,000
                for Old Courthouse restoration costs not included in the
                construction contract, such as wiring for security,
                technology and telecom equipment, construction management,
                and contingency and management reserves.\2\
    ---------------------------------------------------------------------------
        \2\ Because the Courts' budget submission was prepared before the
    fiscal year 2007 budget was enacted, it also includes $13 million to
    complete financing of the construction contract for the renovation.
    ---------------------------------------------------------------------------
        --Moultrie Courthouse.--Also included in the capital budget request
                is $29.1 million to continue work on the Moultrie
                Courthouse, as delineated in the Facilities Master Plan.
                Renovation and reorganization of the interior of the
                Moultrie Courthouse is necessary to shift operations to
                vacate some of the space required to fully consolidate the
                Family Court within Moultrie and to upgrade and make
                efficient use of existing space as envisioned in the
                Facilities Master Plan.
        --Building Maintenance.--The capital budget also includes
                $55,490,000 to maintain the Courts' existing
                infrastructure, preserving the health and safety of
                courthouse facilities for the public and the integrity of
                historic buildings for the community. The Courts'
                facilities encompass more than 1.1 million gross square
                feet of space. Over the course of many years, limited
                resources have forced the Courts to defer routine
                maintenance of these facilities, leading to increased risk
                of severe system failures. For example, electrical service
                to meet modern technology needs is critical, not only to
                conduct court business, but also to prevent failures that
                threaten safety, such as electrical fires or transformer
                explosions.
        --Homeland Security.--To protect the 10,000 daily visitors to the
                courthouse and meet increased security threats that face
                the judiciary nationwide and public institutions post
                September 11, 2001, the Courts' request includes
                $16,000,000 in capital funds for perimeter security
                enhancements to protect the occupants of the high-profile
                court buildings in Judiciary Square.
        --U.S. Marshals Service Space.--The U.S. Marshals Service provides
                security for the D.C. Courts and manages hundreds of
                prisoners who appear in court each day. The adult cellblock
                and Marshals Service office space in the Moultrie
                Courthouse require modernization and upgrade to comply with
                current standards. The Courts are working with the Marshals
                Service on a study to determine the requirements in a
                comprehensive manner. We initiated the study in March and
                expect it to be complete on May 3. Although the preliminary
                cost estimate is $42 million for the construction work, the
                additional cost of the security equipment has not yet been
                determined.
      --Furniture and Equipment for the Restored Old Courthouse.--The
            Courts' request includes $2,589,000 to furnish and equip the
            Old Courthouse upon restoration. As noted above, the
            restoration of the Old Courthouse for this jurisdiction's
            highest court, the D.C. Court of Appeals, is in progress. To
            prepare to move into the structure and efficiently use the
            space as planned, furniture and equipment must be procured in
            fiscal 2008.
      --Services for Citizens.--To enhance services to some of the
            District's most vulnerable residents, $2,184,000 and 10 FTEs
            are requested. This figure includes $853,000 and 2 FTEs to
            provide statutorily-mandated advocates for mentally retarded
            individuals who are wards of the District; $771,000 and 5 FTEs
            to provide services and additional probation officers for
            youths under court supervision; $375,000 for interpreters who
            provide sign language and foreign language interpretation for
            litigants; and $185,000 and 3 FTEs to enhance monitoring of the
            status of incapacitated adults with court-appointed guardians.
      --Technology, Financial, Materiel, and Facilities Management.--To
            enhance technology, financial, materiel, and facilities
            management, $1,607,000 and 10 FTEs are requested. Included in
            the total are $331,000 for software maintenance fees for the
            trial court case management system (CourtView); $585,000 for
            warehouse space to store court records and materials, $363,000
            and 6 FTEs for building engineers and services; $255,000 for
            accounting staff; and $73,000 for a materiel management
            function.
      --Built-In Increases.--The fiscal year 2008 request also includes
            $4,155,000 for a cost-of-living adjustment, $1,630,000 for non-
            pay inflationary cost increases, and $1,412,000 for within-
            grade increases. The Courts' request includes within-grade
            increases for employees because unlike typical agencies, which
            may fund these increases through cost savings realized during
            normal turnover, the Courts have a very low turnover rate (5.5
            percent in fiscal year 2006), a hiring freeze, and a funding
            shortfall in personal services.
      --Defender Services Enhancements.--In recent years, the Courts have
            devoted particular attention to improving the financial
            management and reforming the administration of the Defender
            Services programs. For example, the Courts have significantly
            revised the Criminal Justice Act (CJA) Plan for representation
            of indigent defendants to ensure that highly qualified
            attorneys represent indigent defendants. In addition, the
            Courts have developed a new Counsel for Child Abuse and Neglect
            (CCAN) Plan for Family Court cases, adopting attorney practice
            standards and requiring attorney training and screening to
            ensure that well-qualified attorneys are appointed in these
            cases, and contracting for Guardian ad litem (GAL) services to
            enhance representation of abused and neglected children. The
            Guardianship Program has also been revised, imposing a training
            requirement on attorneys participating in the program.
          In the Defender Services account, the Courts' fiscal year 2008
            budget request represents an increase of $9,000,000 over the
            fiscal year 2007 level. This increase reflects a compensation
            adjustment for attorneys from $65 to $90 per hour, to keep pace
            with the rate paid court-appointed attorneys at the Federal
            courthouse across the street from the D.C. Courts and to ensure
            that the indigent receive high quality legal representation.
                                   conclusion
        Mister Chairman, Senator Brownback, Subcommittee members, the
    District of Columbia Courts have long enjoyed a national reputation for
    excellence. We are proud of the Courts' record of administering justice
    in a fair, accessible, and cost-efficient manner. Adequate funding for
    the Courts' fiscal year 2008 priorities is critical to our success, not
    only in the next year but also as we implement plans to continue to
    provide high quality service to the community in the future. We
    appreciate the President's support for the Courts' funding needs in
    2008 and the support we have received in the past from the Congress. We
    look forward to working with you throughout the appropriations process,
    and we thank you for this opportunity to discuss the fiscal year 2008
    budget request of the District of Columbia Courts.

        Senator Durbin. Judge King, many years ago we worked
    together in the creation of the Family Court and I welcome you
    today.
    STATEMENT OF RUFUS G. KING III, CHIEF JUDGE, SUPERIOR
                COURT OF THE DISTRICT OF COLUMBIA
        Judge King. We did indeed, Mr. Chairman and we at the
    Superior Court are very grateful for the contributions you made
    to that very successful legislation.
        Mr. Chairman, subcommittee members, thank you for this
    opportunity to discuss the fiscal year 2008 budget request of
    the District of Columbia Courts. I'm Rufus G. King III, Chief
    Judge at the Superior Court of the District of Columbia, the
    city's trial court.

                          OPERATING BUDGET PRIORITIES

        Chief Judge Washington's statement on behalf of the Joint
    Committee on Judicial Administration details both courts'
    complete budget request, so I will highlight Superior Court
    issues. The highest priorities described by Chief Judge
    Washington are also critical to the Superior Court.
        The personal services budget shortfall that Chief Judge
    Washington described has had a negative impact in both courts,
    but its impact on the trial court has been especially severe.
    In the Superior Court, more than one in eight positions is
    vacant and in every area of court operations the effect is
    being felt. I cannot overstate the importance of court staff to
    trial court operations. Judges in the courtroom can only do
    their jobs sufficiently and effectively when supported by
    adequate staff. The Superior Court prides itself on innovative
    programs designed to respond to the needs of the community we
    serve. For example, our domestic violence unit provides access
    to law enforcement and social service assistance in the
    courthouse and at a satellite center in Southeast, where many
    of the victims live.

                              FAMILY COURT UPDATE

        More than 5 years into the development of the Family Court,
    we have implemented every aspect of the Family Court Act of
    2001 and continue to look for improvements. This year, we
    opened a Balanced and Restorative Justice Drop-In Center in
    Anacostia, which offers services for the rehabilitation of
    juveniles, including probation supervision, tutoring,
    mentoring, peer mediation, and field trips for youths and their
    families.
        We have opened a Family Court Self-Help Center, in addition
    to ones that we've opened in Landlord Tenant Court, Small
    Claims Court, and Probate Court. In this self-help center,
    employees work with volunteer attorneys to provide
    unrepresented litigants with legal information on family law
    matters.
        We have established a Family Treatment Court to help
    mothers with substance abuse issues without separating them
    from their children. The court has developed attorney practice
    standards and created attorney panels for neglect cases in the
    Family Court and juvenile cases, as well as for the probate and
    criminal bar to better assure adequate legal representation for
    litigants in these vital areas.
        All of these programs rely on staff to serve the public
    directly, to coordinate pro bono services with the bar and
    private organizations, and to collaborate with other Government
    agencies. We are leveraging grant funds and pro bono services
    as much as we can, but the Superior Court must have adequate
    staff to carry out its mission of administering justice in the
    Nation's capital. For that the $8.4 million we've requested is
    critical.
        On the capital side, the new family friendly facility on
    the JM level of the Moultrie Courthouse houses the new Central
    Intake Center for all Family Court clerk's office functions.
    The Mayor's Services Liaison Center coordinates provision of
    social and other services by our District of Columbia partner
    agencies. Earlier this year, we completed its build out with
    the unveiling of a new family sculpture at the entrance to the
    Family Court.

                           CAPITAL BUDGET PRIORITIES

        Restoration of the old courthouse for the Court of Appeals
    will benefit the Superior Court as well as the Court of Appeals
    by freeing up approximately 37,000 square feet of space in the
    Moultrie Courthouse for trial court operations. This will allow
    us to complete consolidation of the Family Court, while also
    addressing other space needs in the Superior Court.

                                   CONCLUSION

        In conclusion, Mr. Chairman, the Superior Court is proud of
    our efforts to enhance the administration of justice and to be
    responsive to the community we serve. We appreciate the support
    Congress and the President have shown in helping us carry out
    our goals and we believe we have been good stewards of the
    taxpayers hard-earned funds.

                               PREPARED STATEMENT

        Thank you for this opportunity to address the subcommittee.
    I'd be happy to answer any questions you might have.
        Senator Durbin. Thank you, Judge King.
        [The statement follows:]
              Prepared Statement of Chief Judge Rufus G. King III
        Mr. Chairman, Senator Brownback, subcommittee members, thank you
    for this opportunity to discuss the fiscal year 2008 budget request of
    the District of Columbia Courts. I am Rufus G. King III, Chief Judge of
    the Superior Court of the District of Columbia. As you know, the
    Superior Court is the trial court for the District of Columbia. It is a
    unified court of general jurisdiction, hearing matters brought to court
    under all areas of District of Columbia law.
        Chief Judge Washington's statement on behalf of the Joint Committee
    on Judicial Administration details the Courts' complete budget request,
    so I will highlight Superior Court issues as part of the larger D.C.
    Courts budget request and capital project needs.
        The personal services budget shortfall that Chief Judge Washington
    described has had a negative impact courtwide. For the Superior Court,
    this shortfall has resulted in a 13 percent vacancy rate today, meaning
    that one in eight non-judicial positions are vacant. Every area of
    court operations is suffering from these excessive vacancies. We are
    leveraging grant funds and pro bono services as much as we can, but the
    Court must have adequate staff to carry out its mission of
    administering justice in the Nation's Capital.
                        responsiveness to the community
        The Superior Court prides itself on innovative programs designed to
    respond to the needs of the community we serve. I would like to share
    with you a few of the programs, some mentioned in Chief Judge
    Washington's statement, that the Superior Court has put in place to
    support our strategic goals of increasing public access and enhancing
    public trust and confidence in the courts.
    Self-Help Centers
        Tens of thousands of individuals come to the Superior Court each
    year to have their disputes resolved without the assistance of an
    attorney. The Court has teamed with the D.C. Bar and local law schools
    to provide resource centers to assist these self-represented litigants
    as they navigate the court system.
      --The Landlord Tenant Resource Center uses volunteer attorneys to
            provide legal information to landlords and tenants without
            lawyers. Services include helping them understand the court
            proceedings, helping them prepare pleadings, giving advice on
            how to present their cases, making referrals to legal service
            providers or social services resources.
      --The Small Claims Resource Center is a collaborative effort with the
            D.C. Bar Pro Bono Program, the Neighborhood Legal Services
            Program, and local law schools to assist litigants with small
            claims cases at the court. Volunteer attorneys help self-
            represented litigants understand the court proceedings, help
            them prepare documents, give them advice on how to present
            their cases, and make referrals to legal service providers.
      --The Family Court Self-Help Center provides free walk-in service to
            self-represented litigants with general legal information on
            family law matters, such as divorce, custody, visitation, child
            support. Court staff members inform litigants of their rights
            and obligations, describe legal options, help litigants
            identify which forms to use, and make referrals.
    Satellite Offices
        The Domestic Violence Unit operates a Domestic Violence Satellite
    Center at Greater Southeast Hospital to provide a community-based
    alternative location to the courthouse for victims of domestic
    violence. This office provides easy access to the Superior Court for
    victims of domestic violence who reside east of the Anacostia River,
    where 60 percent of those filing domestic violence cases live. Both the
    Satellite Center and the Domestic Violence Intake Center at the
    courthouse involve collaborations with other government and community
    groups to provide ``one-stop-shopping'' for victims of domestic
    violence to help them access needed social services and law enforcement
    resources.
        The Court operates three juvenile probation field units, where
    young people meet with their probation officers and attend programs in
    or near their own neighborhoods. Our Family Court Social Services
    Division is restructuring the manner in which probationers are
    supervised and rehabilitated to adopt a more holistic approach that, we
    believe, will result in better outcomes. In February, the Court opened
    the first Balanced and Restorative Justice Drop-In Center, which
    includes a probation supervision office and a community-based satellite
    courtroom and offers services including tutoring, mentoring, education
    and prevention groups, peer mediation, recreation, and field trips to
    youth and their families.
    Specialized Courts
        The Court stays abreast of best practices among courts nationwide
    and has several programs that combine therapeutic and restorative
    justice principles to improve public safety in our community and to
    enhance case outcomes for litigants. In addition to the drug courts we
    have operated for many years, we have three more recent programs.
      --The Family Treatment Court, which celebrated its 7th graduation
            ceremony last November, helps keep children out of foster care
            and with their mothers (or other female guardians) while
            providing substance abuse treatment to the parent. In the
            Family Treatment Court, a collaborative program with the
            Mayor's Service Liaison Office, the children live with their
            mothers in a residential substance abuse treatment program. The
            treatment facility provides on-site and community-based
            services, including substance abuse education and treatment,
            parenting skill workshops, counseling and childcare.
      --The Truancy Court is a diversion program designed to increase
            school attendance and improve academic performance and behavior
            of at-risk children. In collaboration with several D.C.
            government agencies, Family Court judges meet weekly with
            children at Garnett Patterson Middle School and Kramer Middle
            School and, through rewards and corrective actions, promote
            compliance with a school attendance plan of action developed
            for each child and family.
      --Two criminal Community Courts, the D.C./Traffic Community Court and
            the East of the River Community Court, focus largely on
            quality-of-life offenses such as possession of an open
            container of alcohol, aggressive panhandling, disorderly
            conduct, and low-level theft, through a variety of responses.
            These community courts frequently require community service to
            ``pay back'' the community. They also seek to reduce the
            likelihood of future offenses by linking offenders with
            services they may need, such as drug treatment, job training,
            and mental health services. Community input is a key element of
            the community court. At town hall meetings judges go to the
            community to listen to their concerns and learn what the court
            can do to strengthen our communities and to improve public
            confidence in the justice system.
                                   technology
        To enhance service to the public, to operate more efficiently, and
    to support our strategic goal of improving court technology, the Court
    has undertaken a number of technology initiatives. I would like to
    highlight a few of these.
    Integrated Justice Information System (IJIS)
        I am very pleased to report that we have completed implementing the
    Integrated Justice Information System (IJIS) throughout the Superior
    Court. This multi-year technology initiative was designed to facilitate
    case management and linkage of family members (which is essential to
    implementing the one family, one judge principle in Family Court), to
    enhance automation of the Court's business processes, to equip
    employees with productivity-enhancing tools, to provide a seamless
    exchange of information between the Court and other local and national
    criminal justice agencies, and to enhance services to the public by,
    among other things, enabling case filing and payment of fees in one
    location. As IJIS is enhanced, electronic case access and filing will
    be available through the Internet. IJIS has consolidated 19 different
    databases and provides comprehensive information to judicial officers.
    IJIS implementation has also given us an opportunity to improve
    information sharing within and among the District's child welfare and
    criminal justice agencies.
    E-filing
        In a related step in the automation of case processing, the
    Superior Court last fall expanded e-filing. After a transition period,
    e-filing became mandatory for Civil II cases for parties represented by
    counsel. E-Filing provides the public and the legal community with
    user-friendly, low-cost access to the Courts. The new system allows
    documents filed with the Superior Court to be transmitted over the web
    for acceptance into the IJIS. The system generates electronic
    notifications to all parties, as well as to the judge in the case. E-
    filing was implemented in the Superior Court in May 2005 to increase
    the timeliness, efficiency, and accuracy of court filing.
    Web-based Juror Services
        To enhance services for jurors, the Court initiated an interactive
    juror website that allows jurors to view their last or next scheduled
    date of service, complete the juror questionnaire, and defer their
    service for up to 90 days online.
                                   conclusion
        Mr. Chairman, Senator Brownback, the D.C. Superior Court is proud
    of our efforts to enhance the administration of justice, to be
    responsive to the community we serve, and to implement technology that
    enhances our service to the public. We appreciate the support Congress
    and the President have shown in helping us carry out all of those
    goals, and we believe we have been good stewards of the taxpayers'
    hard-earned funds. We hope that the Court's request for funding for
    personal services adequate to bring our vacancy rate down from 13
    percent to a more normal 3-4 percent will meet with the subcommittee's
    approval.
        Thank you for this opportunity to address the subcommittee. I would
    be pleased to answer any questions you may have.

        Senator Durbin. Mr. Quander.
    STATEMENT OF PAUL A. QUANDER, JR., ESQ., DIRECTOR,
                COURT SERVICES AND OFFENDER SUPERVISION
                AGENCY
        Mr. Quander. Good afternoon, Mr. Chairman. I'm pleased to
    appear before you today to present the fiscal year 2008 budget
    request for the Court Services and Offender Supervision Agency
    for the District of Columbia, which includes the District of
    Columbia Pre-Trial Services Agency.
        CSOSA's fiscal year 2008 budget request of $190.3 million
    includes $140.4 million for the Community Supervision Program,
    which supervises sentenced offenders in the community on
    probation, parole or supervised release, and $49.9 million for
    the Pretrial Services Agency, which supervises and monitors
    pre-trial defendants.
        Our fiscal year 2008 request increases total funding by 6
    percent or $10.7 million over fiscal year 2007. The majority of
    the requested increase, $6.2 million, will enable us to absorb
    salary and general schedule cost increases without curtailing
    program services.
        The Community Supervision Program requests an additional
    $2.1 million adjustment to base to achieve full implementation
    of a major program enhancement, our Residential Re-entry and
    Sanctions Center (RSC). This increase will allow us to open the
    Re-entry and Sanctions Center's sixth and final unit which will
    serve the female offender and defendant populations.
        The RSC, as the center is commonly referred to, is a
    tremendous resource for CSOSA and the citizens of the District
    of Columbia. It will enable us to provide re-entry programming
    for high risk offenders and defendants at the point of release.
    We can also respond quickly to noncompliant behavior,
    intervening before new criminal activity occurs. Research tells
    us that both strategies are critical to successful supervision.
        When CSOSA was established in 1997, reducing the high
    caseload of probation and parole officers was a top priority.
    While we have lowered general supervision caseloads to the 50
    cases per officer recommended by the American Probation and
    Parole Association, high pre-trial defendant caseloads continue
    to pose a serious risk to public safety.
        The Pretrial Services Agency's general supervision units
    supervise or monitor approximately 3,500 defendants on each and
    every day. In fiscal year 2006, many pre-trial supervision
    officers in these units carried an average caseload of 115
    defendants. At this level meaningful supervision cannot be
    maintained.
        In choosing to impose pre-trial supervision, the court
    assumes that release conditions will be enforced and
    infractions will be reported. With the current high caseloads,
    PSA is not able to provide the level of supervision that the
    court expects.
        PSA requests $1.6 million and nine full-time equivalent
    positions to lower its general supervision caseloads to 75
    defendants per pretrial supervision officer. While still higher
    than neighboring jurisdictions, this caseload will result in
    closer supervision and more timely response to infractions.
        Technology is an essential component of effective
    supervision. PSA also requests $768,000 and three full-time
    equivalent positions to expand the technology available to pre-
    trial services officers. This request would add wireless
    cellular and global positioning systems monitoring capability
    to PSA's existing electronic monitoring program.
        Wireless cellular technology extends electronic monitoring
    to defendants who do not have a hard wired home telephone.
    Global positioning system (GPS) monitoring would allow PSA to
    quickly determine a defendant's location and track his or her
    movements. In addition, GPS monitoring can be used to notify
    authorities when a defendant violates a court order by
    approaching a school, known drug area or victim's home.
        In the 10 years since its founding, CSOSA has transformed
    community supervision in the District of Columbia. As a young
    agency we are still building critical elements of our
    infrastructure. Initiatives such as information technology,
    disaster recovery, fully modernized personnel and financial
    information systems and other enhancements are essential to
    ensuring our full compliance with Federal regulations.
        We also face continued facility challenges, particularly at
    300 Indiana Avenue--the building that we share with the
    Metropolitan Police Department.
        In closing I would like to thank the ranking member,
    Senator Brownback for his past efforts to make funding
    available to us for transitional housing. Lack of appropriate,
    affordable housing continues to be a major obstacle to
    successful re-entry.

                               PREPARED STATEMENT

        CSOSA's fiscal year 2008 budget enables us to continue
    implementing proven strategies to protect the public through
    effective community supervision. We look forward to the
    subcommittee's support of this request and I look forward to
    responding to any questions that this subcommittee may have.
    Thank you very much.
        Senator Durbin. Thanks, Mr. Quander.
        [The statement follows:]
                   Prepared Statement of Paul A. Quander, Jr.
        Chairman Durbin and Members of the Subcommittee: I am pleased to
    appear before you today to present the fiscal year 2008 budget request
    for the Court Services and Offender Supervision Agency (CSOSA), which
    includes the D.C. Pretrial Services Agency (PSA). CSOSA was established
    by the National Capital Revitalization and Self-Government Improvement
    Act of 1997 (the Revitalization Act). Following a three-year transition
    period under the leadership of a trustee, CSOSA was certified as an
    independent Executive Branch agency on August 4, 2000.
        CSOSA's fiscal year 2008 budget request of $190.3 million is
    comprised of a $140.4 million request for the Community Supervision
    Program, which supervises sentenced offenders in the community on
    probation, parole, or supervised release, and a $49.9 million request
    for PSA, which supervises and monitors pretrial defendants. Our fiscal
    year 2008 request increases total funding by 6 percent, or $10.7
    million, over fiscal year 2007 enacted levels.
        The majority of the requested increase, $6.2 million, would enable
    us to absorb salary and General Schedule cost increases without
    curtailing program services. The Community Supervision Program requests
    an additional $2.1 million adjustment to base to achieve full
    implementation of a major program enhancement, our residential Reentry
    and Sanctions Center (RSC). This increase will allow us to open the
    RSC's final unit, making the program model, which emphasizes intensive
    assessment, case planning, and treatment readiness services, available
    to the female offender population. We look forward to having all six
    units in operation.
        The RSC is a tremendous resource for CSOSA, enabling us to provide
    reentry programming for high-risk offenders at the point of release,
    thereby increasing the likelihood that they will succeed in the
    community. This program is also available to high-risk defendants on
    pretrial release. Most individuals who complete the program then enter
    CSOSA's substance abuse treatment continuum. They often require
    placements in residential, transitional, and outpatient services to
    complete treatment. CSOSA continues to look at ways to maximize
    treatment efficiency and ensure that we make as many successful
    placements as possible.
        The RSC also facilitates our quick response to defendants' and
    offenders' non-compliant behavior before it escalates and leads to new
    criminal activity. Research tells us that timely intervention and
    consistent sanctions are critical to effective community supervision.
    With the RSC, CSOSA has greatly increased its capacity to provide both.
        When Congress passed the Revitalization Act in 1997, one of the
    most distressing conditions facing the new agency was the high
    caseloads carried by D.C.'s probation and parole officers. In many
    instances, these caseloads, often exceeding a hundred cases per
    officer, prohibited meaningful levels of contact and monitoring.
    Probation and parole officers could often do little more than check for
    new warrants and process paperwork. Meaningful assessment, referrals to
    treatment and other services, and field visits were virtually
    impossible.
        The Community Supervision Program therefore made lower caseloads
    its first priority. General supervision caseloads have been lowered to
    the 50 cases per officer recommended by the American Probation and
    Parole Association. Specialized caseloads, for higher-risk offenders or
    those with significant mental health issues, are even lower.
        These lower caseloads, coupled with improved technology, have
    enabled our officers to implement a level of intervention that was
    previously unthinkable. In fiscal year 2006, Community Supervision
    Officers partnered with Metropolitan Police Department (MPD) officers
    on over 7,000 joint field visits, or accountability tours, monitoring
    over 4,000 high-risk cases. This year, we also implemented an automated
    assessment instrument that uses over 200 separate data elements,
    collected during an in-depth interview with the offender, to measure
    and score the offender's risk level. This data informs a prescriptive
    supervision plan that addresses each offender's programming needs.
    Without this level of contact or knowledge, we cannot hope to achieve
    our long-term goal of substantially reducing recidivism among the
    15,000 offenders we supervise, of whom 6,300 are classified as high-
    risk. Lower caseloads are the baseline condition necessary for us to
    achieve our public safety mission.
        The high-risk defendants under PSA's supervision pose a similar
    risk to public safety. PSA supervises or monitors approximately 5,500
    men and women every day. Approximately 3,500 of them are assigned to
    PSA's General Supervision Units. In fiscal year 2006, many Pretrial
    Supervision Officers (PSOs) in those units carried an average caseload
    of 115 defendants--significantly above the level at which probation and
    parole caseloads were once deemed too high to maintain meaningful
    supervision.
        Defendants released to General Supervision have been charged with a
    range of offenses. In fiscal year 2006, 28 percent of those cases were
    charged with crimes that are statutorily defined as dangerous and/or
    violent; 37 percent were charged with crimes against persons. Even
    though many of these defendants are potentially eligible for pretrial
    detention, the Court has determined that initial, supervised placement
    in the community is appropriate. In making that determination, however,
    the Court expects that supervision will occur, conditions of release
    will be enforced, and non-compliance will be reported promptly.
        With the current high caseload ratios, PSA is not able to provide
    the supervision that the Court expects. In fiscal year 2006, 48 percent
    of defendants released with drug testing conditions were non-compliant
    three or more times. Each of these violations warranted a response by
    the PSO. With such high caseloads, PSOs often cannot respond quickly,
    despite the statutory requirement that every violation be reported to
    the prosecutor and the Court.
        PSA data from fiscal year 2004 reveals that timeliness is
    particularly important when the defendant has a history of domestic
    violence. Of 400 defendants with domestic violence charges who were
    rearrested while on pretrial release, about a third were rearrested for
    another domestic violence incident. These rearrests also tended to
    occur earlier in the supervision period than rearrests of defendants
    with other charges.
        PSA requests $1.6 million and 9 FTE to lower its General
    Supervision caseloads to 75 defendants per PSO. While still higher than
    neighboring jurisdictions, this caseload will facilitate closer
    supervision and more timely response to infractions. Nationwide,
    federal pretrial supervision caseloads range from 40 to 75 cases per
    officer. Defendants prosecuted in the District of Columbia typically
    have more extensive prior criminal records than do defendants in
    federal courts, and are often in need of employment, education, and
    treatment services. Effective supervision of these defendants cannot
    take place with caseloads higher than 75 cases per officer.
        Technology is an essential component of effective supervision and
    can greatly improve the officer's ability to monitor behavior. PSA also
    requests $768,000 and 3 FTE to expand technological tools available to
    Pretrial Service Officers. This request would fund the addition of
    wireless cellular and Global Positioning Systems (GPS) monitoring to
    PSA's existing electronic monitoring program. These two newer, more
    effective technologies are currently being used in many jurisdictions
    to monitor defendants who cannot be effectively supervised using
    traditional electronic monitoring. Wireless cellular technology extends
    this type of monitoring to defendants who do not have a hard wired home
    telephone. GPS monitoring would allow PSA to quickly determine the
    location of a defendant at any time as well as track his or her
    movement. In addition, GPS monitoring can be used to notify the
    authorities when a defendant enters restricted areas, such as schools,
    known drug areas, or a victim's neighborhood, in violation of the
    court's orders. Combining reduced caseloads with technological
    enhancements will enable PSA to achieve maximum efficiency in the
    supervision of high-risk defendants. GPS supervision has proven very
    effective in the Community Supervision Program, where it is primarily
    used as a short-term sanction for high-risk offenders.
        Since becoming a federal agency in August 2000, CSOSA has
    transformed community supervision in the District of Columbia. Using
    best practices, advanced technology, and wide-ranging collaborations,
    we are helping the men and women we supervise to change their lives. In
    doing so, we make a positive impact on our city and our field. People
    are hearing our message: After CSOSA's presentation on partnerships at
    last summer's Black Police Association International Education and
    Training conference, a delegation from the United Kingdom's National
    Probation Service arranged to spend a week with us. They have taken our
    program model back home to Manchester, England, to inform how community
    supervision occurs there.
        We look forward to demonstrating the results of our efforts. We
    will soon complete our initial three-year recidivism study. Later this
    spring, we will implement a performance accountability system modeled
    on New York State's ``Parole Stat.'' We recently completed the first
    phase of a comprehensive study of our supervision practices. And we
    continue to work with our partners in implementing new and promising
    strategies: Through the Criminal Justice Coordinating Council, we are
    currently working with the U.S. Marshals Service, the U.S. Parole
    Commission, the D.C. Superior Court, the U.S. Attorney, the MPD, and
    the Washington faith community to bring Fugitive Safe Surrender to our
    city. This program, which has resulted in the surrender of thousands of
    fugitives with non-violent and misdemeanor warrants, has been
    successfully implemented in Cleveland and Phoenix, and is also planned
    for Indianapolis. I am committed to bringing it to the District of
    Columbia. Not only will it safely remove fugitives from our streets, it
    will also give many of these men and women the opportunity to reclaim
    their identities and re-enter their communities.
        As a young agency, we have made substantial progress, though much
    work remains to be done. Some critical elements of our infrastructure--
    such as Information Technology (IT) disaster recovery, fully modernized
    personnel and financial information systems, and other enhancements
    necessary to ensure our full compliance with federal regulations--are
    still being implemented. We also face continued facilities challenges,
    particularly at 300 Indiana Avenue, the building we share with the
    Metropolitan Police Department. Addressing these issues is essential to
    our continued maturation as an agency.
        In 1997, the District of Columbia faced a community supervision
    system that was overburdened and under-resourced. We have revived that
    system, turning the nation's capital into a national leader. Our fiscal
    year 2008 budget enables the continued implementation of these proven
    strategies. We look forward to the subcommittee's support of this
    request.

        Senator Durbin. Ms. Buchanan.
    STATEMENT OF AVIS E. BUCHANAN, ESQ., DIRECTOR, PUBLIC
                DEFENDER SERVICE
        Ms. Buchanan. Good afternoon, Mr. Chairman. My name is----
        Senator Durbin. If you'll make sure you activate the mic,
    thank you.
        Ms. Buchanan. Thank you. Good afternoon, Mr. Chairman. My
    name is Avis Buchanan and I have the honor of serving as the
    Director of the Public Defender Service for the District of
    Columbia. I come before you today to provide testimony in
    support of PDS's fiscal year 2008 budget request.
        The Public Defender Service for the District of Columbia,
    or PDS, is an independent legal organization governed by a
    Board of Trustees. PDS is widely recognized as one of the best
    public defender offices in the country and is, in my humble
    opinion, the best.
        In the District of Columbia both PDS and the local courts
    separately provide constitutionally mandated defense
    representation to people who cannot afford to pay for their own
    attorney. Under the District's Criminal Justice Act, the courts
    appoint PDS generally to the more serious, more complex, more
    resource intensive and time consuming criminal cases.
        The courts assign the remaining, far more numerous but less
    serious cases and almost all of the misdemeanor and traffic
    cases, to a panel of approximately 350 prescreened private
    attorneys who was appointed to cases under the District's
    Criminal Justice Act and who are known as CJA attorneys. This
    dual system of representation is used in the Federal criminal
    justice system and is the model favored by the American Bar
    Association as an effective and cost efficient system.
        Approximately 110 staff attorneys at PDS and a similar
    number of administrative staff represent children and adults in
    the most serious felony cases, criminal appeals, serious
    delinquency cases, parole revocation matters, involuntary civil
    commitment cases in the mental health system and the Superior
    Court's Drug Court Treatment Program.
        Our fiscal year 2008 budget request parallels our request
    for fiscal year 2007: $32.7 million or 5 percent above the
    enacted level for fiscal year 2007, which was a level of $30.9
    million.
        With these funds PDS will absorb salary and inflationary
    increases to continue to improve our human capital management
    and comply with the D.C. Court of Appeals' request to do more
    to help reduce the backlog of cases pending before that court--
    all while sustaining the high quality advocacy that the
    criminal justice system is accustomed to seeing from PDS.

                            FAVORABLE SURVEY RESULTS

        PDS's fiscal year 2006 accomplishments are exemplified in
    the results of two surveys PDS conducted as part of its
    strategic planning work.
        During fiscal year 2006, we asked our counterparts in the
    CJA bar and some of our clients about their opinions of the
    quality of PDS's representation. Of the CJA bar respondents, 95
    percent agreed that PDS attorneys provide and promote quality
    representation to indigent adults and children facing a loss of
    liberty. Ninety-three percent agree that PDS promotes society's
    interest in the fair administration of justice. Over 90 percent
    agree that the training PDS provides to the CJA bar is
    effective and relevant to defending their clients.
        The client survey yielded one particularly compelling
    comment, slightly edited for clarity.

        ``To give you a sense of just how satisfied I am with the
    D.C. PDS, you must understand that I was convicted of three
    life offenses. I will most likely die in prison. I know that
    most clients cannot appreciate just how good the quality of PDS
    is. Had I been a rich man, if I'd had an obscene amount of
    money to pay a WASPy, white shoe firm, I could not have gotten
    a better defense. I was defended with an aggression by lawyers
    that showed a range and depth of knowledge and experience that
    I had never before witnessed in a member of the civil
    service.''

        These survey results are consistent with the results of a
    survey of local, trial, and appellate judges that PDS conducted
    in 2004. One appellate judge wrote, ``Of all the litigants'
    counsel to come before the Court of Appeals on a regular basis,
    PDS lawyers are uniformly better. They give this judge, and I
    believe all judges, a sense that their clients are soundly and
    zealously represented while giving the court considered legal
    arguments. If I were facing prosecution in the District, I
    would want PDS to represent me.''
        I continue to be proud of the extraordinary work the staff
    of PDS has done in service to our clients. I would like to
    thank this subcommittee and the chairman for your time and
    attention to these matters and for your support of our work in
    the past.

                               PREPARED STATEMENT

        I would be happy to answer any questions the subcommittee
    may have. Thank you.
        Senator Durbin. Thank you.
        [The statement follows:]
                     Prepared Statement of Avis E. Buchanan
        Good afternoon Mr. Chairman and members of the Subcommittee. My
    name is Avis E. Buchanan, and I am the Director of the Public Defender
    Service for the District of Columbia (PDS). I come before you today to
    provide testimony in support of PDS's fiscal year 2008 budget request.
    We thank Subcommittee members for their support of our programs in
    previous years.
        With fiscal year 2006, the Public Defender Service added another
    year of providing excellent defense representation to people in the
    District of Columbia. Since 1970, when PDS was established as a model
    public defender serving in the newly created District of Columbia
    Superior Court, PDS has developed and maintained a reputation as the
    best public defender office in the country--local or federal. PDS has
    become the national standard bearer and the benchmark by which other
    public defense organizations often measure themselves in a number of
    practice and administrative areas.
        In fiscal year 2008, PDS plans to work with the District of
    Columbia Court of Appeals to reduce the court's backlog of criminal
    appeals, continue to support PDS's human capital improvement plans, and
    continue to better assess its baseline costs.
        PDS's fiscal year 2008 budget request supports PDS's human capital
    improvement plans by seeking a budget that keeps pace with inflationary
    increases and yet allows for PDS to build modestly on its human capital
    plans. PDS requests $32,710,000, a ``flat'' budget as compared with the
    President's fiscal year 2007 request,\1\ to permit the office to
    maintain fiscal year 2007 salary levels and most costs associated with
    inflation. PDS's fiscal year 2006 budget was slightly lower than the
    level of the President's fiscal year 2005 budget request; with this
    essentially ``flat'' fiscal year 2006 budget, PDS focused on increasing
    and improving its internal efficiencies and maintained stable staffing
    levels.
    ---------------------------------------------------------------------------
        \1\ The President's fiscal year 2007 budget request would have
    provided $32,710,000 for PDS. In February 2007, Congress funded PDS for
    the remainder of fiscal year 2007 at the level of $30,898,000, plus 50
    percent of the Cost of Living Allowance, for an effective fiscal year
    2007 budget of $31,103,000.
    ---------------------------------------------------------------------------
                                   background
        In 1997, Congress enacted the National Capital Revitalization and
    Self-Government Improvement Act of 1997 (the Revitalization Act),\2\
    which relieved the District of Columbia of certain ``state-level''
    financial responsibilities and restructured a number of criminal
    justice functions, including representation for indigent individuals.
    The Revitalization Act instituted a process by which PDS submitted its
    budget to Congress and received its appropriation as an administrative
    transfer of federal funds through the Court Services and Offender
    Supervision Agency (CSOSA) appropriation. The President's fiscal year
    2008 budget requests that PDS receive a direct appropriation from the
    Congress. In accordance with its enabling act, PDS remains a fully
    independent organization and does not fall under the administrative,
    program, or budget authority of CSOSA. Rather, due to the
    constitutional mandate it serves, PDS necessarily maintains a separate
    and distinct mission from the missions of CSOSA and the Executive
    Branch.
    ---------------------------------------------------------------------------
        \2\ Pub. L. No. 105-33, Title X (1997).
    ---------------------------------------------------------------------------
        In the District of Columbia, PDS and the local District of Columbia
    courts share the responsibility for providing constitutionally mandated
    defense representation to people who cannot pay for their own attorney.
    Under the District of Columbia's Criminal Justice Act (CJA),\3\ the
    District of Columbia courts appoint PDS generally to the more serious,
    complex, resource-intensive, and time-consuming criminal cases. The
    courts assign the remaining, less serious cases and most of the
    misdemeanor and traffic cases to a panel of approximately 350 pre-
    screened private attorneys (``CJA attorneys'').\4\ Approximately 110
    PDS staff lawyers are appointed to represent: the majority of people
    facing the most serious felony charges; a substantial number of
    individuals litigating criminal appeals; a significant number of the
    children facing serious delinquency charges; nearly 100 percent of
    people facing parole revocation; and the majority of people in the
    mental health system who are facing involuntary civil commitment.
    ---------------------------------------------------------------------------
        \3\ D.C. Code 11-2601 et seq. (2001 Ed).
        \4\ An additional 75 CJA attorneys handle juvenile matters.
    ---------------------------------------------------------------------------
        While much of our work is devoted to ensuring that no person is
    ever wrongfully convicted of a crime, we also provide legal
    representation to recovering substance abusers participating in the
    highly successful Drug Court treatment program, and to children in the
    delinquency system who have learning disabilities and require special
    educational accommodations under the Individuals with Disabilities in
    Education Act.\5\
    ---------------------------------------------------------------------------
        \5\ 20 U.S.C.  1400, et seq.
    ---------------------------------------------------------------------------
        The Public Defender Service, unique among local public defender
    offices in that it is federally funded, has always been committed to
    its mission of providing and promoting constitutionally mandated legal
    representation to adults and children facing a loss of liberty in the
    District of Columbia who cannot afford a lawyer, and PDS has had
    numerous significant accomplishments in pursuit of that mission. In
    addition, PDS has developed innovative approaches to representation,
    from instituting measures to address the problems of incarcerated
    clients who are returning to the community to creating a one-of-a-kind
    electronic case tracking system. Other public defender offices across
    the country have sought counsel from PDS as they have patterned their
    approach to their work after ours.
        As part of its statutory mission to promote quality criminal
    defense representation in the District of Columbia as a whole, PDS
    continues to provide training for other District of Columbia defense
    attorneys and investigators who represent those who cannot afford an
    attorney, and to provide support to the District of Columbia courts.
                            fiscal year 2008 request
        The Public Defender Service's fiscal year 2008 budget request is
    for funding at the same level as that contained in the President's
    fiscal year 2007 request, or $32,710,000. PDS's actual apportionment
    under the full year fiscal year 2007 Continuing Resolution is five
    percent lower at $31,103,000. PDS's fiscal year 2008 request requires
    that PDS absorb normal and customary business cost increases and new
    costs not previously identified as part of base level funding. This
    will be the second time within four years that PDS has requested to
    manage to an essentially flat budget: in fiscal year 2006, PDS proposed
    retaining a budget level of $29,535,000 that was slightly lower than
    the fiscal year 2005 enacted level of $29,594,000, net of rescissions.
    While managing in fiscal year 2008 to a budget level that is flat with
    the President's fiscal year 2007 budget will present a challenge for
    PDS, PDS believes it can accomplish this without adversely impacting
    the constitutionally mandated legal services it provides to individuals
    in the District of Columbia.
                             pds's immediate needs
        PDS faces two major challenges over the next several years that
    require planning and flexibility:
      --Escalating Baseline Costs.--PDS has been assessing and evaluating
            the true cost of its base funding since the passage of the
            Revitalization Act. In fiscal year 2008, PDS will have to
            absorb several items beyond its control that have not been
            previously included in PDS's base. For example, it has been
            determined that, starting in fiscal year 2008, as a federally
            funded entity, PDS must comply with the Federal Employees'
            Compensation Act (FECA).\6\ The law requires that the
            Department of Labor (DOL) submit a bill to each federal entity
            for the program liability that will occur in future years. PDS
            has received notice from DOL that PDS's FECA liability payment
            for fiscal year 2008 will be $130,000. Another cost beyond
            PDS's control is the cost of transcription services. Recordings
            must be reduced to transcripts for use in court proceedings. As
            law enforcement and the government rely increasingly on
            digitally recorded evidence, PDS's transcription costs will
            soar. PDS saw the first indications of this change in a recent
            case in which the transcription costs were $15,000. This change
            is estimated to increase PDS's transcription costs by $100,000
            annually by fiscal year 2008. A final example is the cost of
            mileage reimbursements. PDS is constitutionally required to
            investigate cases and meet with clients. Pre-trial case work
            requires investigators to travel many miles around the D.C.
            metropolitan area locating and speaking with witnesses, and
            meeting clients often requires trips to prison facilities
            throughout the mid-Atlantic region. The rate of reimbursement
            for mileage is not within PDS's control and is likely to be
            substantially higher in fiscal year 2008 than the current rate.
    ---------------------------------------------------------------------------
        \6\ 5 U.S.C.  8147 (1993).
    ---------------------------------------------------------------------------
      --Appellate Workload.--PDS is under unusual pressure from the
            District of Columbia Court of Appeals to expand its Appellate
            Division staff to help the Court meet its performance goal of
            reducing the time required to resolve cases. PDS has responded
            by hiring three new appellate attorneys (two of whom will be
            brought on board toward the end of this fiscal year), but is
            constrained by space limitations to respond further. This
            solution cannot be sustained over the long term, and PDS has no
            reasonable expectation that this workload pressure will abate.
        Despite these challenges, PDS believes it can manage to a
    restricted budget in fiscal year 2008. PDS plans to manage hire lag so
    that vacancies will not jeopardize client representation, but will
    generate savings in salary to help offset the usual labor cost
    increases expected in fiscal year 2008 and the increases in non-
    discretionary fixed costs (e.g., rent, litigation costs). By
    incorporating a longer hiring lag, by keeping about 10 positions
    unfilled, and by controlling costs, PDS will manage to the requested
    $32,710,000 that matches the fiscal year 2007 budget request.
        Any reduction in funds from the President's fiscal year 2008 budget
    request for PDS however, will directly impact services. PDS's budget
    line items are fixed, with little flexibility on the part of PDS to
    decrease spending. In PDS's fiscal year 2008 budget request, 77 percent
    is allocated to personnel and related benefit costs ($25,295,000 out of
    $32,710,000). Of the $7,415,000 budgeted for non-personnel budget
    costs, approximately 95 percent consists of fixed costs (e.g., rent,
    utilities, payroll and financial services, equipment maintenance and
    licensing, litigation costs). PDS has no capital expenditures and
    spends relatively little on training and conferences, outside travel,
    and library materials. Reductions in litigation expenditures impact the
    quality of the representation provided. Reductions in the already small
    non-lawyer professional staff impact PDS's ability to manage the
    organization efficiently and effectively. PDS cannot, as many agencies
    can, detail individuals from other divisions to fill the gap.
    Reductions in front line staff (e.g., lawyers, investigators) lower the
    number of cases PDS can manage and simply shift the burden for
    supplying these constitutionally mandated services to the court's
    Criminal Justice Act budget. Of the approximately 110 lawyers at PDS,
    only six do not handle any individual cases. All supervisors, most
    division chiefs, and even some of the executive staff handle cases
    along with their supervisory and administrative responsibilities.
        As detailed below in the accomplishments section, PDS plays a
    critical role in ensuring that all persons in the District of Columbia
    criminal courts receive due process. Failure to provide this
    fundamental right undermines the public's confidence in the criminal
    justice system and leads to wrongful convictions. While PDS's budget is
    a fraction of the cost of the entire criminal justice system in the
    District of Columbia, the high quality of PDS's performance is
    recognized by all the participants in the criminal justice system. The
    District of Columbia Court of Appeals and the Superior Court for the
    District of Columbia not only recognize this performance; \7\ they rely
    on it in countless serious cases. Diminishing PDS's capacity to provide
    representation to those who cannot afford counsel would diminish
    justice in the District of Columbia.
    ---------------------------------------------------------------------------
        \7\ Just recently, a senior judge on the D.C. Court of Appeals
    commented at the close of an oral argument that a junior PDS attorney's
    rebuttal argument was the best that the senior judge had ever heard.
    ---------------------------------------------------------------------------
                        fiscal year 2006 accomplishments
        As in previous years, PDS devoted substantial resources toward the
    majority of the most serious cases filed in the Superior Court's
    Criminal Division. In fiscal year 2006, PDS was assigned to 77 percent
    of the Felony One cases and to 65 percent of the Accelerated Felony
    Trial Court (AFTC) cases. Felony One cases include all homicides, and
    AFTC cases include all while-armed offenses that carry potential life
    sentences and are to be tried within 100 days. In another of PDS's key
    practice areas, mental health matters, PDS was appointed to 63 percent
    of the involuntary commitment cases filed in the District of Columbia.
        As part of its long-term human capital strategy, PDS has engaged
    the services of a consultant to assist in evaluating PDS's compensation
    and performance evaluation practices with the goal of maintaining the
    current culture of excellence and collaboration while updating and
    expanding the options available to PDS managers and improving the link
    between compensation and individual performance. Pursuant to this
    process, PDS laid the groundwork for adopting an improved salary scale
    for all PDS employees. Also, PDS has successfully transitioned to
    working with a new payroll service provider. The conversion has vastly
    improved record keeping. In addition, PDS has conducted two first-ever
    surveys--one survey of clients and one of CJA attorneys--in support of
    PDS's strategic plan and annual performance plan.
                        general program accomplishments
    Collaborative Work
        While well-respected and widely known for zealously advocating on
    behalf of clients in the criminal justice system's adversarial process,
    PDS also works closely with criminal justice agencies and the courts to
    make the criminal justice system function more efficiently and fairly.
        Collaborative work, essential to an efficient and fair criminal
    justice system, can pose obstacles to a legal entity such as PDS
    because PDS must always be mindful of its professional obligation to
    individual clients. PDS cannot waive any current or future client's
    right to assert a particular position or challenge a procedure. This
    can be frustrating to criminal justice agencies that are not similarly
    constrained. In addition, PDS's collaboration is often with traditional
    adversaries that view PDS with suspicion. Nonetheless, PDS continues to
    collaborate, producing both large and small changes that improve the
    criminal justice system.
        ``Safe Surrender'' Warrant Resolution Program.--During the past
    fiscal year, PDS has worked with a number of District of Columbia
    criminal justice agencies, both local and federal, to plan for the
    institution of the ``Safe Surrender'' program--a program that
    encourages individuals with outstanding arrest warrants and bench
    warrants to turn themselves in exchange for favorable consideration by
    the court. Initiated by the U.S. Marshals Service in Ohio to minimize
    the danger to law enforcement officers of locating and arresting these
    individuals, the program limits participation to those with less
    serious charges. The program collaborates with the faith-based
    community by obtaining the permission of a local church to use its
    facility as the site for implementation.
        Health Care Decisions for People with Mental Retardation or Mental
    Illness.--In fiscal year 2006, PDS led an effort to bring together the
    D.C. Council, the Office of the Mayor, the Office of the Attorney
    General, and a number of non-governmental organizations to improve the
    District's approach to substituted decision-making on behalf of persons
    without family support who lack the capacity to make their own health
    care decisions. PDS has represented many clients in the criminal
    justice system, in the juvenile delinquency system, and in the mental
    health system who were incapable of making medical decisions and who
    had no family. As a result, PDS has developed some expertise securing
    medical treatment for these disadvantaged clients. The District's law,
    which, for years, had been passed repeatedly on an emergency basis,
    permitted the District to make health care decisions for individuals
    with mental retardation, without regard to the individual's capacity to
    make those decisions. The District had proposed creation of a
    complicated and resource-intensive process that required the
    development of a panel to determine the capacity of a person with
    mental retardation to make urgent health care decisions and then to
    decide on behalf of anyone found incapacitated, whether or not to
    consent to the urgent medical procedure.\8\ Based on the experiences of
    PDS lawyers working on behalf of clients with mental retardation and
    clients with mental illnesses, PDS knew this approach would be unwieldy
    and would compromise the health and the decision-making rights of PDS's
    clients. PDS proposed, and the group adopted, legislation modifying the
    Health-Care Decisions Act, the laws governing the provision of services
    to people with mental retardation, and the guardianship laws to create
    an expedited process for the courts to appoint a temporary and limited
    guardian to address medical decisions in appropriate cases where a
    person has been deemed incapacitated under the Health-Care Decisions
    Act. Enactment of this legislation on a temporary basis late last fall
    has streamlined and improved the decision-making in urgent and routine
    medical treatment for some of the District's most vulnerable residents.
    ---------------------------------------------------------------------------
        \8\ Emergency medical situations already have streamlined
    procedures in place.
    ---------------------------------------------------------------------------
    Other Program Accomplishments
        PDS engaged in a number of activities during the past fiscal year
    that had significant implications for individual clients or that
    improved the overall administration of justice.
                Individual Clients
        The core work of PDS is the representation of individual clients
    facing a loss of liberty. The criminal justice system is premised on an
    adversarial system, and PDS has able adversaries in the District's
    Attorney General's Office and the United States Attorney's Office for
    the District of Columbia. A fair criminal justice system depends on
    having all components (judges, government, and defense) fulfill their
    respective roles. PDS plays a pivotal part in ensuring that all cases,
    whether they result in pleas or trials, involve comprehensive
    investigation and thorough consultation with the client, and that the
    trials constitute a full and fair airing of reliable evidence. As it
    has every year since its inception, PDS won many trials in fiscal year
    2006, fought a forceful fight in others, and found resolution prior to
    trial for many clients. Whatever the outcome, PDS's goal and
    achievement for each client was competent, quality representation.
        All of these cases and their outcomes are far too varied and
    numerous to recount here, and the ethical rules that protect all
    clients' confidences, regardless of their economic circumstances,
    preclude PDS from providing detailed examples. Instead, the following
    cases, absent identifying information, are a small sample of how
    competent, quality representation can change lives.
        Unlawful Detention.--In a case of mistaken identity, PDS obtained
    the release of a man who was unlawfully held at the D.C. Jail for two
    weeks for an offense he did not commit. The Community Defender Division
    (CDD) intervened to convince officials at the D.C. Jail and at the U.S.
    Marshals Service to release the client. The client had been detained by
    Maryland police authorities during a routine traffic stop. The police
    conducted a computer records check which revealed that a warrant had
    been issued in the District for someone with the same name as the
    client who had reportedly escaped from a halfway house in 2004. The
    client was arrested in Maryland and shortly thereafter was transported
    by the U.S. Marshals Service to the D.C. Jail, where he waited to be
    returned to the custody of the Bureau of Prisons because of his alleged
    abscondance from Hope Village.
        The client explained to the police, to the U.S. Marshals Service,
    and, eventually, to D.C. Jail officials that although he had served
    time in a Federal Bureau of Prisons facility, he had never been placed
    in a halfway house before, and he insisted that he had not been re-
    arrested since his release in 2005. Furthermore, the client told
    officials that someone had earlier stolen his ID card and that he had
    been the subject of a case of mistaken identity in the past. Even after
    the face of the person who had actually absconded from the halfway
    house appeared on the D.C. Department of Corrections computer database,
    D.C. Jail staff simply exchanged the client's picture with the one
    already in the database, effectively placing a charge on his record
    that he did not commit.
        The client's mother complained to PDS's CDD staff, frustrated
    because for two weeks, she had been trying to convince D.C. Jail
    officials that they were holding the wrong man. CDD staff interviewed
    the client at the jail and performed a records search. CDD staff
    determined that the client could not have been the person who had
    absconded in 2004 because the client had been serving his Federal
    Bureau of Prisons sentence at the time; the client was released from
    the D.C. Jail within 24 hours of when CDD staff began investigating the
    matter.
        Elderly Veteran.--A 70-year-old veteran was charged with losing
    contact with his parole officer and faced a parole revocation hearing
    as a result. The client, who has no family, is partially blind and
    partially deaf, has severe and numerous disabling medical conditions,
    and cannot walk unassisted. During one of his hospital stays, his
    rooming house was sold. When he was released, he had no place to stay
    and would sleep wherever he could. Homeless and ailing, he stopped
    going to meet with his parole officer who then issued a parole
    violation warrant for the client's arrest. He was held at the D.C. Jail
    pending his parole revocation hearing. Before his hearing, his PDS
    attorney and program developer collected volumes of medical records
    from the Veterans Administration, made appropriate referrals, and set
    up services that would allow him to function independently in the
    community. PDS even arranged for transportation to his new residence in
    the event that the U.S. Parole Commission decided to release him. After
    his hearing, not only was the client released, his case was closed--
    implicit acknowledgment that the client's and the community's interests
    were better served by the services PDS arranged than by those that the
    U.S. Parole Commission could provide.
        Disabled Children.--A trial attorney's newly arrested 13-year-old
    client did not know his mother's phone number (or the phone number for
    any relative whatsoever), or even how to spell his mother's name. He
    could not give any contact information to the police or to the court
    besides an address. The client's mother had only a cell phone, and no
    home phone. On the morning of the client's first appearance in juvenile
    court, the trial attorney called another PDS trial attorney at home to
    ask her if she could think of a way to get in touch with the client's
    mother. The second attorney volunteered to drive to the mother's house
    and see if she was home, and to bring her down to court if she was.
        The initial (release) hearing started, and the court's Social
    Services department and the prosecutor both recommended placing the
    client in secure detention, in part because of the lack of information
    about the client's social history and the fact that no parent was
    present. The client was crying and asking his attorney where his mother
    was. The court refused the trial attorney's request for a very short
    delay to allow her to find the client's mother. Because of the client's
    age, the court was disbelieving when the trial attorney explained that
    the client did not know his mother's phone number. During the hearing,
    the client's mother entered the courtroom. She had been worried all
    night because she had no idea where he was. She had been about to call
    the police when the second PDS trial attorney came to the house looking
    for her. The mother was able to explain to the court that her son is
    severely limited mentally and that he had trouble remembering her phone
    number despite her repeated efforts to teach him. The court released
    the client to his mother.
        Discovery Litigation.--Over the past fiscal year, PDS lawyers have
    continued to monitor the government's compliance with its obligations
    to disclose Brady \9\ evidence--evidence that is favorable for or tends
    to exculpate the client. What constitutes Brady evidence and when that
    evidence must be disclosed to the defense are strenuously disputed
    issues in Superior Court. PDS is at the forefront of this litigation,
    which has produced success at the appellate court level and a number of
    acquittals and dismissals at the trial court level. PDS has filed
    dozens of pleadings in trial cases over the past year and was asked to
    file a ``friend of the court'' brief in an appellate case addressing
    Brady and the government's conduct in a specific case. The appellate
    decision resulted in further trial court proceedings concerning what
    exactly was suppressed by the government and whether its suppression
    affected the outcome of the trial; other trial level litigation has
    resulted in a number of acquittals and, on occasion, determinations by
    the government that the charges should be dismissed.
    ---------------------------------------------------------------------------
        \9\ Brady v. Maryland, 373 U.S. 83 (1963).
    ---------------------------------------------------------------------------
                Appellate Division
        The Appellate Division's appellate litigation has an impact
    throughout the District's criminal justice system as decisions in its
    cases often establish or clarify the standards trial court judges and
    litigants must follow in criminal and juvenile cases. The complex and
    novel legal issues the Division is called upon to address are handled
    by its experienced and talented attorneys.
        Changing the Law.--In fiscal year 2006, in Wilson-Bey v. United
    States, the D.C. Court of Appeals issued a landmark unanimous en banc
    (full court) decision changing the standard for accomplice liability in
    the District of Columbia and bringing it in line with the standard used
    in the federal courts and most states. In the District of Columbia,
    since the late 1970s, the Court's decisions have approved jury
    instructions stating that an accomplice is legally responsible for the
    ``natural and probable consequences'' of the crime in which he
    intentionally participates. Since the early 1980s, PDS has argued in
    several cases that the Constitution requires that the government should
    have to prove the same intent element for an offense whether a
    defendant is charged as a principal or an accomplice. As PDS has
    argued, it is precisely when the defendant is merely an accomplice and
    did not commit the crime that the intent requirement becomes all the
    more important under traditional norms of criminal liability. In
    Wilson-Bey, PDS made this same argument as amicus curiae (friend of the
    court). The Court agreed with PDS and, in a scholarly 50-page opinion,
    unanimously held that the natural and probable consequences language
    erroneously omits the intent element of the offense charged, that the
    error is of constitutional magnitude, and that the government must
    prove all the elements of the offense, including premeditation,
    deliberation, and intent.
        Enforcing Constitutional Protections.--PDS recently argued
    successfully to the D.C. Court of Appeals in an amicus curiae (friend
    of the court) brief that there is no ``expert witness'' exception to
    the Confrontation Clause. In December 2006, the Court in Thomas v.
    United States \10\ held that a Drug Enforcement Agency (DEA) chemist's
    certified hearsay report is a paradigmatic ``testimonial'' document
    that clearly falls within the protections of the Sixth Amendment
    Confrontation Clause under the Supreme Court's watershed decisions in
    Crawford v. Washington \11\ and Davis v. Washington.\12\ In a lengthy
    and meticulously reasoned opinion, the Court traced the right of
    confrontation to its common-law roots and to the Framers' disdain for
    ``trial by affidavit,'' the ``primary evil'' targeted by the
    Confrontation Clause. Given that the DEA chemist's certificate is an
    affidavit-like document produced in anticipation of its use in a
    criminal trial and is relied upon by the government to prove an
    essential element of the offense, the Court ``agree[d] with [PDS] that
    `it is difficult to imagine a statement more clearly testimonial.' ''
    The Court also held that a defendant's ability to subpoena the chemist
    and call him as a hostile witness in the defense case does not satisfy
    the Confrontation Clause under Crawford. The Court again relied on
    PDS's brief, reasoning that, ``[i]f the defendant exercises his
    constitutional right to put the government to its proof and not put on
    a defense, the prosecution evidence--what [PDS] aptly calls `the
    misleadingly pristine testimonial hearsay of absent witnesses' ''--may
    appear deceptively probative in the absence of cross-examination.
    Across the country, courts are considering the admissibility of various
    ``expert reports'' without live testimony. The Thomas opinion will
    undoubtedly be highly influential, both because it so thoroughly
    addresses the issue and because the Court is so well-regarded
    nationally.
    ---------------------------------------------------------------------------
        \10\ Thomas v. United States, 914 A. 2d 1 (2006).
        \11\ Crawford v. Washington, 541 U.S. 36 (2004).
        \12\ Davis v. Washington, 126 S. Ct. 2266 (2006).
    ---------------------------------------------------------------------------
        Protecting Society's Interest in a Fair Trial.--In United States v.
    Mickens, PDS secured a remand from the D.C. Court of Appeals after a
    trial judge failed to interview a juror who sent a note during
    deliberations stating that the deliberations had deteriorated and that,
    as a result, he was unable to render a fair verdict. The Court of
    Appeals remanded the record to the trial judge so that he could do what
    he should have done before the verdict was taken and speak with the
    juror. At a hearing, the juror told the trial judge that the guilty
    verdict had been forced. The juror said he had agreed to a guilty
    verdict only because the foreperson had threatened him with physical
    violence and because the trial judge had ignored his pleas for help. In
    the end, the government dismissed the criminal charges, and PDS righted
    an injustice the juror had himself attempted to right some two years
    earlier.
        Protecting the Constitutional Right to Present a Defense.--The
    Appellate Division convinced the D.C. Court of Appeals that the trial
    court was wrong for refusing to admit testimony of a defense witness
    about an excited utterance made by the client. The client, after
    shooting a would-be robber in self defense, ran to his friend's house,
    ``shaking,'' ``hysterical,'' ``scared,'' and ``terrified.'' He told his
    friend that someone had tried to rob him. The trial court ruled that
    the friend couldn't testify about this statement because, as the
    defendant's friend, he was too interested in the case.
        The Court of Appeals held that the trial court was wrong in
    declaring the friend unreliable and barring him from testifying, ruling
    that the trial court made it impossible for the defense to present
    evidence related to the client's actions in response to the attack. The
    Court held that the client was thus prevented from presenting evidence
    crucial to his case, reversed the decision, and remanded the case to
    the trial court.
                Special Litigation Division
        The Special Litigation Division litigates systemic issues in the
    District of Columbia criminal justice system before every court in the
    District of Columbia--the Superior Court and Court of Appeals in the
    local system, and the District Court, the Court of Appeals, and the
    Supreme Court in the federal system. These are some of the highlights
    of SLD's fiscal year 2006 litigation:
        Incarcerated Young Adults.--In J.C., et al. v. Vance, et al., the
    Special Litigation Division seeks to compel the District of Columbia to
    provide special education services to eligible youth incarcerated in
    the D.C. Jail and the Central Treatment Facility (CTF). A final
    settlement agreement was filed in federal district court at the
    beginning of the year. This settlement was effectively a total victory
    for plaintiffs--the District agreed to bring its special education
    program into compliance with federal law. The first phase of the
    settlement, which called for the District to draft a set of policies
    and procedures addressing all aspects of the program (including program
    funding, infrastructure, staffing, curriculum, student screening and
    evaluation, and interagency collaboration) is now complete, and the
    parties have moved on to the implementation phase of the program. The
    District has a year to fully implement its special education program at
    the D.C. Jail and CTF. PDS is monitoring the District's efforts to
    ensure that it honors its commitments.
        Incarcerated Children.--PDS has litigated the lawsuit challenging
    the juvenile detention system in the District, Jerry M., et al. v.
    District of Columbia, et al., for 21 years, and a resolution of the
    case continues to appear possible. The lawsuit and the resulting
    consent decree focus on the conditions of the juvenile detention
    facilities and on the treatment and rehabilitation provided to youths
    at the facilities to reduce their chances of re-offending and to
    increase their chances of becoming productive members of the community.
    Three years ago, PDS's Special Litigation Division asked the court to
    appoint a receiver to oversee the District's Youth Services
    Administration (now the Department of Youth Rehabilitation Services
    (DYRS)) until the consent decree's mandates could be met. While the
    request was pending, the parties agreed to the appointment of a Special
    Arbiter in lieu of a receiver to bring the District into compliance by
    assisting the parties in creating a work plan to implement the consent
    decree. SLD and the District are now well on their way toward
    implementing a comprehensive work plan to address the systemic issues
    that have plagued the District's juvenile justice system for years. In
    the last two years since the Special Arbiter was appointed, the lawsuit
    has led to:
      --New Oak Hill Youth Center.--Plaintiffs and defendants worked with
            the D.C. Council to introduce legislation that resulted in an
            emergency bill to fast-track construction of the new facility.
            Plaintiffs and DYRS are continuing to work with the architects,
            who are national experts in the construction of juvenile
            facilities, in addition to consultants from Missouri (see
            below), and it appears that the facility that will replace the
            current youth secure detention facility will not only be a
            great improvement, but may be the premier juvenile facility in
            the nation. It is set to open in April 2008.
      --Missouri Youth Services Institute.--Plaintiffs and the Special
            Arbiter have worked with DYRS to hire consultants from the
            Missouri Youth Services Institute (MYSI) to implement reform at
            Oak Hill even before the new facility opens by equipping its
            staff with the training and tools to function daily as
            counselors, as opposed to correctional officers, and to operate
            well-run treatment programs. MYSI is comprised of former
            staffers who led what is widely regarded as the nation's model
            juvenile institutional reform effort in Missouri. DYRS has now
            opened four ``Missouri-style'' units at Oak Hill, and the
            physical plant and the services for youth at Oak Hill have
            dramatically improved. Through work with the court, the Office
            of the Attorney General, and the MYSI staff, DYRS has now
            successfully reduced the detained and committed populations
            such that there are only approximately 70 youth at Oak Hill
            (down from 260 in December 2004), all of whom are committed.
            The approximately 80 detained youth are all currently housed at
            the YSC (see below).
      --Youth Services Center.--Plaintiffs and the Special Arbiter also
            secured the hiring of Earl Dunlap, founder and former Executive
            Director of the National Juvenile Detention Association (NJDA),
            to work with staff at the Youth Services Center to improve
            safety, security, and operations. Mr. Dunlap and staff from
            NJDA are playing a vital role in the efforts to equip YSC staff
            with the skill set necessary to operate a safe and humane
            juvenile detention center.
      --Evening Reporting Centers.--Plaintiffs have worked with DYRS to
            open Evening Reporting Centers (ERCs) as alternatives to
            detention, which has resulted in significantly reducing the
            population of detained children. DYRS currently has two ERCs in
            operation, one located in Ward 4 (serving youth from Wards 1,
            2, and 4) and one in Ward 8 (serving youth from Wards 6, 7, and
            8). ERCs are a very intensive form of community placement,
            providing six hours of daily, face-to-face supervision by
            adults for the youths ordered into the facilities.
      --Expert Services.--Plaintiffs and the Special Arbiter have worked
            this past year on improving the quality-of-life and safety
            issues at the facilities, and have worked with top experts to
            prepare baseline reports on issues such as fire safety,
            housekeeping, key control, and mental health. These have turned
            into corrective action plans that have been filed with the
            court and have been models for implementing serious reforms at
            the institution. The parties are now awaiting the final
            baseline report for medical services.
      --Educational Initiatives.--With help from the plaintiffs and the
            Special Arbiter, DYRS successfully led a campaign to establish
            an alternative education model to replace the traditional one
            provided by D.C. Public Schools (DCPS). The Special Arbiter
            helped facilitate communications between DYRS and DCPS that
            helped produce an agreement for the replacement of the DCPS
            model. The new model is designed specifically for youth in
            secure custody and will include innovative and proven delivery
            models by providers with knowledge and experience in working
            with at-risk youth in the juvenile justice system. RFPs are
            currently being reviewed, and a charter school will be taking
            over the Oak Hill school in the fall of 2007.
                Community Defender Division
        The Community Defender Division assists children and adults who are
    confined in correctional facilities or who are returning to their
    communities after periods of incarceration.
        Expungement Summit.--In fiscal year 2006, PDS brought together 21
    service providers for its second Expungement Summit.\13\ Modeled after
    a successful program in Chicago, the Summit offered assistance to
    individuals with criminal records, determining whether the individuals
    might be successful in seeking to seal their arrest records and
    providing them with social services resources. Over 600 individuals
    participated, receiving assistance with job searches; interview skills;
    referrals for re-entry assistance, including the Work Opportunity Tax
    Credit; the Federal Bonding Program; disability benefits; public
    housing opportunities; and substance abuse treatment referrals. PDS not
    only collaborated with service providers, but also coordinated with the
    D.C. Council to create space at the Summit for the D.C. Council to hold
    a community-based hearing on proposed expungement legislation at the
    same location and same time as the Summit. PDS will continue to lead
    this collaborative effort to promote housing, gainful employment, and
    sound health care for ex-offenders returning to the District of
    Columbia.
    ---------------------------------------------------------------------------
        \13\ The service providers included Job Corps (Dept. of Labor);
    Jobs Partnership of Greater Washington; A-Men (Anacostia Men's
    Employment Network); Housing Counseling Services; EXCEL Institute;
    Neighborhood Legal Services Program (D.C.); D.C. Employment Justice
    Center; Washington Legal Clinic for the Homeless; the Better Way
    Program (Pilgrim Rest Baptist Church); Concerned Citizens on Alcohol
    and Drug Abuse (CCADA); D.C. Department of Employment Services (DOES)
    (Mobile Van); Samaritan Inns Intensive Recovery Program; D.C. Central
    Kitchen/Training Program; Healthy Babies Project (Mobile Van); D.C.
    Chartered Health Plan; Opportunities Industrialization Center for D.C.;
    Efforts; Court Services and Offender Supervision Agency; YouthBuild
    PCS; D.C. Prisoners Legal Services Project, Inc.; the Children's Law
    Center; D.C. Law Students in Court; and the University of the District
    of Columbia David A. Clarke School of Law.
    ---------------------------------------------------------------------------
        Re-entry Programs.--In fiscal year 2006, the Community Re-entry
    Program sponsored a day-long conference, ``Representing Combat Veterans
    in the Criminal Justice System,'' on providing assistance to veterans.
    The conference, which placed a special emphasis on veterans of the
    U.S.-Iraq war who are charged with criminal offenses, focused on the
    defenses and sentencing options available to them, and on the resources
    that are available for the health, employment, and education problems
    most encountered by veterans.
                Parole Division
        The Parole Division provides required representation to parolees
    facing revocation before the United States Parole Commission.\14\ This
    Division represents nearly 100 percent of the D.C. Code offenders
    facing parole revocation. Consistent with that, in fiscal year 2006,
    PDS handled over 95 percent of parole and supervised release
    revocations.
    ---------------------------------------------------------------------------
        \14\ The Revitalization Act shifted responsibility for D.C. parole
    matters from the D.C. Board of Parole to the United States Parole
    Commission. 28 C.F.R. 2.214(b)(1) and 2.216(f).
    ---------------------------------------------------------------------------
        Working with the U.S. Justice Department.--PDS's Parole Division
    continues to seek out areas of collaboration that will benefit
    individuals facing parole revocation. Most recently, PDS and the U.S.
    Department of Justice agreed to engage in ongoing discussions regarding
    revisions to the statute that governs proceedings before the U.S.
    Parole Commission. Because of the elimination of parole in the federal
    system, an increasing majority of the Commission's work consists of
    local District of Columbia matters as the number of federal parolees
    declines steadily. PDS's goal is to ensure that a new statute sets
    forth a fair and constitutional process for resolving matters before
    the Commission.
                Training
        PDS conducts and participates in numerous training programs
    throughout the year. The annual Criminal Practice Institute and the
    Summer Criminal Defender Training Program address the training needs of
    the court-appointed CJA attorneys and investigators. In fiscal year
    2006, PDS attorneys and investigators also taught sessions at many D.C.
    law schools and other institutions. PDS attorneys were also invited to
    teach elsewhere locally, including at the D.C. Bar, the National Legal
    Aid and Defender Association, and at D.C. law firms offering pro bono
    services in Superior Court cases.
        Visiting Chinese Lawyers.--PDS agreed to develop a modified version
    of its intensive training program for new PDS attorneys and of the
    accompanying training materials for lawyers visiting PDS from China.
    For two weeks, PDS provided these attorneys, working through
    translators, with lectures on criminal defense practice in the United
    States and with opportunities to participate in practical exercises in
    PDS's moot courtroom.
        Forensic Science Conference.--In the face of growing evidence that
    most wrongful convictions are based on erroneous eyewitness
    identifications, PDS's 2006 Forensic Science Conference, the fourth
    such conference, brought the latest social science research and experts
    in the field to Washington, D.C. The conference provided defense
    attorneys with the information and tools necessary to properly
    investigate cases, to guard against erroneous identifications, and to
    educate jurors and judges about pitfalls surrounding eyewitness
    identification procedures currently in use by many law enforcement
    agencies.
    Administrative Accomplishments
        Relying more extensively on technology, PDS continues to strive to
    be a model public defender in its administrative operations as it is in
    its client representation. PDS has created greater links between its
    payroll and finance operations, and has responded to emphasis from
    Congress on continuity of operations plans and telecommuting by
    exploring ways of supporting employees away from their offices. PDS has
    invested in new technology in the form of both hardware and software
    that allow key staff to have secure access to electronic files and
    databases from remote locations. Also, in its ongoing efforts to adopt
    federal best practices, PDS continues to incorporate the principles of
    the Government Performance and Results Act in the management of the
    office.
        Continuity of Operations.--PDS has upgraded its continuity of
    operations plan to make it more comprehensive and to incorporate the
    capacity (e.g., Blackberrys and docking stations) PDS has provided to
    staff to obtain remote access to their case files and to relevant
    databases. Currently, key managers have access to electronic files and
    databases from remote locations, and all staff have remote access to
    electronic mail. PDS will continue to develop the ability to support
    the technology that provides flexibility in work location and work
    schedule for all key staff. PDS is also tracking the continuity of
    operations plans of the various criminal justice agencies that would
    have to collaborate in the event of a disruption to the criminal
    justice system as a whole.
        Government Performance and Results Act.--Consistent with its
    strategic plan and annual performance plan, PDS conducted its first-
    ever client survey and its first-ever survey of CJA attorneys. These
    surveys are two of several--judicial, PDS employee, social service
    provider, CJA attorney, and client--that PDS plans to conduct regularly
    to assess its performance. Our strategic plan calls for the judicial,
    CJA attorney, and client surveys to be conducted on a staggered
    triennial schedule.
        The client survey was done on a pilot basis to test PDS's ability
    to locate and communicate with former clients, some of whom have moved
    and some of whom are incarcerated.\15\ The survey consisted of twenty
    questions that focused on issues such as client perceptions of PDS's
    attentiveness to clients and preparedness for court. The majority of
    the clients who responded agreed with statements such as, ``I felt my
    attorney was working hard for me,'' and ``[M]y PDS attorney was
    prepared to represent me before the D.C. judicial system, and ``[T]he
    PDS office staff treated me with respect and courtesy.''
    ---------------------------------------------------------------------------
        \15\ The difficulty PDS anticipated in surveying this group was
    confirmed by the fact that more than 50 percent of the surveys were
    deemed undeliverable to the clients' last known addresses.
    ---------------------------------------------------------------------------
        The eleven questions contained in the CJA bar survey related to the
    bar's assessment of PDS's effectiveness and to the quality and extent
    of PDS's support of the CJA attorneys. The survey responses reflected
    the value that the CJA bar places on the training PDS provides, and
    they identified areas where PDS can better serve those attorneys.
        Over 90 percent of the responding CJA attorneys generally agreed
    that PDS achieves its mission of providing and promoting quality
    representation to clients, protecting society's interest in the fair
    administration of justice, and providing helpful and relevant training
    to CJA attorneys. The survey revealed a definite interest among CJA bar
    members in having PDS use its website or other communication methods
    more frequently to provide regular updates on recent changes in
    criminal law and procedure.
        PDS's other performance measures include determining the rate at
    which clients are released pending their trial or hearing dates.
    Release is a goal of virtually every PDS client, and having a client in
    that status improves the staff's ability to prepare the case and
    represent the client overall. For fiscal year 2006, PDS had a target of
    having clients released in 65 percent of cases. PDS obtained clients'
    release in 62 percent of the cases.
        In addition, PDS measures the rate at which attorneys have their
    first substantive visits with their clients after appointment. PDS's
    expectation is that an attorney will meet with a newly assigned client
    as soon as possible. Building trust is key to developing a good
    attorney-client relationship, and meeting with a client right away is a
    fundamental step toward establishing that trust and creating a positive
    impression. Early meetings also assist the attorney with investigation,
    as leads get ``colder'' with time. While certain legitimate
    circumstances may interfere with an attorney's ability to see a client
    as soon as is preferable (e.g., the attorney may be in trial), PDS has
    nonetheless set a two-day standard for this to occur. For fiscal year
    2006, PDS had a target of having these initial meetings in 75 percent
    of the cases. PDS surpassed that target, achieving initial meetings
    within two days in 89 percent of the cases.
                                   conclusion
        I would like to thank the members of the Subcommittee for your time
    and attention to these matters. I would be happy to answer any
    questions the Subcommittee members may have.

        Senator Durbin. Ms. Gist.
    STATEMENT OF DEBORAH A. GIST, STATE EDUCATION OFFICER,
                GOVERNMENT OF THE DISTRICT OF COLUMBIA
        Ms. Gist. Good afternoon, Mr. Chairman, subcommittee, staff
    and guests. I'm Deborah Gist and I serve as the State Education
    Officer in the District of Columbia. I appreciate this
    opportunity to testify today on the success of one of our most
    valued programs in the District of Columbia, the D.C. Tuition
    Assistance Grant Program, or D.C. TAG.
        I'm here to present testimony in support of the President's
    fiscal year 2008 funding request and budget justifications for
    the D.C. TAG program. Let me say, for the record, how much
    Mayor Fenty and our community appreciate the past and continued
    support of the Senate Appropriations Committee and you, in
    particular, Mr. Chairman, for the D.C. TAG Program.
        The D.C. Tuition Assistance Grant Program deserves to be
    funded for fiscal year 2008 at the mark established by the
    President for two reasons. Because the District of Columbia
    counts on the funding to provide affordable college options to
    its residents and most importantly because the program is
    working.
        We are increasing the number of college going District
    residents. Simply put, the D.C. TAG Program levels the playing
    field by providing District residents with the same
    opportunities that high school graduates from around the
    country receive--the ability to pay for college at the in-State
    or near the in-State tuition rate.
        In fiscal year 2006, the State Education Office provided an
    average TAG award of $6,393 to more than 4,800 students. In the
    District of Columbia, graduating seniors have a single option
    for public higher education, the University of the District of
    Columbia.
        The university is a relatively young institution that
    celebrated its 30 year anniversary in 2006. While the
    university educates thousands of students every year, a single
    State school is not the solution for every student in the
    District of Columbia who wants to go to college.
        In every State in the Nation students are able to choose
    from among multiple public universities and colleges on
    multiple campuses. For example, neighboring Maryland has 14 4
    year public university campuses and 16 community colleges.
    State colleges and universities are well known for providing
    quality public education at an affordable price.
        The D.C. Tuition Assistance Grant Program provides this
    choice for the students in the District of Columbia. By
    bridging the gap between the in-State and out-of-State tuition
    rates so that students can attend colleges and universities in
    other jurisdictions at affordable prices.
        The TAG Program provides up to $10,000 per academic year,
    up to a lifetime maximum of $50,000 for District residents who
    have a high school diploma and start college by the age of 24.
    Additional options include up to $2,500 for community colleges,
    for historically black colleges, and universities--and for
    private universities in the D.C. metropolitan area.
        In 1999, prior to the existence of the D.C. TAG Program,
    District residents paid an average $7,890 annually to attend an
    institution of higher education--compared to a much more
    favorable national rate of $3,215 annually.
        As you well know Congress, therefore, passed the District
    of Columbia College Access Act and the D.C. TAG Program has
    received a great deal of bipartisan support since then. To
    date, including the current school year, the program has
    dispersed nearly $160 million to the benefit of over 11,000
    District residents.
        Since the inception of the D.C. TAG Program and the 2000/
    2001 school year, the number of District of Columbia public
    school students who go on to attend an institution of higher
    education has doubled. That's a phenomenal achievement for a
    program that's only in its seventh year.
        Some characteristics of D.C. TAG Programs are as follows:
    38 percent of D.C. TAG grantees are the first in their family
    to attend a college or university.
        And I'll actually point out that this number has decreased
    because the more and more students that we're sending to
    college and their siblings are going as well, it used to be
    over 50 percent; 68 percent of awards are provided to students
    with very low or low income levels as defined by the estimated
    contributions families are expected to make to support their
    child's educational needs.
        The District of Columbia, like other governments across the
    country, is focused on encouraging as many of its residents as
    possible to go to college. Recent research suggests that only
    28 percent of jobs within the District of Columbia belong to
    District residents. This in large part is a result of the
    skills required to attain these jobs. In 2005, for example, 75
    percent of new jobs created required at least some
    postsecondary education.
        The D.C. Tuition Assistance Grant Program is a central
    component of the District's strategy to enhance college access
    and college degree attainment in the District of Columbia. As a
    result TAG is changing the way of life for an entire generation
    of District residents and I would like to ask this
    distinguished committee to fund the D.C. TAG Program for $35.1
    million for fiscal year 2008.

                               PREPARED STATEMENT

        I appreciate this opportunity and I look forward to
    answering your questions.
        [The statement follows:]
                     Prepared Statement of Deborah A. Gist
        Good afternoon, Mr. Chairman, members of the Senate Subcommittee on
    Financial Services and General Government, Committee staff and guests.
    My name is Deborah Gist and I serve as the State Education Officer in
    the Executive Office of the Mayor for the District of Columbia. I
    appreciate the opportunity to testify today on the success of one of
    our most valued higher education programs in the District of Columbia,
    the D.C. Tuition Assistance Grant (D.C. TAG or TAG) program. I am here
    to present testimony in support of the President's fiscal year 2008
    funding request and budget justification for the D.C. TAG program. Let
    me say for the record how much Mayor Fenty appreciates the past and
    continued support of the U.S. Senate and the Appropriations Committee
    for the D.C. TAG program.
        The D.C. TAG program deserves to be funded for fiscal year 2008 at
    the mark established by the President for two reasons: because the
    District of Columbia counts on the funding to provide affordable
    college options to its residents, and because the program is working to
    enhance the number of college going District residents. Simply put, the
    D.C. TAG program levels the playing field by providing District
    residents with the same opportunity that high school graduates around
    the country receive, the ability to pay for college at or near the in-
    state tuition rate. In fiscal year 2006, the State Education Office
    provided an average TAG award of $6,393 to more than 4,800 students.
        In the District of Columbia, graduating seniors have a single
    option for public higher education--the University of the District of
    Columbia. UDC is a relatively young institution that celebrated its
    30th anniversary in 2006. While UDC has done an admirable job of
    educating thousands of students every year, a single state school is
    not the solution for every student in the District of Columbia who
    wants to go to college.
        In every state in the nation, students have the option to attend
    multiple public universities and colleges on multiple campuses. For
    example, neighboring Maryland has 14 four-year public university
    campuses and 16 community colleges. State colleges and universities are
    well known for providing quality education at an affordable price. The
    D.C. Tuition Assistance Grant program provides greater opportunities
    for students in the District of Columbia to obtain a college education
    by bridging the gap between the in-state and out-of-state tuition rate
    so that students can attend colleges and universities in other
    jurisdictions at affordable prices. The TAG program provides up to
    $10,000 per academic year--up to a lifetime maximum of $50,000, for
    District residents who have a high school diploma and start college by
    the age of 24. Additional options include:
      --Up to $2,500 per academic year to bridge the gap between in-state
            and out-of-state tuition at a community college;
      --Up to $2,500 per academic year to attend a historically-black
            college or university anywhere in the nation; and
      --Up to $2,500 per academic year to attend a private university in
            the Washington, DC metropolitan area.
        In 1999, prior to the existence of the D.C. TAG program, District
    residents paid an average of $7,890 annually to attend an institution
    of higher education compared to a much more favorable national tuition
    average of $3,215 annually. As such, Congress passed the District of
    Columbia College Access Act (Public Law 106-98) at the urging of the
    District's Congressional Delegate Eleanor Holmes Norton. It is
    important to note that the D.C. TAG program has received a great deal
    of bipartisan support since its inception. To date, including the
    current school year, the program has disbursed nearly $160 million for
    the benefit of over 11,000 D.C. residents.
        Since the inception of the D.C. TAG program in the 2000-2001 school
    year, the number of District of Columbia public school students that go
    on to attend an institution of higher education has doubled. That's a
    phenomenal achievement for a program that's only in its seventh year.
    The characteristics of TAG recipients are as follows:
      --38 percent of D.C. TAG grantees are the first in their family to
            attend a college or university;
      --67 percent of tuition awards are provided to District of Columbia
            public school students;
      --79 percent of D.C. TAG students attend public colleges and
            universities upon receiving a tuition award;
      --over 90 percent of awardees attend college full-time; and
      --68 percent of awards are provided to students with very low or low
            income levels as defined by the estimated contribution families
            are expected to make to support their child's educational
            needs.
        In an effort to increase the graduation rates of students receiving
    the tuition assistance grant, the State Education Office is actively
    communicating with partner colleges and universities to ensure that
    D.C. TAG grantees are receiving the appropriate retention and academic
    services needed to support our students as they work to earn a college
    degree.
        Numbers alone, however, fail to tell the story of the D.C. TAG
    program's success. This is one of those occasions where our grantees or
    their families tell their own stories far better than I ever could. So
    I will share with you the words of Wezlynn Davis, whose daughter Niya
    graduated from North Carolina Central University last year. Ms. Davis
    writes,

        ``We, the Davis family, have been truly blessed by the District of
    Columbia Tuition Assistance Program. I don't know what we would have
    done without it. . . . I hope that the program continues in the future
    and the process won't change much because I have another youngster who
    will be attending college. He wants to be a culinary chef and has his
    mind set on it. . . . Thank you for all you and others are doing to
    make sure our black children succeed. It gives them self worth and a
    sense of pride knowing that they can afford to attend college. I know
    my daughter is happy. She graduated on May 6, 2006, the first . . . of
    my children to do that. I am ecstatic.''

        This is just one example of success as a result of the D.C. TAG
    program.
        The Government of the District of Columbia, like other governments
    across the country, is focused on encouraging as many of its students
    as possible to go to college. Recent research suggests that only 28
    percent of jobs in the District of Columbia belong to Washington, DC
    residents. This is in large part a result of the skills required to
    obtain these jobs.\1\ In 2005 for example, 75 percent of the new jobs
    created in the District of Columbia required at least some post
    secondary education.\2\ In addition, the Washington, DC metropolitan
    region has one of the highest college degree attainment rates in the
    country with over 42 percent of the region's residents having at least
    a bachelor's degree and 20 percent having graduate degrees.\3\ The
    District's students have to be able to successfully compete for jobs in
    this highly educated environment. The D.C. Tuition Assistance Grant is
    a central component of the District's strategy to enhance college
    access and college degree attainment in the District of Columbia.
    ---------------------------------------------------------------------------
        \1\ Fuller, Stephen S., Ph.D., The District of Columbia Chamber of
    Commerce State of the Business Report 2006, D.C. Chamber of Commerce,
    February 2006.
        \2\ Ibid.
        \3\ Greater Washington Initiative, Internet, http://
    www.greaterwashington.org/pdf/RR_2006.pdf, Accessed 29 March 2007, p.
    12.
    ---------------------------------------------------------------------------
        As a result of the Tuition Assistance Grant, the way of life is
    changing for an entire generation of young people, and I would like to
    call upon this distinguished committee to re-authorize D.C. TAG once
    again for fiscal year 2008 at the funding level requested by the
    President.
        I appreciate the opportunity to testify today, and I look forward
    to answering your questions.
                                  Attachment A

                                                                                ATTACHMENT B.--NUMBER OF AWARD RECIPIENTS
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                               2000-2001           2001-2002           2002-2003           2003-2004           2004-2005           2005-2006
                            State                        ------------------------------------------------------------------------------------------------------------------------   Total   Increase
                                                           Public    Private   Public    Private   Public    Private   Public    Private   Public    Private   Public    Private             2000-06
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
    Alabama.............................................         2  ........         8         1         9         4        16         5        10        10        10        12        87       +20
    Arkansas............................................         1  ........         2  ........         2  ........         2  ........         2  ........         1  ........        10  ........
    Arizona.............................................         7  ........        15  ........        16  ........        17  ........        20  ........        16  ........        91        +9
    California..........................................        14  ........        29  ........        24  ........        32  ........        31  ........        35  ........       165       +21
    Colorado............................................         8  ........        19  ........        27  ........        35  ........        40  ........        39  ........       168       +31
    Connecticut.........................................         1  ........         3  ........         3  ........         5  ........         3  ........         5  ........        20        +4
    Delaware............................................        65  ........       112  ........       134  ........       135  ........       155  ........       171  ........       772      +106
    District of Columbia................................  ........       313  ........       451  ........       585  ........       584  ........       592  ........       506     2,525      +193
    Florida.............................................        25  ........        44         9        67        14        84        21       101        19       108        21       513      +104
    Georgia.............................................         5  ........        10        29        11        65        18        74        19        79        26        73       409       +94
    Hawaii..............................................  ........  ........  ........  ........         1  ........  ........  ........         1  ........         1  ........         3        +1
    Idaho...............................................  ........  ........  ........  ........  ........  ........         1  ........         1  ........  ........  ........         2  ........
    Iowa................................................         8  ........         7  ........        11  ........         8  ........         8  ........         7  ........        49        -1
    Illinois............................................         4  ........         2  ........         2  ........         3  ........         3  ........         2  ........        16        -2
    Indiana.............................................         3  ........        10  ........        14  ........        19  ........        25  ........        29  ........       100       +26
    Kansas..............................................         1  ........         1  ........         2  ........         4  ........         4  ........         2  ........        14        +1
    Kentucky............................................         2  ........         3  ........         4  ........         8  ........         9  ........        10  ........        26        +8
    Louisiana...........................................         6  ........         4         1         5        10        13        15        25        18        12        14        97       +20
    Maine...............................................  ........  ........         1  ........         1  ........  ........  ........  ........  ........         2  ........         4        +2
    Massachusetts.......................................         2  ........         8  ........        11  ........         7  ........         7  ........        11  ........        46        +9
    Maryland............................................       562        17       827        13       914        31     1,053        27     1,128        13     1,069        18     5,672      +508
    Michigan............................................        26  ........        33  ........        38  ........        57  ........        89  ........       115  ........       358       +89
    Minnesota...........................................         4  ........         2  ........  ........  ........         1  ........         2  ........         1  ........        10        -3
    Missouri............................................        12  ........         2  ........         6  ........         6  ........         2  ........         3  ........        31        -9
    Mississippi.........................................  ........  ........         5  ........         6  ........         3  ........         7  ........         4  ........        25        +4
    Montana.............................................         1  ........         1  ........         2  ........         4  ........         2  ........         2  ........        12        +1
    North Carolina......................................        87  ........       163        29       216       107       346       138       509       161       643       105     2,504      +661
    North Dakota........................................  ........  ........         1  ........         2  ........         1  ........         1  ........         1  ........         6        +1
    Nebraska............................................  ........  ........         1  ........  ........  ........  ........  ........  ........  ........         1  ........         2        +1
    New Hampshire.......................................  ........  ........         2  ........         2  ........         3  ........         4  ........         4  ........        15        +4
    New Jersey..........................................        10  ........        16  ........        18  ........        17  ........        27  ........        34  ........       122       +24
    New Mexico..........................................         2  ........         2  ........         2  ........         4  ........         2  ........         3  ........        15        +1
    Nevada..............................................  ........  ........  ........  ........  ........  ........         2  ........         2  ........         1  ........         5         1
    New York............................................        10  ........        17  ........        30  ........        39  ........        41  ........        44  ........       181       +34
    Ohio................................................        22  ........        40         1        53         4        63         8        72         6        69         4       342       +51
    Oklahoma............................................  ........  ........  ........  ........  ........  ........  ........  ........         5  ........         9  ........        14        +9
    Oregon..............................................         1  ........         1  ........         4  ........         4  ........         3  ........         1  ........        14  ........
    Pennsylvania........................................       131  ........       186  ........       270  ........       324  ........       335  ........       349  ........     1,595      +218
    Rhode Island........................................         1  ........         2  ........         4  ........         3  ........         1  ........         1  ........        12  ........
    South Carolina......................................        18  ........        29         2        28        10        39        21        41        23        40        23       274       +45
    Tennesee............................................        13  ........        16  ........        29         4        23         5        26         6        39         6       167       +32
    Texas...............................................         2  ........         7  ........        23         4        29  ........        41         1        48         1       156       +47
    Utah................................................         1  ........         2  ........         1  ........         2  ........         4  ........         4  ........        14        +3
    Virginia............................................       397       139       599       172       732       151       787       175       734       171       664       144     4,865      +272
    Virgin Islands......................................  ........  ........  ........  ........  ........  ........  ........  ........         1  ........         6  ........         7        +6
    Vermont.............................................         7  ........         7  ........        13  ........        22  ........        30  ........        34  ........       113       +27
    Washington..........................................         3  ........         4  ........         7  ........        11  ........        14  ........        16  ........        55       +13
    Wisconsin...........................................       114  ........        21  ........        33  ........        35  ........        49  ........        64  ........       316       -50
    West Virginia.......................................        79  ........        49  ........        61  ........        65  ........        77  ........        80  ........       411        +1
                                                         -------------------------------------------------------------------------------------------------------------------------------------------
          Grand Total...................................     1,657       469     2,313       708     2,838       989     3,350     1,073     3,713     1,099     3,836       927    22,430    +2,637
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

                                  Attachment C

        Senator Durbin. Thank you very much. Judges Washington and
    King, I direct these questions to you and you can decide
    between you who will respond.
        Budget submissions seek a total of $179.8 million for
    capital improvements and the President's recommendation calls
    for $52.5 million, that's only about 29 percent of what you say
    you need. What capital improvement projects would have to be
    forestalled, delayed, if we're not able to meet your request?

                          D.C. COURTS CAPITAL REQUEST

        Judge Washington. I think I'll try to handle that one, Mr.
    Chairman. The facilities master plan that was developed by the
    courts back in 2002 addresses all of our space needs and
    depends on our renovating and moving services out of the
    Moultrie Courthouse into other court buildings. Then we need to
    restack the Moultrie Courthouse to consolidate the Family Court
    to make sure all the services are located in the same family
    friendly location and that we're providing the breadth of
    services that we have been asked to provide and we, of course,
    want to provide to our citizens.
        A key part of this swing is to get the Court of Appeals out
    of the building to free up 37,000 square feet. Once the
    District of Columbia Court of Appeals is moved into the new
    building, the Superior Court, the trial court, will be able to
    use that space. In theory, the Superior Court can then restack
    and move operations into that vacated space and reconfigure the
    space that is currently where the Family Court is located to
    consolidate the Family Court.
        There are other buildings on our campus that will have to
    absorb some of the other Moultrie operations. So, ultimately,
    what the lack of funding ends up doing to us, is delaying all
    of these projects.
        In fact, those projects are then pushed back in time.
    Projects that are not funded include the Moultrie Courthouse
    renovation. I spoke about the Moultrie Courthouse renovation
    and reorganization and the restacking process and there are a
    number of projects that fall into that category, as you can
    imagine, when you're trying to reconfigure that space.
        In addition we need to move some of our operations, as I
    said, out of the Moultrie Courthouse into Building C, another
    building on our campus in order to consolidate our space and
    make room. That modernization project is not funded and those
    are the two large capital projects that will impact our ability
    to finally reconfigure Moultrie into the kind of Family Court
    and trial court that we want it to be.
        So, in essence the delay is a creating this gap between our
    move, the Court of Appeals move, out of the Moultrie building
    into the new Court of Appeals building and the opportunity that
    the Superior Court will have to configure their operations to
    meet the mandates that have been imposed.
        Senator Durbin. So if you had full funding, what's the time
    line?
        Judge Washington. If we had full funding, I would.
        Senator Durbin. At your request.
        Judge Washington. Yes. If we had the full funding right
    now, I would have to turn to our Administrative Services
    Director. There's a design phase that we have not undergone yet
    that precedes each of these restackings because we have to have
    money to do the design phase.
        Our best estimate is that if we got the funds today for
    these projects we would complete the renovations on our campus
    in 4 years.
        Senator Durbin. And so if you receive the President's
    recommendation, is that enough money for the design phase of
    this project?
        Judge Washington. No. The monies that are in the
    President's recommendation will only cover those costs that are
    associated with the old courthouse and the emergency electrical
    repairs.
        So, the monies for the design of the reconfigured Moultrie
    building are not included in the President's recommendation in
    this budget.
        Senator Durbin. I would like to address the perimeter
    security questions, and you talked about the need for $16
    million for perimeter security enhancements. Could you tell us
    a little bit about that?
        Judge Washington. If I can. This is based on a study by the
    U.S. Marshals Service.
        Let me preface this by saying that we've now moved back out
    onto our campus, through renovation of Building A. We are
    moving services and courtrooms into that facility, and into the
    old courthouse in fall 2008, hopefully, maybe the winter 2009.
        The need to create a perimeter around all of the campus has
    increased because we now will have critical operations in every
    building. The Marshals Service has determined that in order to
    protect, not only the courts, but the people who are going to
    be using our court system, we had to create a perimeter of
    security. We've done it as part of our master plan for
    Judiciary Square, a plan that's been approved both by the
    National Capital Planning Commission and by the Commission of
    Fine Arts.
        It includes security that will protect us from any threat
    from traffic that may be traveling up and down the public
    streets or any other attempts to harm the people who work
    inside the court building.
        That also includes perimeter security for the United States
    Court of Appeals for the Armed Forces, with whom we share space
    on Judiciary Square.
        Senator Durbin. So the marshals have security
    responsibilities for the entire campus as opposed to the
    Federal Protective Service, for example?
        Judge Washington. Yes.

                                  FAMILY COURT

        Senator Durbin. Ok, thank you. Judge King, I didn't mean to
    misstate your responsibilities earlier, but when we got
    together it was in establishing the Family Court and there were
    some projections about caseload and productivity that were made
    years ago. Can you give me an update on how that's going?
        Judge King. The caseloads have pretty much remained flat
    and in some cases have gone down a little bit because the city
    agency, the Child and Family Services Agency, is now not
    bringing some cases that were automatically sent to court
    before.
        What I can say is that the level of judicial attention,
    which was very much a discussion at the time of that bill, has
    gone way up with the result that the cases that are coming in
    are very strongly supervised and managed in exactly the way
    that, I think, all of us had in mind at the time of that act.
    It has given us the strength at the judicial level, the
    manpower strength, to handle the cases, with the attention and
    with all of them in the Family Court where they've all been
    consolidated, now in very much the way that, I think, Congress
    intended.
        Senator Durbin. Thank you. Mr. Quander, good to see you
    again. I think we met 5 years ago when I chaired the hearing on
    your nomination. Thank you for your dedication to public
    service.
        The opening of the final unit of the residential Re-entry
    and Sanctions Center is conditioned on receipt of funds
    requested in the 2008 appropriation of $2.1 million. With that
    funding you indicate you can meet the particular needs of the
    female offender population. How are you currently addressing
    those needs?
        Mr. Quander. The design of the unit is to take a special
    segment of the female population that has a chronic history of
    chronic substance abuse coupled with criminogenic factors that
    indicate that that offender poses a severe risk to the public.
        What we're doing now is we're using the drug treatment
    option and supervision options that we have currently
    available, but it's not sufficient to address the needs of this
    special type of offender. The benefits that the Re-entry and
    Sanctions Center allows is that we will have an opportunity for
    28 days to really assess--to really prepare that individual for
    treatment.
        It's almost like we are enhancing our investment in
    substance abuse treatment because a lot of the women have a lot
    of issues that some of the men don't have, child care issues.
    Many of the women have been victims of crimes. There's a lot of
    reasons why they fall victim to substance abuse.
        The contract treatment works better if we can provide a
    road map for the treatment provider as to what some of those
    underlying issues are. We will stand a better chance of getting
    those women through the process successfully and united with
    their families.
        So, the Re-Entry and Sanctions Center serves as a much
    needed bridge, especially for this population that has so many
    other issues than the men, but there's a tremendous need.
        Just yesterday, I was visiting a facility in Northern
    Virginia that actually houses women and their children. It's a
    special facility designed to meet their needs with a lot of
    emphasis in the mental health area, substance abuse, child
    care. It's a wrap around facility. It's that type of approach
    that I think will get us the best results as we invest in the
    future of these offenders because we think that they can make
    it. We know they can, if they're given the proper support and
    the RSC will allow us to give that proper support.
        Senator Durbin. How many persons does the Sanctions and Re-
    entry Center presently serve?
        Mr. Quander. Now, we have, I believe four floors that are
    operational. When it's fully operational with the six units,
    we'll be able to treat at least 1,200 people in the center
    throughout the course of the full year.
        We're anticipating that the next unit to come on line will
    be the mental health unit and then subject to the funding for
    2008, we will bring the women on board.
        Senator Durbin. So, 1,200 for the entire year?
        Mr. Quander. For the entire year, once we're fully staffed
    and operational.
        Senator Durbin. Say at this day, what do you think your
    census or population is today?
        Mr. Quander. It is probably in the area of about 80.
        Senator Durbin. What portion of those served are newly
    released parolees?
        Mr. Quander. The vast majority of the individuals, the
    males that are in the facility now are newly released parolees.
    We have four floors that are in operation now.
        One of the four floors is a pretrial services floor.
    Another is a sanctions floor for those individuals who have
    been in the community but have started to slip--who have
    started to fall. The beauty of this program is that it allows
    us to get them before we have to go to court, before we have to
    do any other type of intervention and bringing in another
    party.
        We can get them back into the center, get them readjusted
    and get them refocused on their mission and on their purpose.
    So, it gives us great flexibility without taxing some of our
    partners before it's really time to bring them in.
        Senator Durbin. What proportion of those you serve present
    substance abuse problems?
        Mr. Quander. Seventy percent of the individuals that we see
    on probation, parole, supervised release, for sentencing
    agreements or civil protection orders upon entry into
    supervision are testing positive for substance abuse.
        Our population, as we test, at least 51 percent of the
    individuals that are undergoing consistent testing with the
    agency, have tested at least once, positive, 51 percent, but at
    intake it's close to 70 percent.
        Senator Durbin. I think we talk a lot about recidivism and
    you've been observing a population that is prone to recidivism.
    What do you think poses the greatest challenge there that we
    should be considering? Is there one element that clearly needs
    more attention or more resources?
        Mr. Quander. It's always a tough question, but if I had to
    limit it just to one area, I would have to concentrate on the
    area of substance abuse. The reason I say that is, when you
    talk about maximizing your resources, the research is very
    clear. There is no dispute anymore, but that substance abuse
    treatment really works.
        It has an impact on reducing crime. It has an impact on
    reducing those individuals who are in the criminal justice
    system, but it also has an impact, as we spoke earlier about
    the women, because women have children and if they have
    children and if the mothers are using, they're not providing
    the type of supervision.
        So, those children are essentially guaranteed to come into
    the criminal justice system. If we don't address the problem--
    and so that would be the one area that--if I had to limit it to
    just one.
        I think that there should be additional attention and
    resources, and I think you get the best return on your
    investment if we go in that direction.
        Senator Durbin. Your top priority reported here is in
    reducing caseload ratios for community supervision officers and
    I believe this should be replicated if it could be with
    pretrial services agencies.
        Mr. Quander. Yes.
        Senator Durbin. You stress an additional $1.6 million and
    nine FTEs will enable you to lower your PSA officer ratio to 75
    to 1. How does that compare to other jurisdictions in the
    region?
        Mr. Quander. Actually, if we received what is requested in
    the President's budget, that would be a tremendous step in the
    right direction and will allow us to meet our goals. But it is
    still higher than some of the surrounding jurisdictions that
    have a lower case load.
        It is manageable. It was extremely high. We can work with
    the 75 to 1 ratio, but it is higher still than some of the
    surrounding jurisdictions.
        Senator Durbin. Give me a comparison number, pick it from
    the sister jurisdiction as to what the ratio number might be.
        Mr. Quander. 65 to 1 in Montgomery County. I believe in the
    Norfolk, Virginia area, it's as low as 45 to 1.
        Senator Durbin. Thank you. Ms. Buchanan, how much is a
    public defender paid in the District?
        Ms. Buchanan. Our salaries are Federal General salaries;
    attorneys with no experience generally enter at the GS-11, step
    1 rate, which is approximately $55,000, and, based upon
    seniority they can go up to GS-14, step 10.
        Senator Durbin. And the grade 14?
        Ms. Buchanan. Very few staff attorneys remain at PDS long
    enough to attain the GS-14, step 10 staff salary which is
    approximately $120,000.
        Senator Durbin. What kind of luck do you have in recruiting
    attorneys for $55,000 a year?
        Ms. Buchanan. PDS is special, and employment at PDS is
    highly sought after; we average approximately 600 applicants
    for what works out to be six to eight openings per year in
    PDS's Trial Division, our largest group of lawyers. We hire
    once a year in the Trial division. We do that because we train
    the attorneys before they are permitted to handle any cases.
    Every year, we receive many applications from the top students
    at the top law schools across the country.
        So we have not experienced any problem recruiting highly
    qualified and motivated candidates. People do not come for the
    salaries; they come because they're dedicated to PDS's mission
    and to our clients.
        Senator Durbin. And what's the usual tenure of these public
    defenders? How long do they stay at the agency?
        Ms. Buchanan. Staff attorneys' tenure varies widely. We ask
    for a minimum 3-year commitment, but we have attorneys who have
    remained at PDS for as long as 14 or 15 years--those are the
    outliers. I would say that our attorneys stay an average of 5
    to 6 years.
        Senator Durbin. I've been trying to pass a bill here,
    passed it in the Senate Judiciary Committee, for a student loan
    repayment for State and local prosecutors and defenders.
        Ms. Buchanan. Yes.
        Senator Durbin. Is this an issue with your new attorneys?
        Ms. Buchanan. Yes. Many of our attorneys come to PDS
    saddled with heavy debt loads and continue to work at PDS with
    these heavy debt loads. We've been intently following your
    legislation as it would benefit many of our attorneys. The
    District of Columbia has enacted its own student loan repayment
    program and we are trying to have our attorneys become eligible
    for this program.
        Senator Durbin. Are they participating now?
        Ms. Buchanan. No, right now the D.C. Bar Foundation, which
    administers the program, has deemed PDS attorneys to be
    ineligible to receive these benefits primarily because of PDS's
    quirky status as being neither Federal nor State or district.
    Because we are federally funded, the D.C. Bar Foundation
    considers our attorneys ineligible for the program, however, we
    continue to work with the foundation to change this
    determination.
        Just today, I had another conversation with the foundation
    about a different rationale for having our attorneys become
    eligible to participate in that program.
        Senator Durbin. Back in the dark ages when I was a student
    at Georgetown Law School, I can recall the Defender Program in
    the District. It enjoyed a great reputation then, but the
    numbers you just given me of 600 applicants for six jobs is an
    amazing indication.
        Ms. Buchanan. Yes.
        Senator Durbin. Of what a challenging professional
    opportunity you offer.
        Ms. Buchanan. PDS is a wonderful place, and there are
    several of us who have left PDS and returned. I am one. PDS's
    deputy, Peter Krauthamer, and PDS's general counsel, Julia
    Leighton, who are here with me, are others. PDS is a very
    special place. It's hard to leave and it's wonderful coming
    back. I have no regrets.
        Senator Durbin. Great, thank you.
        Ms. Buchanan. Thank you.
        Senator Durbin. Ms. Gist, if you take a look at the
    national average of college graduation for low income minority
    students, it's 47 percent and if you take a look at the D.C.
    TAG experience, the 2000/2001 freshman class, 38 percent
    graduated from college. In the next year D.C. TAG, 2001/2002,
    36 percent graduated. Why do you think there's that disparity?
        Ms. Gist. Well part of the reason is that the national
    average that you're referring to is based on a 6-year
    graduation rate.
        And actually I can update you with some new numbers that we
    have based on more students from the cohorts that we have
    information about who's graduated.
        So, just as an example from the 2000/2001 cohort, we have a
    46-percent graduation rate. So we were.
        Senator Durbin. So, its 6 year to 6 year, is that what
    you're saying?
        Ms. Gist. Well, it's kind of hard for us to compare year to
    year, but it's definitely not more than 6 years because it
    hasn't been 6 years, so, less than 6 years.
        We now know that it's 46 percent for that cohort, right
    now, 41 percent for the 2001/2002 cohort and 40 percent for the
    2002/2003 cohort. So, again, compared to a 6-year rate, we feel
    confident about those graduation rates.
        So, I will also say that we have, even with that, I mean,
    retention has become a very big issue for us. We are a leader
    in the ``Double The Numbers'' initiative in the District of
    Columbia, which is a District-wide effort to focus on college
    going and college graduation and so, for example, we are the
    lead on a sector group that's working with college access
    providers across the District.
        Right, exactly that was the report that kicked it off and
    so retention is a serious priority for us right now.
        Senator Durbin. The process you go through is fairly
    automatic in terms of qualification for assistance and so I'm
    wondering if your agency takes a look at any of these factors
    that lead to information about why 60 percent, or 59 percent,
    fail to graduate.
        I know that you're getting closer to the national average,
    but the national average is disappointing too.
        Ms. Gist. Yes.
        Senator Durbin. So, do you have any anecdotal evidence or
    personal experience with the students that would give some
    guidance?
        Ms. Gist. Well, we definitely have anecdotal evidence. We
    have a lot of anecdotal evidence because we work daily with
    these students and we see what they experience in trying to go
    to college and many times they're coming back because of the
    family situation and they have to come back to work to help
    support their family, just as an example.
        But, I'll also say that we have done a lot to improve our
    data system and our collection of data. So that we can do a
    more sophisticated analysis to help us to target services to
    students, such as--are these financial situations that are
    occurring, are they social? Do they need psychological/social
    types of support to help them stay in school and like I said
    this is a major priority for us right now.
        Senator Durbin. And it goes without saying that those who
    don't finish college, even with your assistance, may end up
    carrying a student debt out of that experience even if they
    don't carry a diploma out of it.
        Ms. Gist. That's true and District students unfortunately
    end up taking a lot of remedial courses their first year and
    that's something that we're focused on right now, too, is
    making sure that all of our students are graduating college
    ready.
        Because what we know is that they end up taking remedial
    courses and so they are paying, essentially, to make up for
    what they didn't get in K-12 and that's just unacceptable.
        So we need to have them graduate from high school, college
    ready, work ready, and college ready, so that when they hit
    college, they're earning credit toward graduation from the
    first day, which right now, most of our students are not doing.
        Senator Durbin. And that's not unique to the District of
    Columbia. In the State of Illinois, about 50 percent of those
    admitted to community colleges are not performing at 12th grade
    level. They spend the first year or two trying to catch up to
    what they should have learned in high school.
        Ms. Gist. Right.
        Senator Durbin. They call themselves college students, but
    they're really trying to become college students, and paying
    college tuition in many places to reach that goal.
        Is there going to be change in the differential between in-
    State and out-of-State tuitions at the major schools that you
    provide students for? Maryland and Virginia, I think account
    for almost one-half of the students from the District of
    Columbia. Over the period of this program, has there been a
    change?
        Ms. Gist. Yes, and we've definitely seen the average amount
    that each student gets per year creeping closer and closer to
    the cap which is $10,000 per year. In fact, I believe, I'm not
    sure if we gave you this chart, but we do have a graphic that
    shows the increase in the, like I said, it's pretty dramatic if
    you look at the numbers of students who are now either at the
    cap or close to the cap; thanks, John.
        Senator Durbin. The $50,000 cap?
        Ms. Gist. Right, well the $10,000 per year--right--for the
    maximum. So, for example in 2000/2001, well actually, I'll use
    the second year because the first year was a bit of an outlier.
        But in 2001/2002 school year we had a total of 202 students
    who were at or above the $10,000 a year differential and in the
    past school year, that was 989. So, it has increased and that's
    due largely to the increases in the costs of tuition.
        Senator Durbin. But what we're focusing on is the
    difference between in-State and out-of-State college tuition,
    are we not?
        Ms. Gist. Right.
        Senator Durbin. What I'm asking is whether over the years
    have universities, like the University of Maryland and
    University of Virginia increased that differential between in-
    State and out-of-State?
        Ms. Gist. The States tend to, when we're increasing
    tuition, they're more likely to increase the out-of-State
    tuition than they are the in-State tuition for obvious reasons.
    So, yes, that difference has increased.
        Senator Durbin. Let me talk about the total amounts of
    money here. I've been through this before when we created this
    program and I've watched it.
        In the first 4 years of the program, Congress appropriated
    $17 million annually. The President sought the same level in
    fiscal year 2005, but the amount appropriated increased 49
    percent to $25.6 million, and then in 2006, another 30 percent
    increase to $33.2 million. The funding you seek this year is
    double what was provided in each of the first 4 years and it
    concerns me.
        Now, when we put in the appropriations bill to the District
    of Columbia the following language last year, the subcommittee
    remains concerned of significant annual funding increases in
    the brief 2 year span, it was a signal that program costs have
    the potential of growing well beyond the level at which future
    Federal funding may be available or sustainable.
        So to address this concern, the subcommittee directed the
    Mayor and the D.C. State Education Office, which I know you're
    associated with, to work closely with Congress to take steps to
    institute effective cost contained measures and regular reports
    to Congress about the effects of these efforts.
        The subcommittee directed the District to fully explore
    non-Federal sources of additional funds to augment Federal
    investment, so what cost contained measures have you
    instituted?
        Ms. Gist. There are several that we've already instituted
    and then there are many others that we've studied that are much
    more dramatic. We hope that we won't have to institute those.
        The ones we've already instituted include reducing the
    total amount for community college reimbursement, eliminating
    summer school. We no longer pay for summer school, creating 24
    years of age as the maximum for participation in this program
    and establishing 6 years as a maximum amount of time that
    students have from the first semester they're enrolled to
    receive funding.
        So, those are just a few things we've done already. We've
    also seen, Senator, the costs, although they have continued to
    rise, see them begin to level off. While it looks quite
    dramatic that it's now 35 and it was 17 for several years, the
    actual growth has been very, very consistent over those years.
        The reason that the requested appropriation was staying the
    same and then increased so dramatically was because there was
    carryover. So even in the first year, for example, there was
    about $20 million in carryover, but then was able to be used
    and each year we've sort of dipped deeper and deeper into that
    carryover to today where we have very little carryover.
        Senator Durbin. You said that there were some more
    strenuous ideas that you hoped you didn't have to turn to. What
    would they involve?
        Ms. Gist. Yes, those are, you know, we could reduce the
    maximum award from $10,000, but as I've shared with you
    already, we have students at the maximum and I'll remind you
    that what this program does is essentially levels the playing
    field for our students, so our students still have to come up
    with a tuition just like any other student in this State and
    then they also have to come up with their room and board and
    their books and so forth.
        And so, if they're having to come up with their tuition and
    then they're also having to pay anything that's over the cap
    which is--right now--$10,000 then that's just an added burden.
    So if we had to reduce that to $8,000 for example, that would
    affect a significant number of students.
        We've also looked at the possibility of making it a needs
    based program if we had to, make it a merit based program.
        But again, this dramatically changes the intention of the
    program, which was to mimic a State university for the system,
    the way that other students in other States have and a student
    in another State, a student doesn't have to be, demonstrate
    need in order to pay the in-State tuition rate or doesn't have
    to have a certain grade point average (GPA) to pay the in-State
    tuition rate.
        And I'll also just add quickly that we have seen increases,
    the District has committed increased funding to other types of
    programs. So, for example, we overmatched by a 5 to 1 factor,
    the D.C. LEAP Program which is, of course, as you know, a
    Federal program, but we match it 5 to 1 in order to provide
    needs based aid for students and we also, Mayor Fenty has a new
    program in his budget for this year that's focused toward
    adults who are attending school, since these programs don't
    support those residents.
        Senator Durbin. What percentage of the students who are
    assisted by this program are Pell grant eligible?
        Ms. Gist. Sixty-eight percent, as determined by their
    estimated family contribution are very low or low. I'm not sure
    how that connects to Pell, but 68 percent.
        Senator Durbin. Have you managed to realize any savings
    from these changes that you've discussed, cost containment
    measures?
        Ms. Gist. We have, they have not been very dramatic, but
    we've also, in some cases, like the 6-year cap, the 6-year
    maximum and the 24 age, those are longer term. Those are
    savings that we would realize over time.
        Senator Durbin. Now, I want to ask, if I can, if the rest
    of the panel will bear with me, I don't know how interested you
    are in the student assistance program, a couple, just maybe one
    or two more questions.
        By our calculations, it appears that you have currently
    about $7 million in carryover funds going into fiscal year
    2008. Is that about right?
        Ms. Gist. Well, we carried over $9 million from last fiscal
    year, but we received, as you know, in 2007, we received $33
    million and we carried over $9 million, but we've already spent
    about $40 million. So, again, we use that carryover each year.
    So, already this year, we've allocated about, almost $39.5
    million for awards.
        Senator Durbin. You seek $35 million this year, I mean,
    pardon, the next fiscal year, with a carryover of $7 million;
    it appears that $39 million is the figure that you're going to
    deal with again.
        Ms. Gist. Well, we anticipate having very little carryover
    this year, about $3 million. At this point we don't know what
    our carryover will be from 2007 because 2007 isn't over yet.
        Senator Durbin. Your program is authorized for $33 million?
        Ms. Gist. The program was appropriated in 2007 for $33
    million.
        Senator Durbin. Okay.
        Ms. Gist. And that was just due to the continuing
    resolution. We were actually approved for $35.1 million.
        Senator Durbin. Okay, well, we'll work on that and we'll
    work with you on that as well and I thank you all for your
    patience this evening. You're definitely in overtime and it was
    nice of you to be patient and wait for me to come by here and I
    apologize for that.
        That's not something I like to see happen to anybody.
    You're all very busy and have important things to do and this
    is a new subcommittee and I'm trying to learn a lot of things
    about new programs, some that I have been familiar with, but I
    thank you for being here, all of you on the panel.

                         ADDITIONAL COMMITTEE QUESTIONS

        We'll keep the record open for my colleagues. Some
    questions will be submitted to you, if you could respond to
    them in a timely basis it will help us complete our work on the
    appropriations bill.
        [The following questions were not asked at the hearing, but
    were submitted to the District for response subsequent to the
    hearing:]
             Questions Submitted to Chief Judge Eric T. Washington
                  Questions Submitted by Senator Sam Brownback
                     district of columbia court of appeals
        Question. Would you please explain your request for IT
    improvements, and what is driving the need for upgrades in that area?
        Answer. Industry standards recommend replacement of computer
    systems (LAN/WAN systems) after five years; the Court of Appeals is
    overdue in meeting that standard, as it installed its current computer
    system in 2001. Significant needs of the court that will be met by the
    acquisition of a new LAN include the following.
    Client Workstations/LAN-WAN Servers
        The court's operating system is Windows 2000, which is no longer
    ``supported'' by Microsoft. The court plans to upgrade to a VISTA
    operating system, which will enhance security of the system and enable
    the court to obtain continued vendor ``support'' for the operating
    system.
        A new LAN will also enable the court to move from single to dual
    processors, which will ensure the capability and usability of current
    and future software products and prepare the court for imaging and an
    electronic-filing environment. Storage capacity and speed of operation
    will be improved by moving from IDE to SATA hard drives on clients and
    SANS storage systems for file servers and imaging technology.
    Switches/Routers
        A new LAN will enhance network performance, increase LAN/WAN
    security, and provide for future growth by moving from 10 mbps hubs to
    100/1000 mbps switches and routers. Increased bandwidth is needed for
    high speed imaging, real-time, internet audio streaming of oral
    arguments in the court to expand accessibility for the public, and to
    provide increased access for continuity of operations in case of a
    disaster. Moreover, upgrading from the current 10 mbps to 100/1000 mbps
    units would provide greater transmission speeds and improved Internet
    access for the judges and staff of the court, and for the public.
    Back-up Storage Devices
        A new LAN will enable the court to upgrade its data back-up
    capability by moving from an analog tape back-up to a digital or
    optical back-up system. Such an upgrade will provide increased data
    back-up storage capacity and faster restore speeds.
                          district of columbia courts
        Question. Funding for the Old Courthouse restoration has been
    phased over the past three years. What is the current status of the
    project and what will be financed with the 2008 request?
        Answer. We appreciate the Congress's strong support for this
    project and the President's support for our fiscal year 2008 request.
    The restoration of this historic landmark will return the building to
    its historic use as a courthouse for the people of the District of
    Columbia. Restoration is key to the Judiciary Square Master Plan, an
    urban renewal plan to revitalize Judiciary Square and return it to its
    historic green, park-like setting for public use.
        Construction began in 2006 and is expected to be complete early in
    2009. On May 25, the massive columns of the portico were raised less
    than an inch to permit excavation for the large courtroom that will be
    built underground below the portico.
        The construction contract ($99 million) was financed in fiscal year
    2005-2007. The 2008 request will cover costs that are not part of the
    construction contract, such as removal of hazardous materials, built-in
    furnishings, security, and project reserves.
        Question. What have the D.C. Courts done to address the personal
    services budget shortfall and what impact have these measures had on
    court operations?
        Answer. The gap in the D.C. Courts' personal services budget formed
    by salary and benefit costs increasing faster than appropriations, as
    in all federal agencies. Because the D.C. Courts are a small agency and
    75 percent of our budget is for personal services, these costs have
    risen beyond the Courts' capacity to absorb. Our request for fiscal
    2008 will provide full funding for all authorized staff positions. We
    appreciate the President's support of this request.
        To address this shortfall, the Courts have taken numerous steps to
    limit costs and increase efficiency including the following: severely
    limited hiring; reengineered business processes; given employees
    compensatory time instead of overtime pay; restricted travel and
    training; delayed the 2007 cost of living adjustment; restricted
    purchasing; and requested legislation authorizing the Courts to offer
    buyouts to give us a tool that is available to federal agencies to help
    manage our workforce. We thank Congresswoman Norton for introducing
    legislation last year and hope it will be enacted during the 110th
    Congress.
        The Courts currently have a 14 percent non-judicial vacancy rate,
    which we cannot sustain without severe negative consequences on the
    administration of justice in the District. One example of impact on
    court operations is in our Civil Division, where, due to the staffing
    shortage, docketing has been delayed. This means that documents filed
    with the court are not recorded for several days. The Courts' staff is
    working very hard, in difficult circumstances to maintain the best
    possible service to the public, under the circumstances.
        Question. Please discuss the D.C. Courts' capital budget and plans
    for facilities.
        Answer. The D.C. Courts manage and maintain over one million gross
    square feet of space in five buildings in Judiciary Square. Our
    facilities plans focus on renovation of the Old Courthouse for the
    Court of Appeals to increase available space in the Moultrie Courthouse
    and consolidation of the Family Court in the Moultrie Courthouse, which
    necessitates moving support and operational functions out of Moultrie
    and reorganizing and relocating those operations that will remain.
        Building C is the next building to be renovated. It will house the
    Information Technology Division, one of the divisions scheduled to move
    out of the Moultrie Courthouse. We must bring other court buildings up
    to meet current health and safety codes. Of particular concern is the
    electrical system in the Moultrie Courthouse, which poses serious
    safety risks to workers. The Moultrie cellblock, which holds hundreds
    of prisoners each day, also needs to be brought up to current
    standards. A study detailing the work that needs to be done in the
    cellblock has been conducted.
        Question. What are the D.C. Courts doing to ensure that the public
    can easily access court services and to provide accountability to the
    community?
        Answer. The Courts' Strategic Plan guides our efforts to enhance
    access and accountability to the public.
    Access
        The D.C. Courts have implemented several initiatives to enhance
    public access to the Courts, including the following:
      --The Court of Appeals Education Outreach Initiative is bringing oral
            arguments to the community in D.C. law schools;
      --The Court of Appeals provides on-line access to oral arguments in
            the courthouse;
      --In cooperation with the D.C. Bar and community organizations, the
            Courts have several self-help centers to assist litigants who
            do not have attorneys. For example, we have centers in Family
            Court, Landlord Tenant, and Small Claims;
      --The Superior Court has implemented e-filing in civil cases to make
            it easier to bring a case to court;
      --The Courts recently opened a Drop-In Center in Southeast to provide
            community-based services to juveniles on probation and their
            families;
      --Judicial officers in the Community Courts judges regularly meet in
            the community with groups such as Advisory Neighborhood
            Commissions; and
      --The Courts' award-winning website provides extensive information on
            the courts, including contact information, filing procedures,
            forms, and legal service providers in the community.
    Accountability
        The Joint Committee has adopted 13 Courtwide Performance Measures
    to enhance accountability to the public. The measures cover access to
    court facilities and services, case processing time, treatment of
    litigants, jury management, fiscal accountability, and facilities
    management. We are currently gathering baseline data and establishing
    benchmarks for the measures and plan to issue routine performance
    reports to the public.

                              SUBCOMMITTEE RECESS

        Senator Durbin. So this meeting of the subcommittee will
    stand in recess.
        [Whereupon, at 6 p.m., Wednesday, May 2, the subcommittee
    was recessed, to reconvene subject to the call of the Chair.]

      FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL
                                   YEAR 2008

                                  ----------

                             THURSDAY, MAY 9, 2007

                                           U.S. Senate,
               Subcommittee of the Committee on Appropriations,
                                                        Washington, DC.
        The subcommittee met at 3:09 p.m., in room SD-192, Dirksen
    Senate Office Building, Hon. Richard J. Durbin (chairman)
    presiding.
        Present: Senators Durbin, Nelson, and Allard.

                           DEPARTMENT OF THE TREASURY

                            Internal Revenue Service

    STATEMENT OF HON. KEVIN BROWN, DEPUTY COMMISSIONER FOR
                SERVICES AND ENFORCEMENT
    ACCOMPANIED BY:
            LINDA A. STIFF, DEPUTY COMMISSIONER FOR OPERATIONS, INTERNAL
                REVENUE SERVICE
            J. RUSSELL GEORGE, INSPECTOR GENERAL FOR TAX ADMINISTRATION,
                DEPARTMENT OF THE TREASURY
            NINA E. OLSON, NATIONAL TAXPAYER ADVOCATE, DEPARTMENT OF THE
                TREASURY
            JAMES R. WHITE, DIRECTOR, STRATEGIC ISSUES, GOVERNMENT
                ACCOUNTABILITY OFFICE
            DAVID A. POWNER, DIRECTOR, INFORMATION TECHNOLOGY MANAGEMENT
                ISSUES, GOVERNMENT ACCOUNTABILITY OFFICE

                     STATEMENT OF SENATOR RICHARD J. DURBIN

        Senator Durbin. Good afternoon. The hearing will please
    come to order. I am pleased to welcome you to this session
    before the Financial Services and General Government
    Appropriations Subcommittee.
        Our focus today is on the President's fiscal year 2008
    budget request for the Internal Revenue Service (IRS). Funding
    for the IRS alone constitutes just over one-half of the total
    amount requested by the administration for the nearly 30
    Federal agencies with accounts under the jurisdiction of this
    subcommittee. Each year IRS employees make hundreds of millions
    of contacts with American taxpayers and businesses and really
    represent the face of Government to more U.S. citizens than
    almost any other agency.
        I welcome my colleagues who will join me on the panel
    later.
        Appearing before the subcommittee this afternoon is a
    distinguished panel of witnesses who each bring valuable
    expertise and experience to their testimony. I welcome: Kevin
    M. Brown, Acting IRS Commissioner, and Deputy Commissioner for
    Services and Enforcement; J. Russell George, Treasury Inspector
    General for Tax Administration (TIGTA); and Nina Olson, the
    National Taxpayer Advocate. I look forward to your
    presentations.
        I also want to welcome Linda Stiff, Deputy IRS Commissioner
    for Operations, accompanying Acting Commissioner Brown.
        I acknowledge the helpful contributions of the Government
    Accountability Office (GAO) in response to our request for
    analyses. I welcome senior GAO officials James R. White,
    Director of Strategic Issues, and David Powner, Director of
    Information Technology Management Issues, and members of their
    team. Their prepared statement will be made part of the record
    and they stand ready to respond to questions.
        In addition, the IRS Oversight Board has submitted for
    inclusion in the record its special report on the
    recommendations for the fiscal year 2008 budget proposal.
    Colleen Kelley, President of the National Treasury Employees
    Union, on behalf of the employees of the Internal Revenue
    Service has submitted a written statement. Without objection,
    these materials will be made part of the record.
        [The information follows:]

        The IRS Oversight Board Fiscal Year 2008 IRS Budget Recommendation
    Special Report can be found at http://www.treas.gov/irsob/reports/
    fy2008-budget-report.pdf.

        Senator Durbin. The Internal Revenue Service administers
    tax laws and collects the revenues that fund over 95 percent of
    the Federal Government's operations. With approximately 100,000
    employees, the IRS is effectively the accounts receivable
    department for the United States. Simply stated, the more
    revenue the IRS collects, the more revenue Congress may spend
    on programs and use for cutting taxes and reducing the deficit.
    Conversely, the less revenue the IRS collects, the less revenue
    Congress has available.
        The IRS relies on three sources for the funds it needs to
    operate: appropriated funds, user fees, and reimburseables,
    which are payments the IRS receives from other Federal agencies
    and State governments for services provided. Nearly the entire
    budget, 97 percent of it, is derived from appropriated funds.
        For fiscal year 2008, the administration is seeking a
    direct appropriation of $11.1 billion, an overall increase of
    $498.4 million, 4.7 percent above the 2007 full year continuing
    resolution level. The full year joint continuing resolution
    enacted for fiscal year 2007 provided funding of nearly $160
    million more to the IRS than the earlier continuing resolution
    allowed. So we are hopeful that the resources are there.
        I am not going to go into the details breaking down the
    entire budget. I would rather have the testimony from our
    panelists. There are a few issues that will be discussed in
    depth today as we examine the IRS funding. First, the tax gap.
    The great majority of Americans pay their fair share of taxes.
    There is still a significant tax gap, the difference between
    what taxpayers are supposed to pay and what they actually pay.
    The estimated gross tax gap of $345 billion consists of:
    underreporting tax liability, $285 billion; nonfiling of tax
    returns, $27 billion; and underpayment of taxes, $33 billion.
        I note that as a part of its budget submission the IRS
    proposes 16 legislative reforms to recoup $29 billion, 10
    percent of the $290 billion net tax gap, over 10 years.
    Questions have been raised that such an approach is far from
    aggressive and amounts to a return of just a penny on the
    dollar. I am anxious to hear the perspectives of our panel
    members.
        Second, we are going to consider the proper balance between
    enforcement and service. It is fundamental that as enforcement
    initiatives to boost compliance are advanced, resources devoted
    to taxpayer services are not sacrificed. Taxpayer service plays
    an integral role in facilitating voluntary compliance with our
    tax laws.
        Third, critical information technology enhancements. I am
    interested in the status of the IRS business systems
    modernization program, efforts that the IRS migrates from its
    antiquated and obsolete legacy systems to bring tax
    administration systems to a level equivalent to private and
    public sector best practices. This is a challenge in almost
    every Federal agency.
        I would like to turn now to our panel and invite Acting
    Commissioner Brown to begin. I ask you to make your
    presentation. We will make your written statement part of the
    record and we may have some questions to submit to you after
    the hearing. Possibly some of the other colleagues who cannot
    join us will send questions as well. So if you would not mind
    starting, I invite your testimony, Mr. Brown.

               ORAL STATEMENT OF ACTING COMMISSIONER KEVIN BROWN

        Mr. Brown. Good afternoon. Thank you, Chairman Durbin. I
    also want to thank the other members of the subcommittee who
    will be coming for their efforts in increasing IRS funding in
    the joint resolution over the level proposed under the
    continuing resolution.
        The President's request for fiscal year 2008 provides
    additional money for IRS systems, infrastructure, and
    modernization, as well as for enforcement and, notably, for
    increased research. There is also an increase for taxpayer
    services. We ask the members of the subcommittee to support the
    President's budget and to help enact an appropriation before
    the start of fiscal year 2008.
        These requested moneys will help us generate continued
    progress in attacking the tax gap. But they are not the only
    things we need to do. The administration has made 16
    legislative proposals. I would direct your attention to four
    that I think are particularly important: first, the reporting
    of credit card gross receipts; second, making the willful
    failure to file a tax return a felony rather than a
    misdemeanor; third, requiring basis reporting for sales of
    securities; and fourth, lowering the threshold for mandatory
    electronic filing for large corporations and partnerships.
        With this budget, we can build on our progress in service
    and enforcement. We again enjoyed significant increases in our
    enforcement results in fiscal year 2006 and I am pleased to
    report that we are making continued strides in fiscal year
    2007. I believe the IRS has restored the credibility of its
    enforcement programs without generating a significant amount of
    public discontent or increased allegations of infringement of
    taxpayer rights.
        In addition, to improve our service to taxpayers we have
    developed a taxpayer assistance blueprint. This subcommittee
    was the principal force in bringing about the taxpayer
    assistance blueprint. Begun in July 2005, the blueprint is a
    collaborative effort of the IRS, the IRS Oversight Board, and
    the National Taxpayer Advocate. Under this project we learned a
    great deal about taxpayer needs and how to meet them. From the
    blueprint, we created a strategic plan with a host of
    improvement initiatives. For example, our 2008 budget request
    includes funding for telephone service and web site
    enhancements recommended by the strategic plan.
        Before taking your questions, let me say a few things about
    the filing season we just completed. At the IRS we recognized
    some time ago that this would be a challenging filing season.
    Two of the reasons were Congress' late action on the extender
    legislation and the fact that we did not have an operating
    budget until well into February. The one-time refund of the
    telephone excise tax and the initiation of the split refund
    were also of concern. Taken together, we anticipated the most
    difficult filing season in a number of years.
        Nevertheless, we kept up with the work and the system
    functioned well. The extenders were successfully implemented
    and our software updates were taken care of by early February.
    Electronic return filing continues to grow and our service
    indicators are healthy.
        Along with the increase in the e-file rate, we have seen a
    17 percent gain in our volunteer-prepared returns, a
    cornerstone of our outreach program. As you may know, this
    effort helps eligible participants claim the earned income tax
    credit.

                               PREPARED STATEMENT

        Thank you for the opportunity to testify today and I will
    be glad to take your questions.
        Senator Durbin. Thank you very much.
        [The statement follows:]
                       Prepared Statement of Kevin Brown
                                  introduction
        Chairman Durbin, Ranking Member Brownback, and members of the
    Subcommittee, thank you for the opportunity to testify today on the
    fiscal year 2008 budget request for the Internal Revenue Service. I am
    accompanied this morning by Linda Stiff, IRS's Deputy Commissioner for
    Operations and Support. She will assist me in responding to questions
    that Members of the Subcommittee may have.
        Under the leadership of Commissioner Everson, our working equation
    at the IRS has been and continues to be that service plus enforcement
    equals compliance. A balanced program between service and enforcement
    leads to sound tax administration.
        However, a balanced program can be successful only if the IRS is
    provided the resources necessary to fulfill its mission. Two years ago
    in the fiscal year 2006 budget, the Service was provided those
    resources when Congress approved the President's request for the IRS.
    This fiscal year, however, we were forced to operate under a Continuing
    Resolution (CR) for the first four months of the fiscal year until
    Congress approved the Joint Resolution (JR) in February.
        I want to thank the Members of the Subcommittee for their efforts
    in increasing our level of funding in the JR over the levels proposed
    originally under a full year CR. As a result, we anticipate that there
    will be little or no negative impact on our taxpayer service,
    operations support, or our Business Systems Management (BSM) programs.
        While our enforcement programs also fare much better under the JR,
    the increase is not sufficient to prevent some negative impacts. The JR
    provided $4.7 billion for enforcement, which is $55.4 million below the
    level requested by the President in his fiscal year 2007 budget
    request.
        While we are attempting to partially offset this reduction through
    user fee receipts, this reduction increases the importance of providing
    full funding of our fiscal year 2008 budget request, which I will
    discuss later in my testimony.
                               producing results
        The best case for full funding of the fiscal year 2008 budget can
    be made by looking at the results we achieved with the resources we do
    have. In fiscal year 2006, we spent just 42 cents to collect each $100
    of tax revenue, the third lowest figure in the last 25 years and down
    from 46 cents in fiscal year 2005.
        In fiscal year 2006, we continued making improvements in both our
    service and enforcement programs. This claim is not just our
    assessment, but also that of the IRS Oversight Board in its most recent
    annual report. According to the Board, the IRS has made steady progress
    towards ``transforming itself into a modern institution that provides
    efficient and effective tax administration services to America's
    taxpayers.''
    Improving Taxpayer Service
        According to a survey commissioned by the Board in 2006, taxpayers
    increasingly recognize that the IRS provides quality service through a
    variety of channels, such as our Web site, toll-free telephone lines,
    and Taxpayer Assistance Centers (TACs). This finding is supported by
    the metrics that we use to determine the effectiveness of our taxpayer
    service efforts. In category after category, we continue to see
    improvement in the numbers in our telephone services, electronic
    filing, and IRS.gov access. This improvement is demonstrated by the
    following fiscal year 2006 business results:
      --Electronic filing by individuals continued to increase. It rose
            three percentage points from fiscal year 2005 to 54 percent of
            all individual returns.
      --The level of service for toll-free assistance was 82 percent, about
            the same level of fiscal year 2005 and up substantially from
            fiscal year 2001. The level of customer satisfaction with the
            toll-free line remains 94 percent.
      --The tax-law accuracy of toll-free responses improved to 91 percent
            and account accuracy increased to over 93 percent.
      --Visits to the IRS Web site jumped nearly 10 percent in fiscal year
            2006 to more than 197 million visits.
      --More taxpayers used the online refund status tool ``Where's My
            Refund.'' In fiscal year 2006, there were 24.7 million status
            checks, up nearly 12 percent from fiscal year 2005.
        At the IRS, we continue to work to improve services. Clearly, we
    are making progress, and these numbers underscore that point.
        Another development in our taxpayer service program is the
    completion of the Taxpayer Assistance Blueprint (TAB). This
    collaborative effort of the IRS, the IRS Oversight Board, and the
    National Taxpayer Advocate began in July 2005 in response to a
    Congressional mandate to develop a five-year plan for taxpayer service
    delivery. We sent Phase 1 of the Blueprint to Congress in April 2006.
    Phase 1 identified and reported the following five strategic service
    improvement themes for increasing taxpayer, partner, and government
    value:
      --Improve and expand education and awareness activities.--This theme
            addresses the critical need for making taxpayers and
            practitioners aware of the most effective and efficient IRS
            service options and delivery channels for meeting their tax
            obligations and receiving benefits they are due.
      --Optimize the use of partner services.--This theme emphasizes the
            critical role of third parties in the delivery of taxpayer
            services, and calls for improving the level of support and
            direction provided to partners to ensure consistent and
            accurate administration of the tax law.
      --Enhance self-service options to meet taxpayer expectations.--This
            theme focuses on providing clear, standard, and easily
            customized automated content to deliver accurate, consistent,
            and understandable self-assistance service options--
            particularly for transactional tasks.
      --Improve and expand training and support tools to enhance assisted
            services.--This theme highlights the need for ensuring accurate
            information across all channels by improving and expanding
            training, technology infrastructure, and support for employees,
            partners, and taxpayers.
      --Develop short-term performance and long-term outcome goals and
            metrics.--This theme provides for the development of a
            comprehensive set of performance goals and metrics to evaluate
            how effectively the IRS is meeting taxpayer expectations, and
            how efficiently it is delivering services.
        We delivered Phase 2 of the Blueprint to Congress in April.
    Throughout this project, extensive research allowed us to refine our
    understanding of taxpayer and partner needs, preferences, and behaviors
    and to identify current planning documents, decision processes, and
    existing commitments affecting IRS service delivery. Certain recurring
    findings emerged from the wealth of data analyzed. These findings,
    combined with agency-wide considerations and priorities, led to the
    development of the five-year TAB Strategic Plan for taxpayer service.
        The TAB Strategic Plan includes a suite of service improvement
    initiatives across all delivery channels, a portfolio of performance
    metrics, and an implementation strategy, which recommends numerous
    future research studies. The Plan outlines a decision-making process
    for prioritizing service improvement initiatives based on taxpayer,
    partner, and government value and ensuring continued stakeholder,
    partner, and employee engagement. This process is designed to help the
    IRS to balance quality service with effective enforcement to maximize
    compliance.
        The fiscal year 2008 budget request includes the funding necessary
    to implement some of the telephone service and Web site enhancements
    recommended by the TAB Strategic Plan. Enhancing telephone service will
    contribute to the goal of increasing taxpayer, partner, and government
    value. Improving IRS.gov will help us to make the Web site the first
    choice of individual taxpayers and their preparers when they need to
    contact the IRS for help. The TAB Strategic Plan also recommends a
    suite of multi-year research studies to continue to refine and improve
    our understanding of optimal service delivery. In addition to funding
    for research regarding noncompliance, the fiscal year 2008 budget
    includes funding for research to understand better the effect of
    service on compliance.
    Expanding Enforcement Efforts
        Another reason for the Oversight Board's positive assessment of our
    work in fiscal year 2006 is that IRS enforcement efforts have increased
    in virtually every area. According to the Board, ``As demonstrated by a
    variety of measures, the IRS' performance on enforcement has improved
    considerably, and real progress has been achieved over the past six
    years.'' One of the most obvious measures is the increase in
    enforcement revenue, which has risen from $34 billion in fiscal year
    2002 to almost $49 billion in fiscal year 2006, an increase of 43
    percent.
        In fiscal year 2006, both the levels of individual returns examined
    and coverage rates have risen substantially. We conducted nearly 1.3
    million examinations of individual tax returns. This level is almost 75
    percent more than were conducted in fiscal year 2001, and reflects a
    steady and sustained increase since that time. Similarly, the audit
    coverage rate has risen from 0.58 percent in fiscal year 2001 to more
    than 0.97 percent in fiscal year 2006.
        While the growth in examinations of individual returns is visible
    in all income categories, it is most visible in examinations of
    individuals with incomes over $1 million. The number of examinations in
    this category rose by almost 78 percent compared to fiscal year 2004,
    the first year the IRS began tracking audits of individuals with income
    over $1 million. The coverage rate has risen from 5 percent in fiscal
    year 2004 to 6.3 percent in fiscal year 2006.
        Growth in audit totals and coverage rates extend to other taxpayer
    categories. Preliminary estimates show that the IRS examined over
    52,000 business returns in fiscal year 2006, an increase of nearly
    12,000 over fiscal year 2001. The coverage rate over the same period
    rose from 0.55 percent to 0.60 percent. For corporations with assets
    over $10 million, examinations rose from 8,718 in fiscal year 2001 to
    10,578 in fiscal year 2006, an increase in the coverage rate from 15.1
    percent to 18.6 percent. For the largest corporations, those with
    assets over $250 million, examinations have increased by over 29
    percent growing from 3,305 in fiscal year 2001 to 4,276 in fiscal year
    2006.
        We have also been active in the tax exempt community. Overall,
    examination closures for tax exempt organizations have risen from 5,342
    in fiscal year 2001 to 7,079 in fiscal year 2006. In addition, we have
    an innovative program utilizing correspondence contacts to leverage our
    activities in the compliance area. We have used it successfully in the
    hospital and executive compensation areas, and will be using it
    elsewhere.
        While examinations in the tax exempt community generally do not
    provide the tax collection ``return on investment'' that audits in
    other areas might, it is important that we keep a ``cop on the beat''
    in order to prevent abuses in the exempt sector and an erosion of the
    tax base. Maintaining a strong enforcement presence in the tax-exempt
    sector is particularly important given the role that a small number of
    these entities have played in the past in accommodating abusive
    transactions entered into by taxable parties. In appropriate cases,
    this results in the collection of income or excise taxes--and in the
    most egregious cases, revocation of exempt status.
        One area to which we have paid particular attention is the credit
    counseling industry. Through a compliance initiative in this area, as
    of March 23, we had revoked or proposed revocation of the tax-exempt
    status of 45 credit counseling agencies, with another 16 examinations
    still in process. Proposed or final revocations to date represent 41
    percent of the revenues of the credit counseling industry.
        Using our correspondence contact techniques, we have also sent more
    than 700 questionnaires to all tax-exempt credit counseling
    organizations we know of that were not already under examination. Based
    on responses to the questionnaires and our independent research, we
    expect to examine at least 82 additional credit counseling
    organizations from this group.
        We also have been actively reviewing seller-funded down payment
    assistance programs that provide cash assistance to homebuyers who
    cannot afford to make the minimum down payment or pay the closing costs
    involved in obtaining a mortgage. When properly structured and
    operated, down payment assistance programs can qualify as tax-exempt
    charitable and educational organizations. In May 2006, we issued
    Revenue Ruling 2006-27, which provides examples of organizations that
    may qualify for tax exempt status, but also makes it clear that
    organizations providing seller-funded down payment assistance do not
    qualify for tax exemption.
        Seller-funded down payment assistance programs improperly benefit
    the home seller through circular funding arrangements that result in
    the home buyer paying for all or much of the down payment ``gift'' he
    or she receives from the organization. They also result in buyers
    becoming overextended as the cost of the down payment is added to the
    purchase price of the home. A Housing and Urban Development (HUD)-
    commissioned study and a Government Accountability Office (GAO) report
    found that seller-funded programs led to underwriting problems and
    resulted in an increase in the cost of homeownership.
        In the audits we have conducted in this area, not only have we
    found improper private benefit and activities, but also that the down
    payment assistance organizations often provide excessive compensation
    to their officials. Revocation of exempt status will shut down abusive
    seller funded programs without harming the innocent low income home
    buyers who participated in these arrangements.
        We will continue to look at other areas within the exempt sector
    that have the potential for abuse.
                               2007 filing season
        The progress made in fiscal year 2006 has continued during the 2007
    filing season despite the fact that this filing season presented the
    potential to be one of the most challenging in recent memory. The Tax
    Relief and Health Care Act of 2006 (TRHCA), which passed late last
    year, included the extension of several significant tax benefits. Since
    forms and publications for Tax Year 2006 were printed and distributed
    prior to enactment, we were required to notify taxpayers on IRS.gov as
    to how to modify those forms to claim the allowable benefits. Due to
    separate developments in the tax law, we were faced with implementing
    the Telephone Excise Tax Refund Program (TETR), and this was the first
    filing season that we allowed taxpayer refunds to be split and
    deposited into separate accounts. Finally, because the normal April
    15th filing date fell on a Sunday and the following Monday was a legal
    holiday in the District of Columbia, we had to adjust our programs to
    provide taxpayers an extra two days to file and pay this year. Many of
    these changes also necessitated significant changes in our information
    technology systems.
        Despite these challenges, I am proud to report that the filing
    season has gone very well. By early February, we were able to begin
    processing tax returns claiming the tax benefits authorized by the
    enactment of TRHCA in December. We have also taken a number of steps to
    make sure that taxpayers understand how to claim the benefits. For
    example, we provided instructions on IRS.gov and conducted extensive
    outreach and media events to publicize these provisions. In addition,
    we sent a special mailing of Publication 600, which included the state
    and local sales tax tables and instructions for claiming the sales tax
    deduction on Schedule A (Form 1040), to six million taxpayers who had
    previously claimed the state and local sales tax deduction.
        From a technology perspective, we were able to deliver the timely
    release of 329 of 330 information system for the 2007 filing season.
    The one exception to timely delivery was the enhancements to the
    Customer Account Data Engine (CADE). This system, one of key components
    of the IRS' modernization strategy, will ultimately replace the
    antiquated master files.
        Significant functionality was added to CADE this year. We included
    the ability to handle married taxpayers, dependents, and a number of
    schedules including Schedules C, D, E, F, and SE. Due to system testing
    issues, the IRS did not deploy CADE into production until March 6th. To
    ensure taxpayers filing prior to March 6th were not negatively
    impacted, the IRS continued to process CADE-eligible taxpayers through
    the master file. Hence, the impact to such taxpayers was a delay of a
    couple of days on refund processing.
        The IRS originally estimated that if the enhancements were put into
    production on time, we would have processed 33 million individual tax
    returns through CADE in 2007. Given that we were late and missed many
    of the taxpayers that would be now be CADE-eligible, we processed only
    10.4 million tax returns through CADE as of May 4th. While the 10.4
    million tax returns are more than the 7.4 million posted last year, it
    is still disappointing because it fell well short of our estimates.
    CADE is now operating well in production and we expect that the full
    functionality intended for this year will be there for CADE going
    forward.
        Because of the issues with getting CADE into production this year,
    the IRS is taking more management control of the CADE project, and
    working to embed additional IRS subject matters experts on the CADE
    team. A significant amount of the delay this year is attributable to
    the complexities of the interfaces between CADE and other IRS legacy
    systems.
        In planning for next filing season, the IRS is revisiting the scope
    of what is to be delivered, to ensure that CADE will be in production
    the first day of the 2008 filing season.
        I will discuss the TETR Program later in my testimony, but let me
    first give an update on our filing season numbers.
    Numbers Thus Far
        We expect to process almost 136 million individual tax returns in
    2007, and as anticipated the number of those that were e-filed
    continued to grow. In the 2006 filing season, 54 percent of all income
    tax returns were e-filed. As of April 28, we have received over 76
    million tax returns electronically, an increase of 8.74 percent
    compared to the same period last year.
        This increase in e-filing is being driven by people preparing their
    own returns using their personal computers. The total number of self-
    prepared returns that are e-filed is up by over 11 percent compared to
    this time a year ago. Over 22 million returns have been e-filed by
    people from their personal computers, up from over 19 million for the
    same period a year ago.
        Overall, nearly 61 percent of the 125.7 million returns filed thru
    April 28 have been e-filed. Encouraging e-filing is good for both the
    taxpayer and for the IRS. Taxpayers who use e-file can generally have
    their tax refund deposited directly into their bank account in two
    weeks or less. That is about half the time it takes us to process a
    paper return. For the IRS, the error reject rate for e-filed returns is
    significantly lower than that for paper returns.
        More people are choosing to have their tax refunds directly
    deposited into their bank account than ever before. So far this year,
    we have directly deposited over 58 million refunds, or 63.2 percent of
    all refunds issued this tax filing season. This level is up from 62.3
    percent for the same period in 2006.
        People are also visiting our Web site, IRS.gov, in record numbers.
    Through April 28th, we have recorded over 137 million visits to our
    site this year, up over nine percent from 124.8 million for the same
    period a year ago. The millions of taxpayers that have visited IRS.gov
    have benefited from many of the services that are available through the
    Web site. We have made it easier for taxpayers to get answers to many
    of their tax questions online. Important functions on the Web site
    provide capabilities to:
      --Assist the taxpayer in determining whether he or she qualifies for
            the Earned Income Tax Credit (EITC);
      --Assist the taxpayer in determining whether he or she is subject to
            the Alternative Minimum Tax (AMT);
      --Allow more than 70 percent of taxpayers the option to file their
            tax returns at no cost through the Free File program;
      --Allow taxpayers who are expecting refunds to track the status via
            the ``Where's My Refund?'' feature; and
      --Allow taxpayers to calculate the amount of their Sales Tax
            Deduction.
        As of April 21, we have received 125.7 million returns, a very
    slight increase (1.4 percent) over the same period as last year. We
    have issued 91.9 million refunds so far this year, for a total of
    $209.7 billion. The average refund thus far is $2,280, $63 more than
    last year. In addition, as of April 28th, over 26.6 million taxpayers
    have tracked their refund on IRS.gov, up more than 26 percent over last
    year.
        As of April 28th, our Taxpayer Assistance Centers (TACs) are
    reporting a very slight increase in face- to-face contacts this filing
    season as compared to last year. We have seen a slight decline in the
    number of calls answered (-0.32 percent) as well as automated calls
    (-5.65 percent). The decline in the number of calls answered can be
    attributed to a few weather-related temporary call site closures
    earlier this winter and a slight decrease in overall caller demand.
    Free File
        Over 3.7 million people have utilized Free File as of April 28,
    down 1.8 percent from last year. This year, anyone with adjusted gross
    income of $52,000 or less is eligible for Free File, which includes 95
    million taxpayers.
        We think there are two major reasons for this decline. First, other
    websites advertising free tax preparation service siphoned off a
    significant number of customers. In addition, traditional tax
    preparation sites such as Intuit and TaxAct offered and advertised
    their own free services.
        Second, taxpayers are inundated with advertising and promotions by
    major tax preparation firms such as Intuit, H&R Block, and Liberty Tax.
    This is in contrast with IRS' limited promotion and marketing budget
    for FreeFile.
        A key difference in this year's Free File program is that Alliance
    members are no longer offering ancillary products, such as refund
    anticipation loans (RALs), through the Free File program. IRS data from
    the last filing season shows that only 0.5 percent of Free File users
    chose to utilize a RAL. The Free File Alliance may still offer
    customers the option of having their state tax return prepared for a
    fee, though some Alliance members are offering to do the state return
    along with the Federal at no cost.
        In the 2006 filing season, an indicator was included for the first
    time on Free File returns that allows the IRS to identify those
    taxpayers using Free File. As a result, the Service was able to obtain
    important information such as customer satisfaction and demographic
    data that had never before been available. This information allowed us
    to verify that there was a high level of customer satisfaction with
    Free File. According to a survey conducted for the IRS, 94 percent said
    they intend to use Free File again next year; the same number said they
    found Free File very easy or somewhat easy to use; and 97 percent said
    they would recommend Free File to others. Convenience, not the free
    cost, was the most appealing factor of Free File.
    VITA/TCE Sites and Other Community Partnerships
        The use of tax return preparation alternatives, such as volunteer
    assistance at Volunteer Income Tax Assistance (VITA) sites and Tax
    Counseling for the Elderly sites (TCEs), has steadily increased. In
    fiscal year 2006, over 2.2 million returns were prepared by volunteers.
    As of April 28, volunteer return preparation is up 17 percent above
    last year's level. Volunteer e-filing is also up slightly, by 1.7
    percent over the same period last year. This is reflective of
    continuing growth in existing community coalitions and partnerships.
        We have also made a concerted attempt to improve outreach to
    taxpayers, particularly those taxpayers who may be eligible for the
    EITC. For example, we sponsored EITC Awareness Day on February 1 in an
    effort to partner with our community coalitions and partnerships to
    reach as many EITC-eligible taxpayers as possible and urge them to
    claim the credit.
    Telephone Excise Tax Refunds
        In the middle of 2006, the IRS announced plans to refund at least
    $13 billion in telephone excise taxes to more than 160 million
    taxpayers. To do this task, the IRS modified every individual and
    business tax return form, retooled our systems to handle the forecast
    demand, and launched an extensive communications campaign to increase
    awareness and encourage people without a filing requirement to request
    a refund anyway.
        One difficulty in administering this refund was that taxpayers
    could have experienced significant burden if they had been required to
    find 41 months of old phone bills in order to obtain the information
    they needed to compute their refunds. For this reason, the IRS created
    a set of standard amounts that individuals can claim in lieu of actual
    amounts. For businesses and non-profits faced with potentially more
    paperwork than individuals, the IRS developed an estimation method that
    could require significantly less paperwork than requesting an actual
    amount.
        A review of returns filed so far this year turned up a surprising
    fact: over 28 percent of returns we have received did not include a
    telephone excise tax refund request. Though one of our communications
    goals was to encourage taxpayers not to overlook the telephone tax
    refund, it appears many taxpayers are missing out. In response to these
    early numbers, we consulted with tax professionals, citizens groups,
    and tax software companies to determine potential causes for the low
    take-up rate. The only logical reason we were given was that despite
    our best efforts, some taxpayers were still not aware of the credit and
    how to claim it. We then conducted additional media outreach to
    increase awareness of the refund and were able to generate broad
    national media coverage, including CNN, the Associated Press, and USA
    Today.
        As we monitored the initial returns, we also noticed some problems.
    Even though 99.5 percent of all taxpayers who are requesting the refund
    are claiming the appropriate standard amount, some tax-return preparers
    are requesting thousands of dollars of refunds for their clients in
    instances where clients are entitled to only a tiny fraction of that
    amount. This behavior may indicate criminal intent on the part of the
    return preparer. In some cases, taxpayers requested a refund in the
    thousands of dollars, suggesting that the taxpayer paid more for
    telephone service than they received in income. While some of the large
    claims may be the result of misunderstandings--a number of refund
    requests appear to be for the entire amount of the taxpayer's phone
    bill, rather than just the three-percent long-distance tax--others may
    be deliberate attempts to scam the system.
        To address this problem, in late February, IRS special agents
    executed search warrants seeking evidence from a small number of tax-
    preparation businesses suspected of preparing returns on behalf of
    clients requesting large, improper amounts in telephone excise tax
    refunds. Special agents temporarily closed these businesses, seizing
    computers and documents to use in their investigations. In addition,
    IRS revenue agents (auditors) and special agents also visited other tax
    preparers who were suspected of preparing questionable telephone tax
    refund requests.
        On a positive note, the number of returns with seemingly high
    telephone excise tax refunds dropped significantly. This change
    suggests our enforcement actions, along with increased communications,
    may be having the desired effect.
    Tax Scams
        Each year, we alert taxpayers about the ``Dirty Dozen,'' 12 of the
    most blatant tax scams affecting American taxpayers. This effort is, in
    part, an effort to alert taxpayers so that they may be wary if
    approached and encouraged to participate in any of the listed schemes.
    It also alerts promoters that we are aware of the scam and will be
    taking steps to prevent them from getting away with it.
        This year the ``Dirty Dozen'' highlights five new scams that IRS
    auditors and criminal investigators have uncovered. Topping the list
    this filing season are fraudulent refunds being claimed in connection
    with TETR, which I have already discussed. Other scams making the list
    include:
      --Abusive Roth IRAs.--Taxpayers should be wary of advisers who
            encourage them to shift under-valued property to Roth
            Individual Retirement Arrangements (IRAs). In one variation, a
            promoter has the taxpayer move under-valued common stock into a
            Roth IRA, circumventing the annual maximum contribution limit
            and allowing otherwise taxable income to go untaxed.
      --Phishing.--This technique is used by identity thieves to acquire
            personal financial data in order to gain access to the
            financial accounts of unsuspecting consumers, run up charges on
            their credit cards or apply for loans in their names. These
            Internet-based criminals pose as representatives of a financial
            institution--or sometimes the IRS itself--and send out
            fictitious e-mail correspondence in an attempt to trick
            consumers into disclosing private information. A typical e-mail
            notifies a taxpayer of an outstanding refund and urges the
            taxpayer to click on a hyperlink and visit an official-looking
            Web site. The Web site then solicits a social security and
            credit card number. It is important to note the IRS does not
            use e-mail to initiate contact with taxpayers about issues
            related to their accounts. If a taxpayer has any doubt whether
            a contact from the IRS is authentic, the taxpayer should call
            1-800-829-1040 to confirm it.
      --Disguised Corporate Ownership.--Domestic shell corporations and
            other entities are being formed and operated in certain states
            for the purpose of disguising the ownership of the business or
            financial activity. Once formed, these anonymous entities can
            be, and are being, used to facilitate underreporting of income,
            non-filing of tax returns, listed transactions, money
            laundering, financial crimes and possibly terrorist financing.
            The IRS is working with state authorities to identify these
            entities and to bring their owners into compliance.
      --Zero Wages.--In this scam, which first appeared in the Dirty Dozen
            in 2006, a Form 4852 (Substitute Form W-2) or a ``corrected''
            Form 1099 showing zero or little income is submitted with a
            federal tax return. The taxpayer may include a statement
            rebutting wages and taxes reported by the payer to the IRS. An
            explanation on the Form 4852 may cite statutory language behind
            Internal Revenue Code sections 3401 and 3121 or may include
            some reference to the paying company refusing to issue a
            corrected Form W-2 for fear of IRS retaliation.
      --Return Preparer Fraud.--Dishonest return preparers can cause many
            headaches for taxpayers who fall victim to their schemes. Such
            preparers make their money by skimming a portion of their
            clients' refunds and charging inflated fees for return
            preparation services. They attract new clients by promising
            large refunds. Some preparers promote filing fraudulent claims
            for refunds on items such as fuel tax credits to recover taxes
            paid in prior years. Taxpayers should choose carefully when
            hiring a tax preparer. As the old saying goes, if it sounds too
            good to be true, it probably is. Remember that no matter who
            prepares the return, the taxpayer is ultimately responsible for
            its accuracy. In recent years, the courts have issued
            injunctions ordering dozens of individuals to cease preparing
            returns, and the Department of Justice has filed complaints
            against dozens of others. During fiscal year 2006, 109 tax
            return preparers were convicted of tax crimes and sentenced to
            an average of 18 months in prison.
      --American Indian Employment Credit.--Taxpayers submit returns and
            claims reducing taxable income by substantial amounts citing an
            American Indian employment or treaty credit. Although there is
            an Indian Employment Credit available for businesses that
            employ Native Americans or their spouses, there is no provision
            for its use by employees. In a somewhat similar scam,
            unscrupulous promoters have informed Native Americans that they
            are not subject to federal income taxation. The promoters
            solicit individual Indians to file Form W-8 BEN seeking relief
            from all withholding of federal taxation. A recent ``phishing''
            variation has promoters using false IRS letterheads to solicit
            personal financial information that they claim the IRS needs in
            order to process their ``non-tax'' status.
      --Trust Misuse.--For years, unscrupulous promoters have urged
            taxpayers to transfer assets into trusts. They promise
            reduction of income subject to tax, deductions for personal
            expenses and reduced estate or gift taxes. However, these
            trusts do not deliver the promised tax benefits. There are
            currently more than 150 active abusive trust investigations
            underway and 49 injunctions have been obtained against
            promoters since 2001. As with other arrangements, taxpayers
            should seek the advice of a trusted professional before
            entering into a trust.
      --Structured Entity Credits.--Promoters of this newly identified
            scheme are setting up partnerships to own and sell state
            conservation easement credits, federal rehabilitation credits
            and other credits. The purported credits are the only assets
            owned by the partnership and once the credits are fully used,
            an investor receives a K-1 indicating the initial investment is
            a total loss, which is then deducted on the investor's
            individual tax return.
      --Abuse of Charitable Organizations and Deductions.--The IRS
            continues to observe the use of tax-exempt organizations to
            improperly shield income or assets from taxation. This action
            can occur when a taxpayer moves assets or income to a tax-
            exempt supporting organization or donor-advised fund but
            maintains control over the assets or income. Contributions of
            non-cash assets continue to be an area of abuse, especially
            with regard to overvaluation of contributed property. In
            addition, the IRS is noticing the return of private tuition
            payments being disguised as charitable contributions to
            religious organizations.
      --Form 843 Tax Abatement.--This scam rests on faulty interpretation
            of the Internal Revenue Code. It involves the filer requesting
            abatement of previously assessed tax using Form 843. Many using
            this scam have not previously filed tax returns and the tax
            they are trying to have abated has been assessed by the IRS
            through the Substitute for Return Program. The filer uses the
            Form 843 to list reasons for the request. Often, one of the
            reasons is: ``Failed to properly compute and/or calculate IRC
            Sec 83--Property Transferred in Connection with Performance of
            Service.''
      --Frivolous Arguments.--Promoters have been known to make the
            following outlandish claims: the Sixteenth Amendment concerning
            congressional power to lay and collect income taxes was never
            ratified; wages are not income; filing a return and paying
            taxes are merely voluntary; and being required to file Form
            1040 violates the Fifth Amendment right against self-
            incrimination or the Fourth Amendment right to privacy.
            Taxpayers should not believe these or other similar claims.
            These arguments are false and have been thrown out of court.
            While taxpayers have the right to contest their tax liabilities
            in court, no one has the right to disobey the law or else they
            may subject themselves to increased penalties. As part of the
            Tax Relief and Health Care Act of 2006 [Public Law No. 109-
            432], Congress amended the Code to increase the amount of the
            penalty for frivolous tax returns from $500 to $5,000 and to
            impose a penalty of $5,000 on any person who submits a
            ``specified frivolous position.'' Last week, we released
            guidance identifying these and other frivolous claims that,
            when asserted by a taxpayer on a tax return filed with the
            Service or submitted in a collection due process request,
            offer-in-compromise, application for an installment agreement,
            or application for a Taxpayer Assistance Order, expose the
            taxpayer to the $5,000 penalty.
       president's fiscal year 2008 budget maintains the balance between
                        taxpayer service and enforcement
        The IRS and its employees represent the face of the Federal
    Government to more American citizens than any other government agency.
    The IRS administers America's tax laws and collects 95 percent of the
    revenues that fund government operations and public services. Our
    taxpayer service programs provide assistance to help millions of
    taxpayers understand and meet their tax obligations. Our enforcement
    programs are aimed at deterring taxpayers inclined to evade their
    responsibilities while vigorously pursuing those who violate tax laws.
    Delivering these programs demands a secure and modernized
    infrastructure able to fairly, effectively, and efficiently collect
    taxes while minimizing taxpayer burden.
        The IRS fiscal year 2008 President's budget request supports our
    agency-wide strategic plan as well as Treasury's compliance improvement
    strategy. These documents underscore the IRS' commitment to provide
    quality service to taxpayers while enforcing America's tax laws in a
    balanced manner. The IRS' strategic plan goals are:
      --Improve Taxpayer Service.--Help people understand their tax
            obligations, making it easier for them to participate in the
            tax system;
      --Enhance Enforcement of the Tax Law.--Ensure taxpayers meet their
            tax obligations, so that when Americans pay their taxes, they
            can be confident their neighbors and competitors are also doing
            the same; and
      --Modernize the IRS through its People, Processes and Technology.--
            Strategically manage resources, associated business processes,
            and technology systems to effectively and efficiently meet
            service and enforcement strategic goals.
    Budget Request
        Our total budget request for fiscal year 2008 is for $11.1 billion
    in appropriated resources and represents a 4.7 percent increase over
    the recently enacted fiscal year 2007 Joint Resolution (JR) level of
    $10.6 billion.
        The IRS' taxpayer service and enforcement activities are funded
    from three appropriations: Taxpayer Services (TS); Enforcement (ENF);
    and Operations Support (OS). The total fiscal year 2008 budget request
    for these three operating accounts is $10.8 billion supplemented by
    $180 million from user fee revenue, for a total operating level for
    these accounts of $10.9 billion--a 5.5 percent increase over the fiscal
    year 2007 operating level. As in fiscal year 2006 and fiscal year 2007,
    the Administration proposes to include IRS enforcement increases as a
    Budget Enforcement Act program integrity cap adjustment, and I am
    pleased that the House and Senate Budget Committee marks for the 2008
    Resolution include the full cap adjustment for this activity,
    recognizing the return on investment from these enforcement
    investments.
        The budget also includes $282.1 million for Business Systems
    Modernization (BSM) and $15.2 million to administer the Health
    Insurance Tax Credit program--a 32.6 percent and 2.6 percent increase,
    respectively, over the fiscal year 2007 JR level.
        Our fiscal year 2008 budget request provides $409.5 million for new
    initiatives and $340 million for the pay raise and other cost
    adjustments needed to sustain base operations.
        The IRS' initiatives focus on the most significant needs for fiscal
    year 2008:
      --$20.0 million to enhance taxpayer service through expanded
            volunteer tax assistance, increased funding for research to
            determine the most effective means to help taxpayers, and
            implementing new technology to improve taxpayer service;
      --$246.4 million to expand enforcement activities targeted at
            improving compliance; and
      --$143.1 million to improve the IRS' information technology (IT)
            infrastructure, including $62.1 million for the BSM program and
            $81.0 million for security and infrastructure enhancements.
        This request also includes several program savings and efficiencies
    that reflect the IRS' aggressive efforts to identify and deploy work
    process and technology improvements that will benefit both taxpayer
    service and enforcement programs. Collectively, these cost savings
    total $120.0 million:
      --Taxpayer Service Efficiencies -$23.4 million/-527 FTE.--These
            savings will result from operational efficiencies achieved
            through ongoing efforts to automate and enhance IRS taxpayer
            service programs' workload distribution, such as the
            implementation of automated issuance of Employer Identification
            Numbers and Correspondence Imaging System. Additional
            efficiencies and savings are expected to be achieved through
            the implementation of optimal service delivery initiatives
            identified by the Taxpayer Assistance Blueprint.
      --Enforcement Program Efficiencies -$60.2 million/-620 FTE.--These
            savings will result from productivity and efficiency
            improvements realized through the implementation of enhanced
            technology and business processes, such as improved case
            selection tools and techniques. In addition, the completion of
            initial training and transition of the fiscal year 2006 new
            hires back to their front-line enforcement activities will
            result in additional efficiencies for the examination and
            collection programs.
      --Shared Service Support Efficiencies -$36.4 million/-37 FTE.--These
            savings will result from several efforts, including the
            optimization and consolidation of space projects;
            implementation of cost-efficient government-wide contract
            support; and postage savings achieved through the
            consolidation, automation, and renegotiation of contract
            services for correspondence delivery.
    a strategic plan to improve voluntary compliance and reduce the tax gap
        The fiscal year 2008 budget supports our goal of improving
    voluntary compliance. The IRS has been working closely with the Office
    of Tax Policy at the Department of the Treasury to develop a strategic
    plan to achieve that goal. Key components of that goal and how they
    relate to the IRS budget are discussed below.
    Enhancing Taxpayer Service
        Taxpayer service is especially important to help taxpayers avoid
    making unintentional errors. The IRS provides year-round assistance to
    millions of taxpayers through many sources, including outreach and
    education programs, tax forms and publications, rulings and
    regulations, toll-free call centers, the IRS.gov web site, Taxpayer
    Assistance Centers (TACs), Volunteer Income Tax Assistance (VITA)
    sites, and Tax Counseling for the Elderly (TCE) sites.
        Assisting taxpayers with their tax questions before they file their
    returns reduces burdensome post-filing notices and other correspondence
    from the IRS, and proactively addresses inadvertent noncompliance.
        The fiscal year 2008 budget request contains three significant
    taxpayer service initiatives. First, we are requesting $5 million to
    expand the VITA program, a significant component of our effort to
    support taxpayers eligible to claim the Earned Income Tax Credit. This
    taxpayer service initiative will help expand our volunteer return
    preparation, outreach and education, and asset building services to
    low-income, elderly, Limited English Proficient (LEP), and disabled
    taxpayers.
        The budget also requests $5 million for additional resources to
    enhance our understanding of the role of the taxpayer service on
    compliance. This research will focus on understanding taxpayer burden,
    opportunities for enhanced service to help reduce errors made on
    returns, and the impact of service on overall levels of voluntary
    compliance.
        Finally, the budget requests $10 million for four of the
    initiatives recommended by the Taxpayer Assistance Blueprint (TAB)
    Strategic Plan for taxpayer service. As part of the Blueprint effort,
    we conducted a comprehensive review of our current portfolio of
    services to individual taxpayers to determine which services should be
    provided and improved. Based on the findings of the Blueprint, the
    funding for this initiative will implement the following telephone
    service and Web site interaction enhancements:
      --Contact Analytics provides an analytical tool for evaluating
            contact center recordings for the purpose of improving business
            processes and lowering business costs, as well as improving
            customer service.
      --Estimated Wait Time provides a real-time message that informs
            taxpayers about their expected wait time in queue, allowing
            them to make more informed decisions based on the status of
            their call and thus reducing taxpayer burden and increasing
            customer satisfaction.
      --Expanded Portfolio of Tax Law Decision Support Tools enables
            taxpayers to conduct key word and natural language queries to
            get answers to tax law questions through the Frequently Asked
            Questions database accessed on IRS.gov, thereby steadily
            increasing customer satisfaction and operational savings.
      --Spanish ``Where's My Refund?'' adds the ability to check refund
            status to the Spanish Web page on IRS.gov, enabling the
            Spanish-speaking community to receive the same level of
            customer service on the Web as available to the English Web
            page.
        Continued technological advancements offer significant
    opportunities for the IRS to improve the efficiency and effectiveness
    of call center services. Web site enhancements are designed to maximize
    the value of IRS.gov, making the site taxpayers' first choice for
    obtaining the information and services required to comply with their
    tax obligations.
    Improving Compliance Activities
        The IRS is continuing to improve efficiency and productivity
    through process changes, investments in technology, and streamlined
    business practices. We will continue to reengineer our examination and
    collection procedures to reduce cycle time, increase yield, and expand
    coverage. As part of our regular examination program, we are expanding
    the use of cost-efficient audit techniques first pioneered in the
    National Research Program (NRP).
        We are also expanding our efforts to shift to agency-wide
    strategies, which maximize efficiency by better aligning problems (such
    as nonfilers and other areas of noncompliance) and their solutions
    within the organization. The IRS is committed to improving the
    efficiency of its audit process, measured by audit change rates and
    other appropriate benchmarks.
        There are seven specific initiatives proposed in the fiscal year
    2008 budget aimed at improving compliance. These initiatives provide:
      --$73.2 million to improve compliance among small business and self-
            employed taxpayers in the elements of reporting, filing, and
            payment compliance.--This funding will be allocated for
            increasing audits of high-risk tax returns, collecting unpaid
            taxes from filed and unfiled tax returns, and investigating
            persons who have evaded taxes for possible criminal referral.
            It is estimated that this request will produce $144 million in
            additional annual enforcement revenue per year, once new hires
            reach full potential in fiscal year 2010.
      --$26.2 million for increasing compliance for large, multinational
            businesses.--This enforcement initiative will increase
            examination coverage for large, complex business returns;
            foreign residents; and smaller corporations with significant
            international activity. It addresses risks arising from the
            rapid increase in globalization, and the related increase in
            foreign business activity and multi-national transactions where
            the potential for noncompliance is significant in the reporting
            of transactions that occur across differing tax jurisdictions.
            With this funding, we estimate that coverage for large
            corporate and flow-through returns will increase from 7.9 to
            8.2 percent in fiscal year 2008, and produce over $74 million
            in additional annual enforcement revenue, once the new hires
            reach full potential in fiscal year 2010.
      --$28 million for expanded document matching in existing sites.--This
            enforcement initiative will increase coverage within the
            Automated Underreporter (AUR) program by minimizing revenue
            loss through increased document matching of individual taxpayer
            account information. We believe the additional resources will
            result in an increase in AUR closures from 2.05 million in
            fiscal year 2007 to 2.64 million in fiscal year 2010. We expect
            $208 million of additional enforcement revenue per year, once
            the new hires reach full potential in fiscal year 2010. In
            addition, the budget requests $23.5 million to establish a new
            document matching program at our Kansas City campus. This
            enforcement initiative will fund a new AUR site within the
            existing IRS space in Kansas City to address the misreporting
            of income by individual taxpayers. Establishing this new AUR
            site should result in over $183 million in additional
            enforcement revenue per year once the new hires reach full
            potential in fiscal year 2010.
      --$6.5 million to increase individual filing compliance.--This
            enforcement initiative will help address voluntary compliance.
            The Automated Substitute for Return Refund Hold Program
            minimizes revenue loss by holding the current-year refunds of
            taxpayers who are delinquent in filing individual income tax
            returns and are expected to owe additional taxes. We estimate
            that this initiative will result in securing more than 90,000
            delinquent returns in fiscal year 2008 and produce $82 million
            of additional enforcement revenue per year, once the new hires
            reach full potential in fiscal year 2010.
      --$15 million to increase tax-exempt entity compliance.--This
            enforcement initiative will deter abuse by entities under the
            purview of the Tax-Exempt and Governmental Entities Division
            (TEGE) and misuse of such entities by third parties for tax
            avoidance or other unintended purposes. The funding will aid in
            increasing the number of TEGE compliance contacts by 1,700 (six
            percent) and employee plan/exempt organization determinations
            closures by over 9,000 (eight percent) by fiscal year 2010.
      --$10 million for increased criminal tax investigations.--This
            funding will help us aggressively attack abusive tax schemes,
            corporate fraud, nonfilers, and employment tax fraud. It will
            also address other tax and financial crimes identified through
            Bank Secrecy Act related examinations and case development
            efforts, which include an emphasis on the fraud referral
            program. Our robust pursuit of tax violators and the resulting
            publicity is aimed to foster deterrence and enhance voluntary
            compliance.
      --$41 million for conducting research studies of compliance data for
            new segments of taxpayers needed to update existing estimates
            of reporting compliance.--The data collected from these studies
            will enable the IRS to develop strategies to combat specific
            areas of noncompliance.
        In addition to these initiatives, I would stress the importance of
    allowing us to continue with the private debt collection program. The
    Congress authorized the use of private collection agents (PCAs) in the
    American Jobs Creation Act of 2004. As we continue to debate the
    efficacy of this program, I want to take this opportunity to make a
    couple of points for purposes of our ongoing discussions.
        One issue that has been debated is the relative efficiency of using
    PCAs versus IRS employees to collect the taxes owed. The most important
    question is not whether IRS employees or PCAs can do the job more
    efficiently, but rather whether PCAs collect money that would otherwise
    go uncollected. The IRS lacks the resources to pursue the relatively
    simple, geographically dispersed cases that are now being assigned to
    PCAs. It is not realistic to expect that the Congress is going to give
    the IRS an unlimited budget for enforcement, and if Congress provided
    the IRS additional enforcement resources, I believe those resources
    would be applied best by allocating them to more complex, higher
    priority cases that are not appropriate for PCAs.
        The IRS continues to work with PCAs to ensure that the program is
    fair to taxpayers and respects taxpayer rights. The Treasury Inspector
    General for Tax Administration (TIGTA) agreed with that assessment.
    Earlier this month, TIGTA issued a report which noted that ``IRS has
    taken proactive measures to effectively develop and implement the (PCA)
    Program.''
        The report said that we had taken the appropriate steps to ensure
    contractor employees received sufficient and adequate training on
    applicable laws and regulations before allowing them access to Federal
    tax information. This process included providing contractors with an
    orientation and overview of the training required and conducting an
    onsite assessment of the contractor training.
        TIGTA also recognized that we had required all contractor employees
    assigned to the Program contract, or who have access to Federal tax
    information, to undergo background investigations. We granted either
    interim or final approval of background investigations for each
    employee working on the contract at the time of our review.
        We currently estimate that between now and fiscal year 2017, our
    partnership with PCAs will result in approximately 2.9 million
    delinquent cases receiving treatment that would otherwise have gone
    unworked. This partnership will help reduce the backlog in outstanding
    tax liabilities, which has grown by 118 percent over the last 12 years.
        From September 7, 2006, when cases were first assigned to PCAs,
    through March 22, 2007 PCAs collected $19.47 million in gross revenue.
    We estimate that cases worked by PCAs will generate estimated gross
    revenue of $1.4 billion through fiscal year 2017.
        Another reason to continue to use this tool is to evaluate whether
    we in the public sector can learn anything from these PCAs that will
    enable us to do our jobs better. Particularly over the last 20 years,
    government agencies at all levels have adopted many practices and ways
    of doing business that have been pioneered in the private sector. One
    need look no further than the vastly expanded use by the government of
    the Internet in providing services to the public as an example of a
    practice that was pioneered in the private sector, but adopted quickly
    and effectively by the government. We should not remove PCAs as a tool
    for addressing the problem before we have an opportunity to evaluate
    the potential of this initiative to help improve compliance, and
    perhaps even to show the government how to be more effective in its own
    efforts.
    Reducing Opportunities for Evasion
        The IRS is already aggressively pursuing enforcement initiatives
    designed to improve compliance and reduce opportunities for evasion. As
    I pointed out earlier, these efforts have produced a steady climb in
    enforcement revenues since 2001, as well as an increase in both the
    number of examinations and the coverage rate in virtually every major
    category.
        In the budget request, the Administration proposes to expand
    information reporting, improve compliance by businesses, strengthen tax
    administration, and expand penalties in the following ways:
      --Expand information reporting.--Specific information reporting
            proposals would:
        --Require information reporting on payments to corporations;
        --Require basis reporting on sales of securities;
        --Expand broker information reporting;
        --Require information reporting on merchant payment card
                reimbursements;
        --Require a certified taxpayer identification number (TIN) from
                non-employee service providers;
        --Require increased information reporting for certain government
                payments for property and services; and
        --Increase information return penalties.
      --Improve compliance by businesses.--Improving compliance by
            businesses of all sizes is important. Specific proposals to
            improve compliance by businesses would:
        --Require electronic filing by certain large businesses;
        --Implement standards clarifying when employee leasing companies
                can be held liable for their clients' Federal employment
                taxes; and
        --Amend collection due process procedures applicable to employment
                tax liabilities.
      --Strengthen tax administration.--The IRS has taken a number of steps
            under existing law to improve compliance. These efforts would
            be enhanced by specific tax administration proposals that
            would:
        --Expand IRS access to information in the National Directory of New
                Hires database;
        --Permit the IRS to disclose to prison officials return information
                about tax violations; and
        --Make repeated failure to file a tax return a felony.
      --Expand penalties.--Penalties play an important role in discouraging
            intentional noncompliance. Specific proposals to expand
            penalties would:
        --Expand preparer penalties;
        --Impose a penalty on failure to comply with electronic filing
                requirements; and
        --Create an erroneous refund claim penalty.
        The Administration also has four proposals relating to IRS
    administrative reforms.
        The first proposal modifies employee infractions subject to
    mandatory termination and permits a broader range of available
    penalties. It strengthens taxpayer privacy while reducing employee
    anxiety resulting from unduly harsh discipline or unfounded
    allegations.
        The second proposal allows the IRS to terminate installment
    agreements when taxpayers fail to make timely tax deposits and file tax
    returns on current liabilities.
        The third proposal eliminates the requirement that the IRS Chief
    Counsel provide an opinion for any accepted offer-in-compromise of
    unpaid tax (including interest and penalties) equal to or exceeding
    $50,000. This proposal requires that the Secretary of the Treasury
    establish standards to determine when an opinion is appropriate.
        The fourth proposal modifies the way that Financial Management
    Services (FMS) recovers its transaction fees for processing IRS levies
    by permitting FMS to add the fee to the liability being recovered,
    thereby shifting the cost of collection to the delinquent taxpayer. The
    offset amount would be included as part of the 15-percent limit on
    continuous levies against income.
        Collectively, these proposals should generate $29.5 billion in
    revenue over 10 years. The proposed budget provides $23 million to
    begin implementation of these initiatives. This funding will allow the
    purchase of software and the modifications to IRS information
    technology systems necessary to implement these legislative proposals.
    Enhancing Research
        Research enables the IRS to develop strategies to combat specific
    areas of noncompliance, improve voluntary compliance, and allocate
    resources more effectively. Historically, our estimates of reporting
    compliance were based on the Taxpayer Compliance Measurement Program
    (TCMP), which consisted of line-by-line audits of random samples of
    returns. This study provided us with information on compliance trends
    and allowed us to update audit selection formulas. However, this method
    of data gathering was extremely burdensome on the taxpayers who were
    forced to participate. One former IRS Commissioner noted that the TCMP
    audits were akin to having an autopsy without the benefit of death. As
    a result of concerns raised by taxpayers, Congress, and other
    stakeholders, the last TCMP audits were done for Tax Year (TY) 1988.
        We have conducted several much narrower studies since then, but
    nothing that would give us a comprehensive perspective on the overall
    tax gap. As a result, until the recent NRP data, all of our subsequent
    estimates of the tax gap were rough projections that basically assumed
    no change in compliance rates among the major tax gap components; the
    magnitude of these projections reflected growth in tax receipts in
    these major categories.
        The National Research Program (NRP), which we have used to estimate
    our most recent tax gap updates, provides us a better focus on critical
    tax compliance issues in a manner that is far less intrusive than
    previous means of measuring tax compliance. We used a focused,
    statistical selection process that resulted in the selection of
    approximately 46,000 individual returns for TY 2001. This population
    sample was less than previous compliance studies, even though the
    population of individual tax returns had grown over time. Like the
    compliance studies of the past, the NRP was designed to allow us to
    estimate the overall extent of reporting compliance among individual
    income tax filers, and to update our audit selection formulas. It also
    introduced several innovations designed to reduce the burden imposed on
    taxpayers whose returns were selected for the study.
        The NRP provided updated estimates for determining the sources of
    noncompliance. The IRS also uses the NRP findings to better target
    examinations and other compliance activities, thus increasing the
    dollar-per-case yield and reducing ``no change'' audits of compliant
    taxpayers. Innovations in audit techniques to reduce taxpayer burden,
    pioneered during the 2001 NRP, have been adopted in regular operational
    audits.
        Almost as important as understanding what the NRP research provides
    is to understand its limitations. The focus of the first NRP reporting
    compliance study was on individual income tax returns. It did not
    provide estimates for noncompliance with other taxes, such as the
    corporate income tax or the estate tax. Our estimates of compliance
    with taxes other than the individual income tax are still based on
    projections that assume constant compliance behavior among those major
    tax gap components, since the most recent compliance estimates were
    compiled (i.e., for TY 1988 or earlier).
        Recurring and timely compliance research is needed to ensure that
    the IRS can efficiently target resources, effectively provide the best
    service possible, and respond to new sources of noncompliance as they
    emerge. Compliant taxpayers benefit when the IRS uses the most up-to-
    date research to improve workload selection formulas, as this reduces
    the burden of unnecessary taxpayer contacts.
        The fiscal year 2008 budget request includes funds for two
    significant research initiatives. First, the budget requests $41
    million to improve compliance estimates, measures, and detection of
    noncompliance. This funding will allow research studies of compliance
    data for new segments of taxpayers needed to update existing estimates
    of reporting compliance. Unlike in the past, the IRS will conduct an
    annual study of compliance among 1040 filers based on a smaller sample
    size than the 2001 NRP study. This approach will provide fresh
    compliance estimates each year, and by combining samples over several
    years, will provide a regular update to the larger sample size needed
    to keep our targeting systems and compliance estimates up to date.
        The second initiative funded by the request is to research the
    effect of service on taxpayer compliance. The budget requests $5
    million for this project, which will undertake new research on the
    needs, preferences, and behaviors of taxpayers. The research will focus
    on four areas:
      --Meeting taxpayer needs by providing the right channel of
            communication;
      --Better understanding taxpayer burden;
      --Understanding taxpayer needs through the errors they make; and
      --Researching the impact of service on overall levels of voluntary
            compliance.
    Continuing Improvements in Information Technology
        Tax administration in the twenty-first century requires improved
    IRS information technology (IT). We are committed to continuing to make
    improvements in technology and the fiscal year 2008 budget request
    reflects that commitment. The request includes $81 million to improve
    the IRS' information technology infrastructure. Sixty million dollars
    of this amount is requested to upgrade critical IT infrastructure,
    addressing the backlog of IRS equipment that has exceeded its life
    cycle. Failure to replace the IT infrastructure will lead to increased
    maintenance costs and will increase the risk of disrupting business
    operations. Planned expenditures in fiscal year 2008 include procuring
    and replacing desktop computers, automated call distributor hardware,
    mission critical servers, and Wide Area Network/Local Area Network
    routers and switches.
        The other $21 million will be used to enhance the Computer Security
    Incident Response Center (CSIRC) and the network infrastructure
    security. This infrastructure initiative will provide $13.1 million to
    fund enhancements to the CSIRC necessary to keep pace with the ever-
    changing security threat environment through enhanced detection and
    analysis capability, improved forensics, and the capacity to identify
    and respond to potential intrusions before they occur. The remaining
    $7.9 million will fund enhancements to the IRS' network infrastructure
    security. It will provide the capability to perform continuous
    monitoring of the security of operational systems using security tools,
    tactics, techniques, and procedures to perform network security
    compliance monitoring of all IT assets on the network.
        Finally, the fiscal year 2008 budget request includes a total of
    $282.1 million to continue the development and deployment of the IRS
    Business Systems Modernization (BSM) program in line with the
    recommendations identified in the IRS Modernization, Vision, and
    Strategy. This funding will allow the IRS to continue progress on
    modernization projects, such as the Customer Account Data Engine
    (CADE), Account Management Services (AMS), Modernized e-File (MeF), and
    Common Services Projects (CSP).
        The development of the CADE (Customer Account Data Engine) and AMS
    (Account Management Services) systems is the heart of the IT
    modernization of the IRS. The combination of these two systems working
    together will enable the IRS to process tax returns and deal with
    taxpayer issues in a near real-time manner. Our objective is that the
    IRS operate similarly to what one expects from one's bank--account
    transactions occurring during the business day will be posted and
    available by the next business day. In addition, AMS will enable the
    IRS representatives who work with taxpayers to have access to all the
    information regarding that taxpayer, including electronic access to tax
    return data, and electronic copies of correspondence. Equipped with
    such comprehensive and up-to-date information, our representatives will
    be in a much better position to help taxpayers resolve their issues.
        MeF is the future of electronic filing. It provides a standard data
    format for all electronic tax returns, which will reduce the cost and
    time to add and maintain additional tax form types. MeF is a flexible
    real-time system that streamlines the processing of e-filed tax
    returns, resulting in a quicker acknowledgement of the filing to the
    taxpayer or their representative. In fiscal year 2007, the IRS will
    start development and implementation of the 1040 on the MeF platform.
        CSP will provide funding for new portals, which are technology
    platforms that meet many IRS business needs through Web-based front-
    ends, and provide secure access to data, applications, and services.
    The portals are mission-critical components of the enterprise
    infrastructure required to support key business processes and
    compliance initiatives.
        The benefits accruing from the delivery and implementation of BSM
    projects not only provide value to taxpayers, the business community,
    and government, but also contribute to operational improvements and
    efficiencies within the IRS.
                                  other issues
        In recent weeks, there has been much publicity over identity theft
    and the loss of IRS laptops. Please allow me to bring you up to date on
    these issues.
    Identity Theft
        Taxpayer and employee privacy is a foremost concern of the IRS. We
    are charged with protecting confidential information about every
    taxpayer. In recognition of this responsibility, we continue to update
    our systems and our training so that employees who have access to
    sensitive information are aware of the steps they must take to prevent
    that information from being compromised.
        This job has never been tougher. According to the FBI, identity
    theft is one of the fastest growing white collar crimes. There has been
    a 4,600 percent increase in computer crime since 1997. Nearly 10
    million Americans each year are affected by identity theft, according
    to the Federal Trade Commission (FTC). Deloitte-Touche has reported
    that financial institutions and U.S. banks have also experienced a
    significant increase in the number of computer based attacks and
    attempted intrusions into financial systems.
        The FTC also reports, ``About 90 percent of business record thefts
    involve payroll or employment records, while only about 10 percent are
    generated from customer lists.'' These business record thefts also
    include job applications, personnel records, health insurance and
    benefits records, and payroll related tax documents that provide
    personal information that identity thieves use to steal employees'
    identities. While most identity theft is use of consumer's personal
    information to make purchases, almost 1.5 million victims indicated
    that their personal information was misused in non-financial ways to
    obtain government documents or tax forms.
        Through our Automated Underreporter Program (AUR), we see firsthand
    potential instances of identity theft. The AUR matches W-2s for the
    same SSN to ensure that the taxpayer has reported all sources of
    income. If identity theft has occurred the SSN may have been used with
    multiple employers who have issued multiple W-2s for the SSN. In Tax
    Year (TY) 2004, the latest year for which we have data, there were
    16,152 identity theft claims made through the AUR program. This level
    is far less than the 30,639 cases in TY 2002, but a few more than the
    12,618 claimed in TY 2003. In these cases, if the affected taxpayer
    provides the necessary documentation on an identity theft claim, the
    income in question will not result in an additional assessment.
        We have tried to take the initiative in proactively analyzing
    processes to identify areas of vulnerability, and in educating
    taxpayers and employees about identity theft. We have teamed with other
    federal agencies, such as the Federal Trade Commission (FTC), the
    Department of Justice (DOJ) and the Social Security Administration
    (SSA) to address identity theft crime. Treasury was also a member of
    the Identity Theft Task Force, created by executive order in May 2006,
    and which recently submitted to the President an identity theft plan
    entitled ``Combating Identity Theft: A Strategic Plan''.
        In 2005 we began an aggressive strategy to research and address
    this growing problem. We established an Identity Theft Program Office
    charged with implementing the IRS' policy on identity theft. This
    policy requires the IRS to take the necessary steps to provide
    assistance to victims of identity theft within the scope of their
    official duties. Our Identity Theft Program Office works with offices
    throughout the IRS to implement the agencies' Identity Theft Enterprise
    Strategy comprised of three components--Outreach, Prevention and Victim
    Assistance.
    Outreach
        The IRS has undertaken several outreach initiatives to provide
    taxpayers, employees, and other stakeholders with the information they
    need to proactively prevent and resolve identity theft issues. For
    example, the IRS:
      --Revised the most widely used documents, such as the Form 1040
            instructions and Publication 17, Your Federal Income Tax, to
            include information about identity theft.
      --Launched an identity theft website on IRS.gov to provide victims
            with updated information and links to SSA and FTC and with
            information on how to contact the Taxpayer Advocate.
      --Participated with Department of Treasury and the SSA in a multi-
            agency panel discussion on identity theft, which was held at
            the IRS nationwide tax forums in 2006 that reached
            approximately 30,000 tax preparers.
      --Developed an internal web communication tool to alert IRS employees
            to issues of identity theft.
      --Lead a multi-agency working group (Treasury, FTC, SSA, and Homeland
            Security) with a goal of providing consistent information and
            services to victims, consistent with recommendations being made
            by the President through the Identity Theft Task Force.
      --Partnered with the Treasury Inspector General for Tax
            Administration (TIGTA) to develop and promote a consistent
            message to inform taxpayers that the IRS does not communicate
            with taxpayers via e-mail, with the goal of reducing the number
            of identity thefts accomplished by ``phishing.''
      --Jointly with TIGTA published an e-mail address on IRS.gov to serve
            as a repository for the fraudulent emails so they could be
            tracked to the source and destroyed.
    Victim Assistance
        We recognize that outreach alone is not enough and that we also
    must be prepared to assist victims when identity theft occurs. With
    respect to the victim assistance prong of the Enterprise Strategy:
      --The IRS established a new identity theft policy that provides for
            consistent procedures across its functions to ensure timely
            resolution of identity theft issues affecting taxpayer
            accounts.
      --The IRS has developed new standards for documentation required from
            taxpayers to validate the identity of the taxpayer, address,
            and the fact of the identity theft. These documentation
            standards are consistent with those required by FTC and SSA.
      --The IRS has worked closely with SSA to reduce the time required to
            resolve cases where more than one taxpayer uses the same SSN on
            a tax return (called the Scrambled SSN process). The average
            timeframe to resolve the case is now approximately 10 months
            compared to 18 months previously. As of March 24, 2007, the
            current scrambled SSN inventory count is approximately 5,000
            cases. Approximately 38,000 cases have been referred to SSA in
            2003-2006.
      --The IRS updated its processes and notices to help taxpayers whose
            name and SSN were used by an identity thief for employment
            purposes. When the IRS matches an identity thief's W-2
            information with a legitimate taxpayer's income tax return, the
            IRS sends the taxpayer a notice regarding the under-reported
            income. This notification is often the first time the victim is
            aware of the identity theft. To aid these victims of identity
            theft, the under-reporter notices were updated with specific
            instructions on the type of documents and information needed to
            validate the identity theft cases.
      --The IRS is taking additional steps to reduce taxpayer burden
            associated with identity theft. By January 2008, the IRS will
            implement a new Service-wide identity theft indicator that will
            be placed on a taxpayer's account upon the authentication of
            identity theft. Once the new process is fully deployed,
            taxpayers should have to provide identity theft authentication
            only one time, and the IRS will be able to reject returns which
            do not appear to be from the legitimate owner of the SSN.
    Prevention
        There are three types of identity theft crimes in tax
    administration: refund crimes, employment and income diversion.
      --Refund crimes are perpetrated by criminals who use another person's
            tax information to fake a return and steal a refund. The Refund
            Crimes Unit of the IRS' Criminal Investigation Division
            identifies those returns through the Questionable Refund
            program.
      --The IRS is developing several initiatives to reduce the incidence
            of theft related to employment, such as working with SSA to
            explore initiatives to improve the accuracy of SSN reporting.
      --Individuals who make false identity claims to underreport income
            will face additional tax and penalties, as will preparers who
            promote such schemes.
        To augment the IRS Identity Theft Enterprise Strategy composed of
    outreach, assistance, and prevention, the IRS initiated a Service-wide
    Identity Theft Risk Assessment to qualify and quantify existing threats
    and vulnerabilities related to IRS processes that could directly or
    indirectly facilitate identity theft and/or taxpayer burden. As an
    output of this risk assessment, the IRS developed (and has began the
    implementation of) targeted remediation strategies designed to address
    the identified threats and vulnerabilities.
        Where justified, we have referred cases of identity theft to our
    Criminal Investigation (CI) unit. In the past two years, CI has
    successfully investigated a number of cases that were successfully
    prosecuted in which identity theft has led to tax fraud. Just last
    month, two women from Ohio were sentenced to 63 and 188 months,
    respectively, and ordered to pay $300,000 in restitution for
    perpetuating an identity theft scheme. As part of this scheme, the
    women claimed nearly $114,000 in tax refunds to which they were not
    entitled.
        Last November, a Florida man was sentenced to 63 months in prison
    to be followed by three years of supervised release for making false
    claims against the IRS and for identity theft. He was also ordered to
    pay a personal money judgment of $152,171, and to pay $152,171 in
    restitution to the IRS. To carry out this scheme, the man used the
    Internet to obtain personal information, including names and dates of
    birth, for at least 150 Florida inmates.
        We are also continuing to review ways we can protect our employees
    from identity theft. The IRS Office of Privacy is identifying ways to
    reduce or eliminate the Service's use of employee SSNs in certain
    applications to minimize the risk of improper use. We are closely
    coupling privacy and identity theft protections with the agency
    security program, so that when we do need to collect SSNs--either
    employee or citizen, we can ensure that they are adequately protected
    within our systems.
        The main focus for the annual IRS' Security Awareness Week, last
    November, was ``Identity Theft/Fraud.'' We focused activities on
    raising awareness and making employees aware of their responsibilities.
        While research shows that the IRS has one of the lowest rates of
    identity theft in all the Federal government, we still take this
    situation very seriously. We have made significant progress, but
    additional work remains--including implementing additional mediation
    strategies and conducting in-depth analyses of the remaining high-
    priority processes.
    Laptop Security
        Every year, the IRS processes over $2 trillion in revenues to fund
    the U.S. operating budget. Although the majority of this is collected
    in an automated banking system throughout the year, about $300 billion
    is collected through 8 IRS campuses where taxpayers send their tax
    returns for processing. We house computing systems that hold data on
    all taxpayers, and also process enormous volumes of paper data in our
    more than 500 offices across the country. We have more than 82,000 full
    time and 12,000 part-time employees across the United States. Our
    workforce is highly mobile, as revenue agents and officers are often in
    the field working directly with taxpayers.
        IRS computers, networks, and databases are protected by multiple
    layers of security, including modern security technology devices such
    as firewalls, encrypted communication links, and automatic intrusion
    detection devices.
        The IRS is one of the few government agencies operating its own 24/
    7 computer security incident response center (CSIRC) to monitor IRS
    computer and network security, and to collect and follow up on any
    security incidents. The IRS' CSIRC works in close coordination with the
    Treasury Department and the Department of Homeland Security's CSIRCs
    and the US-CERT incident reporting center.
        As I mentioned earlier, the fiscal year 2008 budget for IRS
    proposes $21 million to be used to enhance CSIRC and the network
    infrastructure security. This infrastructure initiative will provide
    $13.1 million to fund enhancements to the CSIRC necessary to keep pace
    with the ever-changing security threat environment through enhanced
    detection and analysis capability, improved forensics, and the capacity
    to identify and respond to potential intrusions before they occur. The
    remaining $7.9 million will fund enhancements to the IRS' network
    infrastructure security. It will provide the capability to perform
    continuous monitoring of the security of operational systems using
    security tools, tactics, techniques, and procedures to perform network
    security compliance monitoring of all IT assets on the network.
        The IRS has always had policy guidance in place requiring employees
    to protect taxpayer information and other personal and private data.
    Protection of taxpayer information is emphasized and stressed in all
    employee orientation and refresher training as one of the Service's
    highest priorities.
        Prior to January 2007, all IRS laptops included encryption tools
    that IRS employees were required to use to encrypt all sensitive
    information. We recognize that this previous generation of encryption
    tools may have been technically complex and challenging for many
    employees and as a result some may have not have done the proper
    encryption. Therefore, we have recently completed installation of an
    automatic full disk encryption product on all IRS laptops that
    automatically encrypts all data on the laptop, without requiring any
    employee action. We have tested this encryption system and certified
    that it meets mandatory standards. We have also provided physical
    security locks for all IRS laptops.
        IRS employees have reported the loss or theft of over 500 laptop
    computers over the last five years. Prior to May 2006, these reports
    primarily focused on reporting the theft or loss of IT equipment. Given
    the heightened awareness across the Federal Government in 2006 to the
    protection of sensitive personally identifiable information (PII), all
    government agencies now are focused more on the reporting of any
    sensitive information that may have been lost when a laptop is lost or
    stolen.
        The IRS laptop losses were reported to TIGTA, which investigated
    these incidents and provided reports back to IRS management. We
    recovered very few devices, as they are quickly re-sold.
        We are also working with our Federal and State partners with whom
    we share information to implement encryption solutions on data tapes.
    The encryption solutions are planned to be completed by October 1,
    2007. In the interim, the IRS is using special security shipping
    containers and courier services to ensure that tapes shipped from IRS
    are protected. Recipients of the data are subject to implementing
    specific safeguards and complying with published standards for the
    protection of the data. Appropriate documentation is required for the
    transport of the tapes.
        As the President's Taskforce on Identity Theft recommended, the
    Office of Management and Budget (OMB) is working closely with all
    agencies, including the IRS, to develop policy guidance for
    notification in instances where an individual's personally identifiable
    information has been compromised. The IRS has everything in place to
    comply with this new policy. We have reviewed all incidents, and there
    are a few that likely will require follow up (notification).
                                    summary
        One of the questions that the IRS is asked frequently is how much
    money, beyond the budget request, we could use productively. My honest
    answer to that question is that while I want Congress to appropriate
    every cent that has been requested, our ability to absorb additional
    funding beyond that amount is limited by our capacity to hire and train
    new personnel.
        The fiscal year 2008 budget request includes significant increases
    for IRS enforcement efforts. Fully funding that request will help us
    make progress in greatly improving voluntary compliance. Based on our
    analysis, covering the most recent 11 years of collection experience,
    we estimate that every dollar we have spent on enforcement has
    generated a direct return of an average of four dollars in increased
    revenue to the Federal Treasury. This return can be expected to occur
    when the full productive benefit of the investment is realized.
        This direct return on investment does not consider the indirect
    effect of increased enforcement activities in deterring taxpayers who
    are considering engaging in noncompliant behavior. Econometric
    estimates of the indirect effects indicate a significant impact from
    increased enforcement activities. Stated another way, taxpayers who see
    us enforcing the law against their friends, neighbors, or competitors
    are more likely to comply voluntarily and not risk the chance that we
    might audit them. We do not measure this indirect impact, but research
    suggests that it could be as much as three times or more the direct
    impact on revenue.
        We also believe that dollars spent on taxpayer service have a
    positive impact on voluntary compliance. The complexity of complying
    with the nation's current tax system is a significant contributor to
    the tax gap, and even sophisticated taxpayers make honest mistakes on
    their tax returns. Accordingly, helping taxpayers understand their
    obligations under the tax law is a critical part of improving voluntary
    compliance. To this end, the IRS remains committed to a balanced
    program assisting taxpayers in both understanding the tax law and
    remitting the proper amount of tax.
        In addition, the President's fiscal year 2008 budget request
    contains a number of legislative proposals that provide additional
    tools for the IRS to enforce the existing tax law. Perhaps the most
    critical of these tools is greater third party reporting. An analysis
    of the data from the National Research Program of TY 2001individual
    income tax returns leads to one very obvious conclusion. Compliance is
    much higher in those areas where there is third party reporting. For
    example, only 1.2 percent of wages reported on Forms W-2 are
    underreported. This compares to a 53.9 percent underreporting rate for
    income subject to little or no third party reporting.
        The fiscal year 2008 budget request asks Congress to expand
    information reporting to include additional sources of income and make
    other statutory changes to improve compliance. These legislative
    proposals are intended to improve tax compliance with minimum taxpayer
    burden. When implemented, it is estimated that these proposals will
    generate $29.5 billion over ten years.
        I appreciate the opportunity to testify this morning, and I will be
    happy to respond to any questions that Members of the Committee may
    have.

        Senator Durbin. Mr. George.

                          STATEMENT OF RUSSELL GEORGE

        Mr. George. Thank you, Mr. Chairman. Mr. Chairman, thank
    you for the invitation to appear to discuss the Internal
    Revenue Service's fiscal year 2008 proposed budget. At your
    request, my testimony will also address the 2007 tax filing
    season as well as TIGTA's 2008 budget request.
        The IRS's total budget request of approximately $11.4
    billion includes funding for programs that pose significant
    long-term and short-term challenges to the service. Some of
    these concerns include improving taxpayer services, enhancing
    enforcement of the tax laws, as well as the IRS's modernization
    efforts, all while attempting to ensure their security. The IRS
    is making progress in some of these areas. However, several
    concerns remain.
        For example, in the area of taxpayer services the IRS has
    indicated that it wants to expand its voluntary income tax
    assistance program. However, during the 2007 filing season our
    auditors found that only 56 percent of the test tax returns we
    used to help test the system were accurately prepared by the
    volunteers. While this is an improvement over the test TIGTA
    conducted in 2006, it is unacceptable that taxpayers who use
    this IRS-sanctioned service have a slightly better than 50-50
    chance that their tax returns will be accurately prepared.
    TIGTA believes that taxpayers would be better served if the
    resources were allocated in a way to allow these programs to
    achieve better results.
        Another area of concern is the IRS's implementation of the
    taxpayer assistance blueprint. The initiatives in this document
    focus on services that support the needs of individual
    taxpayers. TIGTA reviewed the development of the first phase of
    the blueprint and found that most but not all the information
    it contained was accurate. Our review concluded that the
    inaccurate information did not affect the service's improvement
    themes. However, we are concerned that if these problems were
    to continue there is a heightened risk of bad data leading to
    bad choices.
        The 2008 IRS budget request also includes approximately $62
    million to develop and deploy the IRS's business systems
    modernization program. This increase would allow the service to
    continue projects such as the customer account data engine
    (CADE), which is the foundation of the IRS's modernization
    efforts. Referred to as CADE, it will replace the antiquated
    master file system, which is based on technology from the
    1960s.
        The IRS has estimated that CADE would process 33 million
    tax returns during the 2007 filing season. However, due to
    delays in implementing the newest release of the project, the
    service now estimates that the system will process fewer than
    20 million returns this season. While this delay is a short-
    term concern, there has been a pattern of deferring CADE
    requirements and missing deployment dates. Allowing this
    pattern to continue could undermine the long-term success of
    the program.
        It is widely recognized that continued emphasis on
    enforcement is needed if we are to successfully narrow the tax
    gap. Indeed, a significant portion of the IRS's proposed
    funding for fiscal year 2008 is for enhanced enforcement
    personnel and an initiative to improve compliance, estimates
    and measures. Although having new information about individual
    taxpayers is useful as they are the largest taxpaying segment,
    there is no current information available about employment,
    small and large corporations, and other compliance segments.
    Without firm plans to study these segments, the current tax gap
    estimate is an incomplete picture.
        Despite the challenges of implementing last-minute tax law
    changes, the 2007 filing season appears to be progressing
    without major problems. The number of electronically filed
    returns has increased, as has use of the IRS's Internet site
    and many of its other customer services. However, I have raised
    concerns about the IRS's telephone excise tax refund program
    conducted this year. Many taxpayers have not claimed the one-
    time refund even though the IRS simplified the process and
    publicized it. In addition, some taxpayers have submitted
    highly questionable refund claims which did not garner further
    IRS scrutiny.
        Mr. Chairman, as requested, I have included in my written
    statement the challenges confronting TIGTA, many of which are
    similar to those of other Federal agencies. Our workload, labor
    costs and rent continue to increase. However, due to budgetary
    constraints our staffing level over the last several years
    declined by over 12 percent.

                               PREPARED STATEMENT

        Mr. Chairman, members of the subcommittee, I hope my
    discussion of some of the fiscal year 2008 budget and 2007 tax
    filing season issues will assist you in your consideration of
    the IRS's appropriations. I would be happy to answer questions
    at the appropriate time.
        Senator Durbin. Thanks, Mr. George.
        [The statement follows:]
                    Prepared Statement of J. Russell George
        Chairman Durbin, Ranking Member Brownback, and Members of the
    Subcommittee, I thank you for the opportunity to testify today. My
    comments will focus on the Internal Revenue Service's (IRS or Service)
    fiscal year 2008 budget, the 2007 Filing Season, and, at your request,
    the Treasury Inspector General for Tax Administration's (TIGTA) fiscal
    year 2008 budget request. The IRS administers America's tax laws and
    collects approximately 95 percent of the revenues that fund the Federal
    Government. It is therefore important to identify the resources
    required to support the IRS' role as steward of the Nation's tax
    administration system.
              overview of the irs' fiscal year 2008 budget request
        The major component of the Department of the Treasury, IRS has
    primary responsibility for administering the Federal tax system. Since
    this is a self-assessment system, almost everything the Service does is
    in some way related to fostering voluntary compliance with tax laws. It
    provides taxpayer service programs that help millions of taxpayers to
    understand and meet their tax obligations. The IRS' resources also
    provide for enforcement programs aimed at deterring taxpayers who are
    inclined to evade their responsibilities, and vigorously pursuing those
    who violate tax laws.
        The IRS must strive to enforce the tax laws fairly and efficiently
    while balancing service and education to promote voluntary compliance
    and reduce taxpayer burden. To accomplish these efforts, the proposed
    fiscal year 2008 IRS budget requests resources of approximately $11.4
    billion. Included in this amount are approximately $11.1 billion in
    direct appropriations, $133.5 million from reimbursable programs, and
    $180 million from user fees. The direct appropriation is approximately
    a $657 million increase, or 6.3 percent, over the budget provided by
    the fiscal year 2007 Continuing Resolution. Highlights of the increase
    include: $131 million for taxpayer service initiatives; $440 million
    for enforcement initiatives; $282 million for the IRS' Business Systems
    Modernization program; and $60 million for critical Information
    Technology (IT) infrastructure upgrades (included in the enforcement
    and taxpayer service totals above).
        The fiscal year 2008 budget also includes funding to implement the
    Department of the Treasury's (Department) tax gap strategy. In
    September 2006, the Department published a comprehensive plan to
    improve tax compliance. Additionally, delivery of IRS programs demands
    a secure and modernized infrastructure capable of fairly, effectively,
    and efficiently collecting taxes while minimizing taxpayer burden. The
    fiscal year 2008 budget request supports the Service's five-year
    strategic plan and the Department's compliance improvement strategy.
    The IRS' strategic plan goals are to improve taxpayer service, enhance
    enforcement of the tax law, and modernize the Service through its
    people, processes and technology.
                            improve taxpayer service
        The fiscal year 2008 budget increases funding for taxpayer service
    by $131 million. This includes $56 million for new service initiatives
    and $75 million for cost increases. IRS employees represent the face of
    the Federal Government to more American citizens than most other
    government agencies. The request includes $20 million to enhance
    taxpayer service through expanded volunteer income tax assistance,
    increased funding for research, and implementing new technology to
    improve taxpayer service.
        TIGTA is concerned about the taxpayer service initiative to expand
    the IRS' volunteer return preparation. The IRS is requesting an
    additional $5 million and 46 Full Time Equivalents (FTE) \1\ to expand
    the VITA Program. According to the IRS, this will help ``expand the
    IRS' volunteer return preparation, outreach and education, and asset
    building services to low-income, elderly, limited English proficient,
    and disabled taxpayers.'' \2\
    ---------------------------------------------------------------------------
        \1\ A measure of labor hours in which 1 FTE is equal to 8 hours
    multiplied by the number of compensable days in a particular fiscal
    year. For fiscal year 2005, 1 FTE was equal to 2,088 hours.
        \2\ U.S. Department of the Treasury Fiscal Year 2008 Budget in
    Brief, February 5, 2007, page 62.
    ---------------------------------------------------------------------------
        TIGTA believes the IRS should proceed cautiously in its expansion
    efforts, given the importance of the accuracy of tax return
    preparation. TIGTA is reviewing the IRS' Volunteer Income Tax
    Assistance (VITA) program as part of our 2007 Filing Season oversight
    activities. As of April 12, 2007, TIGTA has had 39 tax returns prepared
    with a 56 percent accuracy rate. While the 2007 Filing Season accuracy
    rate is an improvement compared to the 39 percent accuracy rate
    reported for the 2006 Filing Season, taxpayers still have just a 1 in 2
    chance of having their tax returns accurately prepared by VITA program
    volunteers.\3\ TIGTA's observations are that volunteers did not always
    use the tools and information available to them when preparing returns.
    There is the potential that these resources might be put to better use
    by funding IRS assistance programs that achieve better results.
    ---------------------------------------------------------------------------
        \3\ The population of VITA sites is not fixed, and VITA sites open
    and close throughout the filing season. Therefore, TIGTA could not
    determine a total population of VITA sites and could not select a
    statistical sample from which to project results. The filing season is
    the period from January through mid-April when most individual income
    tax returns are filed.
    ---------------------------------------------------------------------------
        The fiscal year 2008 IRS budget request also includes $10 million
    to implement the Taxpayer Assistance Blueprint (TAB). The TAB
    initiative provides additional resources for new research on the needs
    of taxpayers in order to better understand the role of taxpayer service
    on compliance. The research will focus on meeting taxpayer needs by
    providing the right channel of communication; providing a better
    understanding of taxpayer burden; understanding taxpayer needs through
    the errors they make; and evaluating the impact of service on overall
    levels of voluntary compliance.
        In July 2005, Congress issued a conference report requesting that
    the IRS develop a five-year plan for taxpayer service activities.\4\ In
    November 2005, the IRS was asked to provide the report to the House and
    Senate by April 14, 2006.\5\ The Senate committee report stated that
    the plan should outline the services the IRS should provide to improve
    service to taxpayers; detail how the IRS plans to meet the service
    needs on a geographic basis; and, address how the IRS would improve
    taxpayer service based on reliable data. The plan was to be developed
    with the IRS Oversight Board \6\ and the National Taxpayer Advocate.
    ---------------------------------------------------------------------------
        \4\ United States Congress, Senate Report 109-109. Transportation,
    Treasury, The Judiciary, Housing and Urban Development, and Related
    Agencies Appropriations Bill, 2006: Internal Revenue Service,
    Processing, Assistance and Management, Committee Recommendation, July
    26, 2005.
        \5\ United States Congress, Conference Report 109-307. Joint
    Explanatory Statement of the Committee of Conference: Internal Revenue
    Service, Processing Assistance, and Management (Including Rescission of
    Funds), November 14, 2005.
        \6\ A nine-member independent body charged with overseeing the IRS
    in its administration, management, conduct, direction, and supervision
    of the execution and application of the internal revenue laws and to
    provide experience, independence, and stability to the IRS so that it
    may move forward in a cogent, focused direction.
    ---------------------------------------------------------------------------
        The IRS conducted a comprehensive review of its current portfolio
    of services to individual taxpayers to determine which services should
    be provided and improved. Based on the findings of the TAB review, the
    funding for this initiative would implement telephone service and Web
    site enhancements.
        To satisfy the report submission date of April 14, 2006, the IRS
    designed the TAB as a two-phased process. The TAB Phase I report
    identified strategic improvement themes by researching IRS service
    relative to taxpayers' needs and preferences. The TAB Phase II report
    will validate those themes through further research of taxpayers'
    service preferences and will develop the five-year plan for service
    delivery. The 2006 TAB Phase I report, issued April 24, 2006, presented
    strategic themes to improve education and awareness; optimize partner
    services; elevate self-service options; improve and expand training and
    services; and, develop performance and outcome goals and metrics.
        The focus of the TAB initiative is on services that support the
    needs of individual filers who file or should file Form 1040 series tax
    returns.\7\ TIGTA reviewed the development of the TAB, and found that
    while the majority of the information it contains is accurate, some of
    the information is not accurate. The compilation of some of the data
    could adversely affect IRS management decisions. For example, TIGTA
    noted inaccuracies in the report related to changes in Taxpayer
    Assistance Center visits and the number of telephone calls answered.
    Overall, TIGTA concluded that information found to be inaccurate and
    inconsistent did not affect the IRS' strategic improvement themes.\8\
    ---------------------------------------------------------------------------
        \7\ Form 1040 series tax returns include any IRS tax forms that
    begin with ``1040'' such as U.S. Individual Income Tax Return (Form
    1040), U.S. Individual Income Tax Return (Form 1040-A), and Income Tax
    Return for Single and Joint Filers With No Dependents (Form 1040-EZ).
        \8\ Draft Audit Report--The Strategic Improvement Themes in the
    Taxpayer Assistance Blueprint Phase I Report Appear to Be Sound;
    However, There Were Some Inaccurate Data in the Report (TIGTA Audit
    Number 200740012, dated April 13, 2007).
    ---------------------------------------------------------------------------
        The inaccuracies and inconsistencies resulted primarily from the
    IRS not having an effective process to ensure that all statements in
    the TAB Phase I report correctly reflected the results of its research
    and data analyses. According to IRS officials, actions were taken to
    improve the process for the validation of information included in the
    TAB Phase II report. The actions included an in-depth review to locate
    and verify the accuracy of all data in the report. Verifications were
    also performed to ensure the accuracy of statements and representations
    included in the report. Based on these actions, TIGTA did not make
    recommendations on the TAB Phase I report.
        If these inconsistencies exist in the Phase II report, the risk
    increases that the IRS will draw inaccurate conclusions based on
    erroneous data.\9\ TIGTA was unable to determine the impact the
    inconsistencies may have on results outlined in the TAB Phase II report
    because it was not available for review. The IRS did not provide TIGTA
    with a copy of the report before it was officially issued.
    ---------------------------------------------------------------------------
        \9\ The TAB Phase II report was issued the week of April 9, 2007,
    after completion of TIGTA's TAB Phase I review. TIGTA has begun a
    review and evaluation of the TAB Phase II report and will include
    testing of the quality review process.
    ---------------------------------------------------------------------------
                               2007 filing season
        The 2007 Filing Season appears to be progressing without major
    problems. As of April 28, 2007, the IRS reported that it had received
    more than 125 million individual tax returns. Of those returns, more
    than 76 million (61 percent) were filed electronically. The number of
    electronically filed tax returns is 8.7 percent higher than at the same
    time last year. The IRS has issued almost 92 million refunds for a
    total of $209 billion.
        While the IRS has seen a growth in the number of electronically
    filed tax returns so far this filing season, the number of Free File
    returns is down slightly. As of April 28, 2007, the IRS received
    approximately 3.7 million tax returns through the Free File Program,
    compared to approximately 3.8 million returns at the same time last
    year.
        Over the past few years, TIGTA audits have shown that the IRS has
    improved customer assistance in its face-to-face, toll-free telephone,
    tax-return processing, and electronic services, including the IRS
    public Internet site (www.IRS.gov).\10\
    ---------------------------------------------------------------------------
        \10\ Taxpayer Service Is Improving, but Challenges Continue in
    Meeting Expectations (TIGTA Reference Number 2006-40-052, dated
    February 2006).
    ---------------------------------------------------------------------------
        Use of IRS.gov is up with over 133 million visits to the Web site,
    while the Taxpayer Assistance Centers (TACs) have received 2.2 million
    walk-in contacts, approximately 3 percent more than this time last
    year. TIGTA made anonymous visits to TACs to determine if taxpayers are
    receiving quality service, including correct answers to their
    questions. The assistor level of service in the IRS' toll-free
    operations was higher than was planned, as the IRS answered 14.6
    million calls. The IRS also completed 17.5 million automated calls; a
    decrease of 5.4 percent from last year's 18.5 million.
    Telephone Excise Tax Refunds
        A concern so far this filing season has been the IRS' telephone
    excise tax refund program. The IRS estimated that between 151 million
    and 189 million people would seek this one-time refund, including many
    without a filing requirement. Taxpayers may claim either a standard
    refund amount or an itemized refund for the actual excise tax they paid
    on their telephone bills. By using the standard amounts individuals do
    not have to assemble 41 months of telephone bills to determine the
    amount of their refund. Requesting one of the standard amounts requires
    the completion of only one additional line on the tax return.
        The standard amounts developed by the IRS have proved to be very
    effective. Through the week ending April 21, 2007, IRS records indicate
    that 99.5 percent of telephone excise tax refund claims were filed for
    standard amounts. However, over 28.5 percent of the total number of
    individual tax returns filed contained no claim for a telephone excise
    tax refund, which indicates that many taxpayers may not be aware of
    their opportunity to claim this refund. TIGTA is continuing to monitor
    the steps the IRS is taking to address this issue.\11\
    ---------------------------------------------------------------------------
        \11\ Ongoing Audit--Telephone Excise Tax Refund (TIGTA Audit Number
    200630036).
    ---------------------------------------------------------------------------
        TIGTA raised concerns to the IRS regarding the processing of
    returns claiming telephone excise tax refunds for non-standard amounts.
    Specifically, thresholds were set too high for the IRS to take action
    when taxpayers:
      --claimed refunds for more than the standard amounts but did not
            provide the required Form 8913, Credit for Federal Telephone
            Excise Tax Paid, to substantiate their claims.
      --claimed one amount on their tax return and a different amount on
            their Form 8913.
        When TIGTA reported these issues, the IRS took immediate steps to
    address the problems.
        TIGTA has also raised concerns with the IRS' implementation of its
    compliance strategy related to these claims. In TIGTA's opinion, the
    dollar threshold used to identify potentially egregious claims is set
    too high. As of April 28, 2007, over 51,000 such claims had been
    received that did not meet the IRS' criteria for review. The amount of
    telephone excise tax refunds on these claims totaled more than $44.1
    million. Over 38,000 of these claims were on tax returns with no
    Schedules C, E or F,\12\ which makes the claimed amounts even more
    questionable. If each of the 38,000 returns claimed the standard excise
    tax refund amount of $60, the total refunds would equal $2.3 million.
    While small business claims for actual excise taxes paid would likely
    be greater than the standard amount, the lack of corresponding
    Schedules C, E or F raises questions about the claims.
    ---------------------------------------------------------------------------
        \12\ Various schedules may be attached to a tax return, if needed.
    Schedule C is for reporting Profit or Loss From Business; Schedule E is
    for Supplemental Income and Loss; and Schedule F is for Profit or Loss
    From Farming.
    ---------------------------------------------------------------------------
        The IRS reported that it set the threshold high because its
    examination resources are limited, and because it believes that
    examinations of returns claiming the Earned Income Credit (EITC) \13\
    and other discretionary examinations will result in higher assessment
    rates than examinations of the telephone excise tax refund claims.
    TIGTA recommended that the IRS re-examine all options at its disposal
    to address significantly more inappropriate telephone excise tax refund
    claims. The IRS responded to TIGTA's concerns, stating that it did not
    plan to make adjustments to the threshold amounts.
    ---------------------------------------------------------------------------
        \13\ The Earned Income Tax Credit (EITC) is a refundable credit
    designed to help move low-income taxpayers above the poverty level.
    ---------------------------------------------------------------------------
        TIGTA has also shared concerns about paid preparers and the
    telephone excise tax refund with the IRS. As of April 28, 2007, one
    paid preparer had filed over 1,500 returns with telephone excise tax
    refund claims exceeding the standard amounts. Only eight of this
    preparer's claims have exceeded the Service's tolerance. TIGTA referred
    this preparer to the IRS' Criminal Investigation function. The IRS
    requested information from TIGTA regarding other questionable preparers
    who may be avoiding IRS scrutiny. TIGTA provided the requested
    information to the Service on other preparers. Among them:
      --One preparer has filed 1,019 claims totaling over $677,000. The
            claims are all under IRS' tolerance, and most of the claims are
            for one of five amounts that are repeated on the filed claims.
      --Another preparer has filed 1,138 claims. The preparer has filed
            returns for taxpayers in 31 different States. In addition to
            telephone excise tax refund claims, over 95 percent of the
            returns also claim employee business expenses.
                      enhance enforcement of the tax laws
        The fiscal year 2008 budget request is designed to continue the
    IRS' emphasis on tax enforcement. The request increases funding for
    enforcement by approximately $440 million, which includes $291 million
    for new enforcement initiatives and $149 million in cost increases. The
    increase includes funding for additional enforcement personnel.
    According to the request, increased resources for the IRS' examination
    and collection programs will yield direct measurable results each year
    of $699 million.
        Included in the IRS' fiscal year 2008 budget request is an
    initiative to improve compliance estimates and measures, and also
    improve detection of non-compliance. This enforcement initiative would
    fund research studies of compliance data for new segments of taxpayers
    needed to update existing estimates of reporting compliance. Unlike the
    past, the IRS plans to conduct an annual study of compliance among Form
    1040 filers based on a smaller sample size than the 2001 National
    Research Program study.
        TIGTA reviewed the tax gap estimates that were developed from the
    2001 National Research Program data and concluded that the IRS still
    does not have sufficient information to completely and accurately
    assess the overall tax gap and voluntary compliance rate. Although
    having new information about Tax Year (TY) 2001 individual taxpayers is
    an improvement when compared to the much older TY 1988 information from
    the last major compliance study, some important individual compliance
    information remains unknown. Additionally, although individuals
    comprise the largest segment of taxpayers and were justifiably studied
    first, no new information is available about employment, small
    corporate, large corporate and other compliance segments. With no firm
    plans for further studies or updates in many areas of the tax gap, the
    current tax gap estimate is an unfinished picture of the overall tax
    gap and compliance rate.
        The IRS' fiscal year 2008 budget request also includes funding for
    an initiative to improve compliance among small business and self-
    employed taxpayers in the areas of reporting, filing, and payment by
    increasing audits of high-risk tax returns, collecting unpaid taxes,
    and investigating and, where appropriate, prosecuting persons who have
    evaded taxes. According to the budget request, this initiative would
    produce $144 million in additional annual enforcement revenue, once
    newly hired employees reach their full performance potential in fiscal
    year 2010.
         modernize the irs through its people, processes and technology
        The IRS must optimally manage its resources, business processes,
    and technology systems to effectively and efficiently support its
    service and enforcement mission. The IRS' fiscal year 2008 budget
    request includes initiatives to update critical information technology
    infrastructure ($60 million), and to enhance the IRS' Computer Security
    Incident Response Center (CSIRC) and its network infrastructure
    security ($21 million).
        Upgrading the Service's critical IT infrastructure initiative would
    include upgrading equipment that has exceeded its life cycle. According
    to the budget request, failure to replace the IRS' IT infrastructure
    will lead to increased maintenance costs and increase the risk of
    disrupting business operations. Planned expenditures in fiscal year
    2008 include replacing desktop computers, automated call distributor
    hardware, mission critical servers, and Wide Area Network/Local Area
    Network routers and switches.
        Enhancing the CSIRC would require $13.1 million to allow the CSIRC
    to keep pace with the ever-changing security threat environment through
    improved detection and analysis capability, improved forensics, and
    increased capacity to identify and respond to potential intrusions
    before they occur. An additional $7.9 million would fund enhancements
    to the IRS' network infrastructure security, providing the capability
    to perform continuous monitoring of the security of operational
    systems, using security tools, tactics, techniques, and procedures to
    perform network security compliance monitoring of all IT assets on the
    network.
        Less than two months ago, TIGTA reported that IRS employees
    reported the loss or theft of at least 490 computers and other
    sensitive data in 387 separate incidents. Employees reported 296 (76
    percent) of the incidents to the TIGTA Office of Investigations but not
    to the CSIRC. In addition, employees reported 91 of the incidents to
    the CSIRC; however, 49 of these were not reported to TIGTA's Office of
    Investigations. IRS procedures require employees to report lost or
    stolen computers to both the IRS CSIRC and to TIGTA's Office of
    Investigations. TIGTA reported that coordination was inadequate between
    the CSIRC and TIGTA's Office of Investigations to identify the full
    scope of the losses.\14\
    ---------------------------------------------------------------------------
        \14\ The Internal Revenue Service Is Not Adequately Protecting
    Taxpayer Data on Laptop Computers and Other Portable Electronic Media
    Devices (TIGTA Reference Number 2007-20-048, March 23, 2007).
    ---------------------------------------------------------------------------
        Prior to the Department of Veterans Affairs data loss incident in
    May 2006, the CSIRC had not placed sufficient emphasis on identifying
    actual taxpayers potentially affected by lost or stolen computers.
    TIGTA's Office of Investigations did investigate many of these
    incidents but focused on criminal aspects (e.g., identifying the
    perpetrator and recovering the stolen equipment).
        On July 7, 2006, the Chief, Mission Assurance and Security
    Services, issued a memorandum that re-emphasized reporting requirements
    and stated that all computer security incidents shall be reported to
    the CSIRC and to front-line managers. In addition, any incident
    involving physical loss of equipment that could result in unauthorized
    access to IRS systems or information must also be reported to the TIGTA
    Office of Investigations. The IRS Commissioner had issued an earlier
    email reminding all managers to safeguard personally identifiable
    information and to immediately report any security incidents to the
    CSIRC. The email message also stated that managers work with the CSIRC
    to promptly notify the TIGTA Office of Investigations when appropriate.
    As a final measure to ensure total coordination, the IRS has entered
    into an agreement with the TIGTA Office of Investigations to share
    reports of all incidents relating to the loss or theft of IT assets.
        The Service's fiscal year 2008 budget request includes an
    initiative to fund Business Systems Modernization. The initiative would
    provide approximately $62.1 million to continue the development and
    deployment of the IRS' modernization program in line with the
    recommendations identified in the IRS' Modernization, Vision, and
    Strategy. According to the request, the increase would allow the IRS to
    continue progress on modernized projects, such as the Customer Account
    Data Engine (CADE) and Modernized e-File (MeF).
        CADE is the IRS' lynchpin modernization project that will replace
    the antiquated master file system, which is based on a 1960s
    architecture. The IRS is developing CADE in stages and expects to
    retire the Individual Master File in 2012. When fully operational, the
    CADE database will house tax information for more than 200 million
    individual and business taxpayers. Congress authorized $58 million for
    the CADE in fiscal year 2007. Through fiscal year 2007, CADE project
    release costs total about $233.9 million. The IRS initiated the CADE
    project in September 1999 and began delivering releases in August 2004.
        During Calendar Year (CY) 2006, the CADE posted over 7.3 million
    tax returns and generated more than $3.4 billion in refunds. This is a
    significant increase over the 1.4 million tax returns posted in CY 2005
    that generated refunds totaling more than $427 million. The CADE is now
    in the process of completing delivery of Release 2.2. Release 2.2 will
    process 2007 Filing Season tax law revisions (Tax Year 2006) and
    additional tax forms.\15\
    ---------------------------------------------------------------------------
        \15\ DRAFT Audit Report--Vital Decisions Must Be Made to Ensure
    Successful Implementation of Customer Account Data Engine Capabilities
    (TIGTA Audit Number 200620012, dated May 1, 2007).
    ---------------------------------------------------------------------------
        On February 27, 2007, the IRS put Release 2.2 into production, but
    because computer reports on the number of returns received did not
    match the number of returns posted, the CADE was turned off and tax
    returns were sent back to the current IRS processing system. The IRS
    reports that a major portion of Release 2.2 was successfully put into
    production on March 6, 2007 (seven weeks late). On the first day, it
    posted over 571,000 tax returns of which 566,332 contained refunds.
    Because of the late start into production, the IRS goal of using the
    CADE to process 33 million tax returns will not be met. According to
    IRS officials, the latest estimate was that the IRS would complete the
    deployment of Release 2.2 by the end of April 2007, and it would post
    between 16 million and 19 million returns during the 2007 Filing
    Season. As of April 27, 2007, the CADE has processed 10.3 million
    returns with $10.9 billion in refunds.
        From the project's beginning, there has been a pattern of deferring
    CADE requirements to later releases and missing release deployment
    dates. Allowing this pattern to continue will undermine the long-term
    success of the project. To meet the CADE's long-term computer
    processing demands, further consideration needs to be given to
    alternative design approaches. The project design currently includes
    building a computer system large enough to process the highest daily
    volume of tax returns received by the IRS even though this processing
    capacity is needed for only a few days each year. Alternative design
    solutions, such as obtaining additional computer resources on an
    interim basis or delaying the processing of some tax return types on
    extremely high-volume processing days, have been considered but have
    not been thoroughly developed. In addition, based on the current design
    of the project, meeting storage and processing demands may be cost
    prohibitive.
        MeF is the future of electronic filing. It provides a single
    Extensible Markup Language-based standard for filing electronic tax
    returns. Standardizing the formats/structures for all filings will
    allow transmitters to submit multiple return types in the same
    transmission, something that currently restrains e-file growth. In
    fiscal year 2008, the IRS has scheduled to start development and
    implementation of the Form 1040 on the MeF platform, which is expected
    to take two years. TIGTA is currently concluding an audit of the MeF
    and will report the results later this spring.
                             legislative proposals
        The fiscal year 2008 budget request includes several legislative
    proposals that would provide the IRS with additional enforcement tools
    to improve compliance. It is estimated that these proposals could
    generate approximately $29 billion in revenue over the next 10 years.
    These proposals would expand information reporting, improve compliance
    by businesses, and expand penalties. This enforcement initiative
    includes funding for purchasing software and making modifications to
    the IRS' IT systems, which are necessary to implement these legislative
    proposals.
      treasury inspector general for tax administration fiscal year 2008
                                 budget request
        TIGTA was created by Congress to provide independent oversight of
    the IRS. TIGTA's investigations and audits protect and promote the fair
    administration of the Nation's tax system. TIGTA's responsibilities
    include ensuring that the IRS is accountable for more than $2 trillion
    in tax revenue received each year. TIGTA's investigations protect the
    integrity of IRS employees, contractors, and other tax professionals;
    provide for infrastructure security; and protect the Service from
    external attempts to threaten or corrupt the administration of tax
    laws. TIGTA conducts audits that advise Congress, the Secretary of the
    Treasury, and IRS management of high-risk issues, problems, and
    deficiencies related to the administration of IRS programs and
    operations. TIGTA's audit recommendations aim to improve IRS systems
    and operations, while maintaining fair and equitable treatment of
    taxpayers.
        TIGTA's Office of Audit (OA) provides comprehensive coverage and
    oversight of all aspects of the Service's daily operations. Audits not
    only focus on the economy and efficiency of IRS functions but also
    ensure that taxpayers' rights are protected and the taxpaying public is
    adequately served. Overall, as of March 31, 2007, audit reports
    potentially produced financial accomplishments of $579 million, and
    potentially impacted approximately 379,000 taxpayer accounts in areas
    such as taxpayer burden, rights, and entitlements. OA develops an
    annual audit plan that communicates oversight priorities to Congress,
    the Department of the Treasury, and the IRS. Emphasis is placed on
    mandatory coverage imposed by the IRS Restructuring and Reform Act of
    1998 \16\ and other statutory authorities, as well as issues impacting
    computer security, taxpayer rights and privacy, and financial-related
    audits. OA's work focuses on IRS' major management challenges, IRS'
    progress in achieving its strategic goals, eliminating IRS' systemic
    weaknesses, and the Service's response to the President's Management
    Agenda initiatives.
    ---------------------------------------------------------------------------
        \16\ Pub. L. No. 105-206, 112 Stat. 685 (codified as amended in
    scattered sections of 2 U.S.C., 5 U.S.C. app., 16 U.S.C., 19 U.S.C., 22
    U.S.C., 23 U.S.C., 26 U.S.C., 31 U.S.C., 38 U.S.C., and 49 U.S.C.).
    ---------------------------------------------------------------------------
        TIGTA's mission includes the statutory responsibility to protect
    the integrity of tax administration and to protect the ability of the
    IRS to collect revenue for the Federal Government. To accomplish this,
    TIGTA's Office of Investigations (OI) investigates allegations of
    criminal violations and administrative misconduct by IRS employees,
    protects the Service against external attempts to corrupt tax
    administration, and ensures IRS employee safety and IRS data and
    infrastructure security. Employee investigations include extortion,
    theft, taxpayer abuses, false statements, financial fraud, and
    unauthorized access (UNAX) of confidential taxpayer records by IRS
    employees. Investigations of external attempts to corrupt tax
    administration include bribes offered by taxpayers to compromise IRS
    employees, the use of fraudulent IRS documentation to commit crimes,
    taxpayer abuse by tax practitioners, impersonation of Service
    employees, and the corruption of IRS programs through procurement
    fraud. TIGTA assists in maintaining IRS employee and infrastructure
    security by investigating incidents of sabotage, and threats or
    assaults made against IRS employees, facilities, and infrastructure.
        From fiscal year 2001 to fiscal year 2006, TIGTA's labor expenses
    have grown 22 percent from $88 million to $107.3 million, despite a
    substantial reduction in FTEs (a decrease of 11 percent from 938 to
    838). Labor costs currently account for 81 percent of TIGTA's annual
    budget. Labor and rent together consume approximately 87 percent of the
    annual budget. The fiscal year 2007 President's budget request for
    TIGTA was $136.5 million. TIGTA's actual fiscal year 2007 funding level
    was $132.9 million, a $3.6 million reduction (2.6 percent decrease).
    Total resources required in fiscal year 2008 to support its mission are
    $140.6 million.\17\
    ---------------------------------------------------------------------------
        \17\ U.S. Department of the Treasury Fiscal Year 2008 Budget in
    Brief, February 5, 2007, pages 29-31.
    ---------------------------------------------------------------------------
        Since fiscal year 2001, TIGTA has achieved its performance and
    quality expectations by implementing several efficiency and cost-
    cutting initiatives. From fiscal year 2001 to fiscal year 2006,
    discretionary spending (such as training, travel, equipment, etc.) fell
    nearly 21 percent from $19.5 million to $15.4 million. These costs
    currently consume only 12 percent of TIGTA's annual budget. Through
    incremental FTE losses and implementation of cost-cutting initiatives
    in non-labor expense categories, TIGTA has been able to finance annual
    pay and labor-related benefit increases (health care, pensions and
    retirement) while also maintaining the FTE level necessary to meet
    performance and quality expectations.
        TIGTA's efficiency-enhancing and cost-cutting initiatives are
    largely exhausted. The impact of a budget reduction in fiscal year 2008
    will fall almost exclusively on labor and, would affect TIGTA's
    capability to provide comprehensive oversight of IRS operations. TIGTA
    has lost 100 FTEs because budget increases have not been adequate to
    finance annual pay increases, labor-related benefit increases, and non-
    labor related requirement expenses such as contracts, rent, and
    equipment. Because of decreasing budgets, TIGTA's overall employee
    population has declined 12 percent from fiscal year 2001 to fiscal year
    2006 (a decrease from 938 in fiscal year 2001 to 825 at end of fiscal
    year 2006) and is expected to continue to decline over the foreseeable
    future. In addition, 39 percent of TIGTA's current staff is retirement
    eligible through fiscal year 2010, threatening TIGTA's overall ability
    to effectively fulfill its core missions.
        Labor reductions would reduce TIGTA's enforcement capacity and
    circumscribe efforts to combat IRS employee misconduct and external
    threats to the security and integrity of IRS personnel and
    infrastructure. FTE losses would result in fewer opportunities to
    examine high-risk areas and, thus, reduce financial benefits from audit
    recommendations and impact fewer taxpayer accounts. Losses would also
    require TIGTA to curtail, delay and/or fail to initiate reviews of
    high-risk areas and/or eliminate entire programs.
        TIGTA must also address human capital issues. In order to
    accomplish its mission, TIGTA employees need to possess the necessary
    skills. Because of the increasingly modernized and computerized IRS
    operating systems and environment, the most critical gaps TIGTA faces
    are in the Auditor and Criminal Investigator occupations.
        TIGTA also faces the challenge of addressing increasing requests
    from Congress and other IRS stakeholders in a timely and efficient
    manner. In fiscal year 2007, TIGTA has reallocated resources in order
    to perform congressionally requested audits and comply with new
    statutory provisions. TIGTA anticipates increased congressional
    interest and requests in future years.
        The fiscal year 2008 President's budget request for TIGTA will be
    used to continue to provide critical audit and investigative services,
    ensuring the integrity of tax administration on behalf of the Nation's
    taxpayers. While there are a number of critical areas in which TIGTA
    will provide oversight, highlights of TIGTA's investigative and audit
    priorities include:
      --Adapting to the IRS' continuously evolving operations and
            mitigating intensified risks associated with modernization,
            outsourcing, and enforcement efforts;
      --Responding to threats and attacks against IRS personnel, property,
            and sensitive information;
      --Improving the integrity of IRS operations by detecting and
            deterring fraud, waste, abuse, or misconduct by IRS employees;
      --Conducting comprehensive audits that include recommendations for
            cutting costs and enhancing IRS service to taxpayers; and
      --Informing Congress and the Secretary of the Treasury of problems
            and the progress being made to resolve them.
        Total resources needed in fiscal year 2008 to support TIGTA's
    mission are $141,753,000, including $140,553,000 from direct
    appropriations and approximately $1,200,000 from reimbursable
    agreements. Budget adjustments to maintain current levels in fiscal
    year 2008 include $4.87 million to fund the cost of the January 2007
    pay increase, the proposed January 2008 pay raise, and non-labor
    related items.
        I hope my discussion of some of the fiscal year 2008 budget and
    2007 Filing Season issues will assist you with your oversight of the
    IRS. Mr. Chairman and Members of the Subcommittee, thank you for the
    opportunity to share my views.

        Senator Durbin. Ms. Olson.

                           STATEMENT OF NINA E. OLSON

        Ms. Olson. Mr. Chairman and distinguished members of the
    subcommittee: Thank you for inviting me to testify on the
    proposed budget of the Internal Revenue Service for fiscal year
    2008.
        In developing the IRS budget, the logical starting point is
    to consider the IRS's fundamental mission. The IRS is the
    Nation's tax collector and its overriding objective should be
    to maximize voluntary compliance with the tax laws. In my view
    the IRS should go about maximizing voluntary compliance in four
    ways:
        First, by improving its outreach and education efforts to
    minimize inadvertent errors attributable to tax law or
    procedural complexity or confusion;
        Second, by conducting compliance-oriented audits to
    reinforce the perception that taxpayers may be audited;
        Third, by utilizing all IRS collection alternatives while
    collecting tax debts, to bring taxpayers into future
    compliance;
        And fourth, by reserving targeted enforcement actions to
    combat clear abuses.
        In addition, the IRS should launch a public information
    campaign that reminds taxpayers of what taxes really are about,
    the price we pay for a civilized society.
        I strongly encourage the subcommittee to fund the IRS at
    approximately the level requested by the administration for
    fiscal year 2008. In my annual report to Congress, I
    recommended that Congress provide the IRS with after-inflation
    increases of about 2 to 3 percent a year for the foreseeable
    future.
        Assuming the funds are wisely spent, I believe that
    increasing the IRS budget at this rate is an excellent
    financial investment. The IRS collects about 96 percent of all
    Federal revenue. The more revenue the IRS collects, the more
    revenue Congress may spend on other programs or use to cut
    taxes or reduce the deficit. The less revenue the IRS collects,
    the less revenue Congress has available for these other
    purposes.
        If the Federal Government were a private company, its
    management clearly would fund the accounts receivable
    department at whatever level it believed would maximize the
    company's bottom line. Since the IRS is not a private company,
    maximizing the bottom line is not in and of itself an
    appropriate goal. But the public sector analogy should be to
    maximize tax compliance, especially voluntary compliance, with
    due regard for protecting taxpayer rights and minimizing
    taxpayer burden.
        Studies show that if the IRS were given more resources, it
    could collect substantially more revenue. One of the most
    critical choices facing tax administration is how to allocate
    resources between taxpayer service and tax law enforcement.
    While I believe that both categories would benefit from
    additional funding, I am concerned that the IRS has been
    emphasizing enforcement at the expense of taxpayer service.
    Since fiscal year 2004, funding for enforcement has increased
    substantially, while funding for taxpayer service has been
    reduced. For fiscal year 2008, the administration has requested
    a funding increase of 6.5 percent for enforcement to $7.2
    billion and 3.8 percent for taxpayer service to $3.6 billion.
    If the administration's proposal is enacted, funding for
    enforcement will have increased by 19.4 percent and funding for
    taxpayer service will have been reduced by 3.8 percent over the
    5-year period from fiscal year 2004 to 2008.
        I am deeply concerned about this fundamental shift in the
    balance between taxpayer service and enforcement. Under the
    proposal the IRS would be spending literally twice as much on
    enforcement as it spends on taxpayer service. There is no
    reliable data showing that more enforcement will do more than
    taxpayer service to increase compliance.
        I believe the IRS can produce a positive return on
    investment from more funding in both areas, but, given limited
    resources, I think it is misguided to ramp up enforcement at
    the expense of taxpayer service. Moreover, the absence of an
    accurate measure of return on investment leads to misguided
    efforts to privatize inherently governmental activities, such
    as tax collection, harming taxpayers and tax administration in
    the process.
        Because taxpayer service and enforcement are drivers of
    overall compliance, we need to measure taxpayer service needs
    concurrently with our efforts to measure the tax gap. Thus, I
    believe in addition to additional research about what causes
    taxpayers to be noncompliant, the national research program
    should update its analysis of taxpayer service needs at the
    same time it is measuring taxpayer noncompliance for the
    particular taxpayer population it is studying. The IRS can then
    make an informed resource allocation only by being armed with
    information of both types.
        Thank you.
        Senator Durbin. Thank you very much.
        [The statement follows:]
                      Prepared Statement of Nina E. Olson
        Mr. Chairman, Ranking Member Brownback, and distinguished Members
    of the Subcommittee: Thank you for inviting me to submit this written
    statement regarding the proposed budget of the Internal Revenue Service
    for fiscal year 2008.\1\ I will address the mission of the IRS, the
    overall level of funding I believe the agency should receive, the
    allocation of that funding between enforcement and taxpayer service,
    and then a number of important issues in tax administration in which I
    believe this Committee may have an interest. I approach these issues
    from my perspective as the National Taxpayer Advocate, the voice for
    taxpayers and taxpayer rights inside the IRS.
    ---------------------------------------------------------------------------
        \1\ The views expressed herein are solely those of the National
    Taxpayer Advocate. The National Taxpayer Advocate is appointed by the
    Secretary of the Treasury and reports to the Commissioner of Internal
    Revenue. The statute establishing the position directs the National
    Taxpayer Advocate to present an independent taxpayer perspective that
    does not necessarily reflect the position of the IRS, the Treasury
    Department, or the Office of Management and Budget. Accordingly,
    congressional testimony requested from the National Taxpayer Advocate
    is not submitted to the IRS, the Treasury Department, or the Office of
    Management and Budget for prior approval. However, we have provided
    courtesy copies of this statement to both the IRS and the Treasury
    Department in advance of this hearing.
    ---------------------------------------------------------------------------
       the overriding mission of the irs should be to increase voluntary
                                   compliance
        In developing the IRS budget, the logical starting point is to
    consider the IRS's fundamental mission. The IRS is the nation's tax
    collector, and its overriding objective should be to maximize voluntary
    compliance with the tax laws. In general, the IRS seeks to achieve
    compliance through two main types of activity. First, it seeks to
    enable taxpayers to comply with their tax obligations voluntarily. In
    most cases, outreach, education, and taxpayer assistance are sufficient
    to produce complete or substantial compliance. Second, it targets its
    enforcement resources at taxpayers who are unwilling to comply with the
    tax laws.
        Voluntary compliance--as opposed to enforced compliance--must be
    our goal for two overriding reasons.
      --First, it is far preferable for our civic culture when taxpayers
            pay voluntarily rather than pursuant to enforcement action. We
            should strive to make sure taxpayers understand how the tax
            dollars they pay are used to protect and benefit them, and we
            should make compliance as easy as possible.
      --Second, enforced compliance is extremely expensive and therefore
            must be targeted narrowly. For fiscal year 2006, the IRS
            reported that its face-to-face audit rate was 0.23 percent,
            meaning that only one out of every 435 taxpayers was audited in
            person.\2\ Even taking into account less comprehensive
            correspondence audits, the audit rate was less than one
            percent.\3\ Notably, IRS enforcement actions brought in only
            about two percent ($48.7 billion) \4\ of total IRS collections
            ($2.24 trillion).\5\ As the IRS has acknowledged, it is simply
            not realistic to close the tax gap one taxpayer at a time.
    ---------------------------------------------------------------------------
        \2\ Internal Revenue Service, Fiscal Year 2006 Enforcement and
    Service Results (Nov. 20, 2006). The actual face-to-face audit rate is
    apparently lower than the IRS reported. According to a study by the
    Treasury Inspector General for Tax Administration, the IRS classifies
    its audits based on which IRS function handled a case. Some cases
    referred to the IRS function responsible for conducting face-to-face
    audits are resolved without a face-to-face meeting. By analyzing data
    from IRS Audit Technique Codes, TIGTA concluded that the face-to-face
    audit rate was 0.18 percent for fiscal year 2006, about 22 percent less
    than the IRS reported. See Treasury Inspector General for Tax
    Administration, Ref. No. 2007-30-056, Trends in Compliance Activities
    Through Fiscal Year 2006 at 2 (March 27, 2007); Allen Kenney, TIGTA
    Finds Audit-by-Mail Process More Common Than IRS Says, Tax Notes Today
    (April 6, 2007).
        \3\ Internal Revenue Service, Fiscal Year 2006 Enforcement and
    Service Results (Nov. 20, 2006).
        \4\ Id.
        \5\ Government Accountability Office, GAO-07-136, Financial Audit:
    IRS's Fiscal Years 2006 and 2005 Financial Statements at 95 (Nov.
    2006). The IRS actually collected $2.51 trillion on a gross basis in
    fiscal year 2006, but issued $277 billion in tax refunds.
    ---------------------------------------------------------------------------
        In my view, the IRS should go about maximizing voluntary compliance
    in four ways:
      --By improving its outreach and education efforts to minimize
            inadvertent errors attributable to tax law or procedural
            complexity or confusion;
      --By conducting compliance-oriented audits to reinforce the
            perception that taxpayers may be audited;
      --By utilizing all IRS collection alternatives while collecting tax
            debts to bring taxpayers into future compliance; and
      --By reserving targeted enforcement actions to combat clear abuses.
        In addition, the IRS should launch a public information campaign
    that reminds taxpayers of what taxes really are about--the price we pay
    for a civilized society.
    congress should provide increases in irs personnel funding at a steady
      but gradual pace, perhaps two percent to three percent a year above
                                   inflation
        I strongly encourage the Committee to fund the IRS at approximately
    the level requested by the Administration for fiscal year 2008. In the
    National Taxpayer Advocate's 2006 Annual Report to Congress, we
    recommended that Congress provide the IRS with after-inflation
    increases of about two percent to three percent a year for the
    foreseeable future. Assuming the funds are wisely spent, I believe that
    increasing the IRS budget at this rate is an excellent financial
    investment.
        The IRS collects about 96 percent of all federal revenue.\6\ The
    more revenue the IRS collects, the more revenue Congress may spend on
    other programs or use to cut taxes or reduce the deficit. The less
    revenue the IRS collects, the less revenue Congress has available for
    these other purposes.
    ---------------------------------------------------------------------------
        \6\ Government Accountability Office, GAO-07-136, Financial Audit:
    IRS's Fiscal Years 2006 and 2005 Financial Statements 68 (Nov. 2006).
    ---------------------------------------------------------------------------
        If the federal government were a private company, its management
    clearly would fund the Accounts Receivable Department at whatever level
    it believed would maximize the company's bottom line. Since the IRS is
    not a private company, maximizing the bottom line is not--in and of
    itself--an appropriate goal. But the public sector analogue should be
    to maximize tax compliance, especially voluntary compliance, with due
    regard for protecting taxpayer rights and minimizing taxpayer burden.
    Studies show that if the IRS were given more resources, it could
    collect substantially more revenue.
        In his final report to the IRS Oversight Board in 2002, former
    Commissioner Charles Rossotti presented a discussion titled ``Winning
    the Battle but Losing the War'' that detailed the consequences of the
    lack of adequate funding for the IRS. He identified 11 specific areas
    in which the IRS lacked resources to do its job, including taxpayer
    service, collection of known tax debts, identification and collection
    of tax from non-filers, identification and collection of tax from
    underreported income, and noncompliance in the tax-exempt sector.
        Commissioner Rossotti provided estimates of the revenue cost in
    each of the 11 areas based on IRS research data. In the aggregate, the
    data indicated that the IRS lacked the resources to handle cases worth
    about $29.9 billion each year. It placed the additional funding the
    agency would have needed to handle those cases at about $2.2
    billion.\7\
    ---------------------------------------------------------------------------
        \7\ Commissioner Charles O. Rossotti, Report to the IRS Oversight
    Board: Assessment of the IRS and the Tax System 16 (Sept. 2002).
    ---------------------------------------------------------------------------
        Significantly, this estimate reflects only the potential direct
    revenue gains. Economists have estimated that the indirect effects of
    an examination on voluntary compliance provide further revenue gains.
    While the indirect revenue effects cannot be precisely quantified, two
    of the more prominent studies in the area suggest the indirect revenue
    gains are between six and 12 times the amount of a proposed
    adjustment.\8\
    ---------------------------------------------------------------------------
        \8\ Alan H. Plumley, Pub. 1916, The Determinants of Individual
    Income Tax Compliance: Estimating The Impacts of Tax Policy,
    Enforcement, and IRS Responsiveness 35-36 (Oct. 1996); Jeffrey A.
    Dubin, Michael J. Graetz & Louis L. Wilde, The Effect of Audit Rates on
    the Federal Individual Income Tax, 1977-1986, 43 Nat. Tax J. 395, 396,
    405 (1990).
    ---------------------------------------------------------------------------
        I want to emphasize that the existing modeling in this area is not
    especially accurate, and estimates of both the direct and indirect
    effects of IRS programs vary considerably. As I will discuss below, the
    IRS needs to develop better modeling to produce more accurate return-
    on-investment estimates. But I also want to emphasize that almost all
    studies show that, within reasonable limits, each additional dollar
    appropriated to the IRS should generate substantially more than an
    additional dollar in federal revenue assuming the funding is wisely
    spent.
     irs funding increases should be balanced between taxpayer service and
                                  enforcement
        One of the most critical choices facing tax administration is how
    to allocate resources between taxpayer service and tax-law enforcement.
    While I believe that both categories would benefit from additional
    funding, I am concerned that the IRS has been emphasizing enforcement
    at the expense of taxpayer service.
        Since fiscal year 2004, funding for enforcement has increased
    substantially while funding for taxpayer service has been reduced. For
    fiscal year 2008, the Administration has requested a funding increase
    of 6.5 percent for enforcement (to $7.2 billion) and 3.8 percent for
    taxpayer service (to $3.6 billion).\9\ If the Administration's proposal
    is enacted, funding for enforcement will have been increased by 19.4
    percent and funding for taxpayer service will have been reduced by 3.8
    percent over the five-year period, fiscal year 2004-fiscal year
    2008.\10\
    ---------------------------------------------------------------------------
        \9\ Government Accountability Office, GAO-07-673, Internal Revenue
    Service: Interim Results of the 2007 Tax Filing Season and the Fiscal
    Year 2008 Budget Request 26 (April 2007).
        \10\ Id. at 27. These numbers are apparently not adjusted for
    inflation. GAO reports that overall IRS funding would increase, on an
    inflation-adjusted basis, by a mere 0.5 percent from fiscal year 2004
    to fiscal year 2008 under the Administration's proposal. Id. at 26.
    ---------------------------------------------------------------------------
        I am deeply concerned about this fundamental shift in the balance
    between taxpayer service and enforcement. Under this proposal, the IRS
    would be spending literally twice as much on enforcement as it spends
    on taxpayer service. There is no reliable data showing that more
    enforcement will do more than taxpayer service to increase compliance.
    I believe the IRS can produce a positive return on investment from more
    funding in both areas. But given limited resources, I think it is
    misguided to ramp up enforcement at the expense of taxpayer service.
        I discuss some of the specific consequences of this shortchanging
    of taxpayer service in the Appendix to this testimony. However, I want
    to emphasize that the concerns I am expressing about the relative shift
    in emphasis from taxpayer service to enforcement do not reflect simply
    the misgivings of a zealous taxpayer advocate. My concerns are shared
    by former IRS Commissioner Rossotti. In a memoir about his experience
    running the IRS from 1997 to 2002, Mr. Rossotti wrote:

        ``Some critics argue that the IRS should solve its budget problem
    by reallocating resources from customer support to enforcement. In the
    IRS, customer support means answering letters, phone calls, and visits
    from taxpayers who are trying to pay the taxes they owe. Apart from the
    justifiable outrage it causes among honest taxpayers, I have never
    understood why anyone would think it is good business to fail to answer
    a phone call from someone who owed you money.'' \11\
    ---------------------------------------------------------------------------
        \11\ Charles O. Rossotti, Many Unhappy Returns: One Man's Quest to
    Turn Around the Most Unpopular Organization in America 285 (2005).

        Why is the IRS today putting greater emphasis on enforcement? My
    sense is that there are two factors at play.
        In the aftermath of the IRS Restructuring and Reform Act of 1998,
    the IRS focused on improving taxpayer service, and its enforcement
    presence declined. Some observers believe that the IRS's response to
    the 1998 Act went too far and that the current emphasis on enforcement
    is needed to restore the balance that existed previously.
    Significantly, this reasoning rests on the premise that the relative
    balance between service and enforcement that existed prior to 1998--
    when IRS answered taxpayers' phone calls only 51 percent of the time
    \12\--was the ``correct'' one.
    ---------------------------------------------------------------------------
        \12\ Annual IRS Restructuring and Reform Act of 1998 Joint
    Congressional Review, Testimony of Mark W. Everson, Commissioner,
    Internal Revenue Service (May 20, 2003) (indicating level of service on
    the telephones for fiscal year 1998).
    ---------------------------------------------------------------------------
        That may or may not be the case. The IRS's current strategic
    formula, ``Service + Enforcement = Compliance,'' \13\ does not contain
    any coefficients. Did the improvements in service more than balance out
    the reductions in enforcement, or did compliance suffer? There is no
    hard data either way, so we're all left to make educated guesses.
    ---------------------------------------------------------------------------
        \13\ IRS Strategic Plan 2005-2009.
    ---------------------------------------------------------------------------
        In the absence of hard data, I do not believe it is sound public
    policy to make a shift from helping taxpayers comply on the front end
    toward clamping down on taxpayers on the back end. The government
    should prefer to treat its taxpayers courteously and with respect.
    While enforcement actions are clearly necessary, I think it is unwise
    to make a significant shift in the relative emphasis on taxpayer
    service and enforcement in the absence of data showing it would produce
    a significant boost in overall tax compliance.
        The second factor supporting more enforcement funding are the
    congressional scoring rules. ``Direct'' enforcement revenue is
    ``scorable,'' while current modeling does not permit economists to
    measure the return-on-investment of funds spent on taxpayer service or
    on the ``indirect'' (i.e., deterrent) effect of enforcement spending.
    While this is understandable, it may be leading to bad results. As I
    noted above, direct enforcement revenue ($48.7 billion in fiscal year
    2006) comes to only about two percent of overall IRS collections. To
    make budgeting decisions by striving to maximize two percent of
    collections without grappling adequately with what is required to
    maximize the remaining 98 percent of collections is a bit like letting
    the tail wag the dog.
        The Administration's fiscal year 2008 budget request acknowledges
    this problem. It states: ``The IRS cannot currently measure either the
    impact of deterrence or service, but they are positive.'' \14\ Then,
    having acknowledged that the effects of spending that brings in 98
    percent of Federal revenue cannot be measured, the budget goes on to
    recommend the use of a ``program integrity cap.'' Under this concept,
    additional funding can be provided that does not count against the
    budget caps if certain conditions are satisfied, notably that the
    Congressional Budget Office can certify the spending will produce a
    positive return on investment and thus will not increase the budget
    deficit. Since the return on taxpayer service spending cannot be
    quantified, the ``program integrity cap'' approach leads inexorably
    toward greater funding for enforcement.
    ---------------------------------------------------------------------------
        \14\ Department of the Treasury, Fiscal Year 2008 Budget-in-Brief
    at 56.
    ---------------------------------------------------------------------------
        For the reasons I have described, I urge the Committee to consider
    carefully the appropriate balance between taxpayer service and
    enforcement in making funding decisions for the fiscal year 2008 IRS
    budget. Many aspects of taxpayer service are akin to a wholesale
    operation that reaches groups of taxpayers (e.g., outreach and
    education), while IRS audits constitute a far more costly retail
    operation that requires individual taxpayer contact. The IRS should
    pursue a balanced approach to tax compliance that puts priority
    emphasis on improving IRS outreach and education efforts, while
    reserving targeted enforcement actions to combat clear abuses and send
    a message to all taxpayers that noncompliance has consequences.\15\
    ---------------------------------------------------------------------------
        \15\ For research purposes, we believe it is important to study
    inadvertent errors as well as deliberate misreporting. Knowledge about
    inadvertent errors can be used to clarify ambiguous laws or
    administrative guidance both to help increase future compliance and to
    better apply IRS outreach, education, and other voluntary compliance
    initiatives.
    ---------------------------------------------------------------------------
     the irs should devote more resources to obtaining better research to
        improve its strategic planning and resource allocation decisions
        As described above, the IRS currently does not know whether its
    next dollar is better spent on taxpayer service or enforcement. It does
    not know within either category where its funds can be most efficiently
    deployed. The IRS will be much better off if it has better information
    to guide its resource allocation decisions.
        Congress should consider directing the IRS to undertake additional
    research studies, perhaps utilizing the expertise of outside experts,
    to improve the accuracy of its return on investment (ROI) estimates for
    various categories of work, especially taxpayer service and the
    indirect effect of enforcement actions, including the downstream costs
    of such work. Improved methods should also be developed to verify,
    retrospectively, the marginal ROI that the IRS has achieved for each
    category of work.
        Among other things, the IRS should measure and report to Congress
    on its progress in handling all significant categories of work,
    including the known workload, the percentage of the known workload the
    IRS is able to handle and the percentage of the known workload the IRS
    is not able to handle, the additional resources the IRS would require
    to perform the additional work, and the likely return-on-investment of
    performing that work.\16\
    ---------------------------------------------------------------------------
        \16\ Much of this information was published in former Commissioner
    Rossotti's final report to the IRS Oversight Board. Commissioner
    Charles O. Rossotti, Report to the IRS Oversight Board: Assessment of
    the IRS and the Tax System 16 (Sept. 2002). However, we have not seen
    updated statistics published in this format since that time.
    ---------------------------------------------------------------------------
    The IRS Can and Should Do a Better Job of Measuring the Impact of
            Taxpayer Service on Compliance
        The Taxpayer Assistance Blueprint (TAB) notes that it is difficult
    to measure the impact of taxpayer service on compliance. Of the private
    sector and government entities that the TAB team surveyed, all had
    concluded that customer service at least indirectly impacts their
    organizations, but only one had attempted to empirically measure that
    impact.
        Although little work has been done in this area, I believe the IRS
    does have the capability to develop useful estimates, and I am
    suggesting a general framework for conducting this research. Measuring
    the compliance impact of customer service would entail identifying a
    group of taxpayers who received a particular service (the ``treatment
    group'') and an otherwise comparable group that did not receive that
    service (the control group). Compliance of both groups could then be
    measured on returns filed subsequent to the receipt of service by the
    treatment group. The three measures used to estimate the tax gap could
    be applied--payment compliance, filing compliance, and reporting
    compliance.
        We can determine the payment compliance of survey respondents by
    simply observing whether the full tax liability was paid at the time of
    filing. We can estimate their filing compliance by determining whether
    non-filers appeared to have a filing requirement. To determine
    reporting compliance, by far the biggest component of the tax gap, we
    could use IRS-developed algorithms for estimating reporting compliance.
    These algorithms have been updated based on results from the recently
    completed National Research Program (NRP) and should provide good
    preliminary estimates. The estimates could subsequently be validated
    during the next NRP by comparing actual reporting compliance against
    predicted reporting compliance based on the IRS algorithms.
                Measuring the Direct Effect
        If we accept the above proposed framework as a valid means of
    estimating compliance, surveys could then be designed and administered
    to identify groups of taxpayers who did or did not receive certain
    services, such as telephone or Internet assistance with tax law
    questions, Internet or walk-in site (also known as Taxpayer Assistance
    Center or TAC) assistance obtaining forms, etc. Subsequent compliance
    of those who receive the service could then be compared to compliance
    for a comparable group who do not. Taxpayer satisfaction with services
    received might also be an interesting variable to examine.
                Measuring Indirect Effects
        It is possible that taxpayer compliance behavior may be influenced
    by knowledge and attitudes about IRS customer service offerings, even
    if the affected taxpayers have not used those services. The same basic
    proposed framework could be used to measure these indirect effects. We
    would have to determine a set of relevant attributes to identify
    taxpayer groups indirectly affected by IRS customer service offerings.
    It seems to me that such attributes would probably include use,
    awareness, access and general satisfaction level:
      --Use.--To be indirectly affected, a taxpayer could not have used the
            service in question (at least during the year being studied).
      --Awareness.--A taxpayer would have to be aware of the existence of a
            service to be influenced by it.
      --Access.--It seems likely that taxpayers who could access the
            service if they chose to are more likely to be influenced
            (e.g., those living close to a TAC).
      --Satisfaction Level.--It seems likely that taxpayers having a
            generally favorable level of satisfaction with our services are
            more likely to be positively influenced (and vice versa).
        Surveys could be administered to determine whether compliance was
    impacted based on the values for the above attributes (or others
    suspected of indirectly affecting compliance).
                Return Preparation
        The IRS has data that enable us to estimate compliance for the
    entire population of returns by type of preparation: IRS prepared,
    volunteer, commercial, and taxpayer prepared. It would be instructive
    to compare estimated reporting compliance for IRS prepared returns
    against comparable returns (i.e., low income, especially Earned Income
    Tax Credit) prepared by the other methods. If the data show that IRS-
    prepared returns are substantially more compliant, the IRS might decide
    to expand return preparation in the TACs.\17\
    ---------------------------------------------------------------------------
        \17\ As I discuss in the Appendix, existing data suggest that EITC
    returns prepared in the TACs are more compliant than other returns.
    ---------------------------------------------------------------------------
    The IRS Should Include the Cost of the Downstream Consequences of Its
            Actions in Its Return on Investment (ROI) Calculations
        The IRS needs to conduct more thorough and accurate analyses when
    measuring return on investment (ROI) in order to allocate future
    dollars appropriately. For example, although in the short run it may
    cost more to process and review an Offer in Compromise and it may
    appear that the government is writing off revenue, the taxpayer in the
    long run may pay more tax dollars into the system as a result of his
    promise to be fully compliant for the five succeeding years.\18\ Five
    years is a long enough period to enable the taxpayer to ``learn'' a new
    norm of behavior--namely, compliance. And when you compare the 16 cents
    on the dollar that IRS receives from offers \19\ to the virtually no
    cents it collects after year 3 of the 10-year collection period,\20\
    the Offer in Compromise suddenly looks like a very efficient and
    productive program.
    ---------------------------------------------------------------------------
        \18\ If a taxpayer fails to comply with all his tax obligations
    over the five-year period following IRS acceptance of an offer, the IRS
    may rescind the offer and reinstate the tax debt. See IRS Form 656,
    Offer in Compromise.
        \19\ IRS Small Business/Self Employed Division, Offer In Compromise
    Program, Executive Summary Report (Jan. 2006).
        \20\ IRS Automated Collection System Operating Model Team,
    Collectibility Curve (August 5, 2002).
    ---------------------------------------------------------------------------
        When computing ROI, the IRS should include the costs of the
    downstream consequences of its enforcement actions, which include the
    costs associated with cases handled by Appeals or the Taxpayer Advocate
    Service. Downstream consequences analysis tells us not only true ROI
    (i.e., the true cost to the IRS) but also gives us clues as to how to
    improve our processes from an IRS and a taxpayer perspective. That is,
    downstream consequences analysis is a form of taxpayer service.
    The IRS Should Conduct Research, Organized by Taxpayer Segment, to
            Better Understand Taxpayer Behavior and Taxpayer Response to
            IRS's Various Service and Enforcement ``Touches''
        The absence of research about taxpayer needs often leads the IRS to
    place its immediate resource needs over taxpayers' immediate and long-
    term needs.\21\ This approach may cause more taxpayers to become
    noncompliant, thereby requiring more expensive enforcement actions.
    Concern over the lack of research and taxpayer-centric strategic
    planning led Congress to enact Section 205 of the fiscal year 2006
    Appropriations Act funding the IRS and to direct the IRS to develop a
    five-year strategic plan for taxpayer service.\22\
    ---------------------------------------------------------------------------
        \21\ The declining number of Taxpayer Assistance Center (TAC)
    visits is an example of IRS placing its resource needs over taxpayer
    needs. For fiscal year 2006, IRS established a goal of preparing 20
    percent fewer tax returns in TACs than in fiscal year 2005. Not
    surprisingly, TAC visits for year-to-date fiscal year 2006 have
    declined 14 percent compared with this time last year. Even though the
    decline in TAC usage appears to result from IRS-imposed limitations on
    service, the IRS is nonetheless citing this decline as a justification
    for making further reductions in service at the TACs. Wage &
    Investment, 2006 Filing Season Data: Cumulative Statistics Report (Feb.
    25, 2006).
        \22\ Pub. L. No. 109-115,  205, 119 Stat. 2396 (2005).
    Specifically, the statute provides:
        ``None of the funds appropriated or otherwise made available in
    this or any other Act or source to the Internal Revenue Service may be
    used to reduce taxpayer services as proposed in fiscal year 2006 until
    the Treasury Inspector General for Tax Administration completes a study
    detailing the impact of such proposed reductions on taxpayer compliance
    and taxpayer services, and the Internal Revenue Service's plans for
    providing adequate alternative services, and submits such study and
    plans to the Committees on Appropriations of the House of
    Representatives and the Senate for approval: . . . Provided further,
    That the Internal Revenue Service shall consult with stakeholder
    organizations, including but not limited to, the National Taxpayer
    Advocate, the Internal Revenue Service Oversight Board, the Treasury
    Inspector General for Tax Administration, and Internal Revenue Service
    employees with respect to any proposed or planned efforts by the
    Internal Revenue Service to terminate or reduce significantly any
    taxpayer service activity.''
        The accompanying Joint Explanatory Statement of the Committee of
    Conference stated: ``The conferees direct the IRS, the IRS Oversight
    Board and the National Taxpayer Advocate to develop a 5-year plan for
    taxpayer service activities. . . . The plan should include long-term
    goals that are strategic and quantitative and that balance enforcement
    and service.'' H. Rep. No. 109-307, 209 (2005).
    ---------------------------------------------------------------------------
        I have written at length elsewhere on the need to understand the
    causes of noncompliance so that the IRS doesn't adopt a one-size-fits-
    all enforcement approach.\23\ Each year, academics and other scholars
    propose many ideas that a 21st century tax administrator should be
    examining and testing. In fact, the IRS has such a vehicle for
    partnering with academics in the Intergovernmental Personnel Act (IPA)
    program. Unfortunately, this program is underutilized. The IRS must
    conduct and underwrite such applied research.
    ---------------------------------------------------------------------------
        \23\ See National Taxpayer Advocate 2004 Annual Report to Congress
    211 (Most Serious Problem: IRS Examination Strategy) and 226 (Most
    Serious Problem: IRS Collection Strategy); National Taxpayer Advocate
    2005 Annual Report to Congress 55 (Most Serious Problem: The Cash
    Economy); Written Statement of Nina E. Olson, National Taxpayer
    Advocate, Before the Subcommittee on Federal Financial Management,
    Government Information, and International Security, Committee on
    Homeland Security and Governmental Affairs, United States Senate, on
    The Tax Gap (Oct. 26, 2005); Written Statement of Nina E. Olson,
    National Taxpayer Advocate, Before the Committee on the Budget, United
    States Senate, on The Causes of and Solutions to the Federal Tax Gap
    (Feb. 15, 2006).
    ---------------------------------------------------------------------------
        Because taxpayer service and enforcement are the drivers of overall
    compliance, we need to measure taxpayer service needs concurrently with
    our efforts to measure the tax gap. Thus, the National Research Program
    should update its analysis of taxpayer service needs at the same time
    it is measuring taxpayer noncompliance for the particular taxpayer
    population it is studying. The IRS can make informed resource
    allocation decisions only if it is armed with both types of
    information.
    the irs should address the impact of irs business systems modernization
        limitations on both taxpayer service and enforcement initiatives
        When I was in private practice as an attorney representing clients
    before the IRS, I did not have a full appreciation of how significant a
    role Business Systems Modernization (BSM) plays in both creating and
    solving problems for taxpayers and the IRS. As the National Taxpayer
    Advocate, I know that on a regular basis my office identifies systemic
    problems for which the complete solution requires some sort of BSM fix.
        When former Commissioner Everson began his tenure, he ordered three
    separate reviews--two external, one internal--of the state of IRS BSM
    projects. Based on these reviews, the Commissioner quickly--and, I
    believe, correctly--concluded that the IRS was spreading its internal
    BSM resources too thin. Project managers and experts charged with
    overseeing our key initiatives--such as the Integrated Financial System
    (IFS) and the Customer Account Data Engine (CADE)--were also managing
    scores of smaller projects, all more or less important but all
    detracting from our central progress on IFS and CADE.
        For the past several years, the IRS has focused on its primary
    projects and strictly controlled the number of other BSM projects. This
    approach makes sense because it is critical to both effective service
    and enforcement that the IRS move forward with its primary initiatives.
    On the other hand, many projects cannot be deferred too much longer
    without significantly impacting taxpayer rights, accuracy of taxpayer
    data, and effective examination and collection initiatives. Thus,
    Congress should ensure that the IRS has the funding to address and is
    addressing current taxpayer needs while the IRS moves its primary
    initiatives forward.
    funding for the private debt collection initiative should be redirected
                  to fund collection activity by irs employees
        In my view, the Private Debt Collection (PDC) initiative is a bad
    idea and should be terminated. The premise of the PDC initiative was
    essentially this: ``There is a significant amount of tax debt that the
    IRS can't go after because it doesn't have the resources. If we simply
    turn those cases over to private collection agencies, they'll collect
    the debt for us and the government will get to keep 75 to 80 cent of
    every dollar the debt collectors are able to collect.''
        The problem with that simple approach is that it fails to take into
    account the enormous amount of IRS resources that need to be devoted to
    creating and supporting the program. Because tax collection is
    considered to be an inherently governmental function, private
    collection agencies (PCAs) cannot negotiate or compromise tax
    liabilities, interest, or penalties. Unless a taxpayer contacted by a
    PCA agrees to pay the tax debt in full, the case must be sent back to
    the IRS referral unit for additional work that only the IRS can
    constitutionally take on the account. Keep in mind that these are cases
    the IRS currently considers too unproductive to devote resources to.
    Yet ironically, under the PDC initiative, the IRS will end up pulling
    employees off high-priority, high-return cases to work on these low-
    priority, low-return cases.
        As the IRS's PDC initiative moves forward, PCAs will be given more
    complex cases in order to compensate for the smaller number of easy
    cases. This change of course began as early as phase 1.2 of the PDC
    initiative, when the IRS developed case selection criteria that allowed
    certain nonfiler cases to be sent to the PCAs. The determination that a
    taxpayer is a nonfiler is a discretionary decision that can be made
    only by the IRS, not a private collection agency. Therefore, many of
    these nonfilers will raise issues only the IRS can address. The IRS
    intends to continue this trend of allowing PCAs to work cases that are
    complex and difficult to collect, such as innocent spouse cases, trust
    fund recovery penalty cases and business taxes.\24\
    ---------------------------------------------------------------------------
        \24\ Internal Revenue Service, F&PC Advisory Council Deck (Mar. 7
    2007).
    ---------------------------------------------------------------------------
        Working on these complex cases increases the likelihood that the
    PCAs will make mistakes and decreases the likelihood that the PCAs will
    be able to collect any payment from the taxpayer. Moreover, in these
    more complex cases, taxpayers are more likely to have questions that
    the PCA employees are unable to answer because their knowledge
    regarding tax issues is limited, at best, or because PCAs cannot
    exercise discretion in either answering a question or working a case.
    Faced with having to send the case back to the IRS referral unit, the
    PCAs may attempt to pressure the taxpayer into an unreasonable payment
    plan. As the expanded case selection increases the likelihood of IRS
    referral unit involvement, the underlying business case for the PCA
    initiative evaporates.
        This approach makes little business sense, and on top of that, the
    program raises significant concerns about the adequacy of taxpayer
    rights protections and confidentiality of tax return information. In
    fact, to make the program profitable, the IRS will be under pressure to
    expand the authorized actions that private collection agencies can take
    on a case so they can work higher dollar, more complex cases. This
    expansion would clearly raise constitutional concerns.\25\
    ---------------------------------------------------------------------------
        \25\ For a detailed discussion of the IRS Private Debt Collection
    initiative and its constitutional and taxpayer rights implications, see
    Use of Private Agencies to Improve IRS Debt Collection, Subcommittee on
    Oversight, House Committee on Ways and Means, 108th Cong., 1st Sess.
    (statement of Nina E. Olson, National Taxpayer Advocate, May 13, 2003);
    see also National Taxpayer Advocate 2005 Annual Report to Congress 76-
    93.
    ---------------------------------------------------------------------------
            trends in taxpayer advocate service (tas) case inventory
        I close with a reflection on the Taxpayer Advocate Service and its
    role in identifying and mitigating the downstream consequences of IRS
    actions and programs, and improving taxpayers' attitudes toward the tax
    system. This recent March 1st marked my six-year anniversary as the
    National Taxpayer Advocate. They have been quite remarkable years--I
    have watched my talented and dedicated employees achieve a quality
    rating of 89.7 percent for fiscal year 2006, up from 71.6 percent in
    2001. The performance of TAS employees over the past two years has been
    particularly commendable--TAS case receipts rose an overwhelming 43
    percent from fiscal year 2004 to fiscal year 2006,\26\ while the number
    of case advocacy employees working those cases declined seven percent
    from 1,908 to 1,766 over the same period. Yet we have managed to handle
    this increased workload to date without much decline in our case
    quality.
    ---------------------------------------------------------------------------
        \26\ In fiscal year 2006, TAS received a total of 242,173 cases. In
    fiscal year 2004, TAS received a total of 168,856 cases.
    ---------------------------------------------------------------------------
        The increase in TAS cases is not surprising. The IRS has
    substantially increased the number of its compliance actions in recent
    years, and about 70 percent of TAS's cases are classified as
    ``compliance'' related. Increasing the number of compliance cases
    inevitably produces a corresponding increase in TAS cases. Thus, the
    greater IRS emphasis on enforcement has resulted in a greater need for
    TAS services. Notably, TAS was able to obtain relief for the taxpayer
    in 70 percent of the cases we closed in fiscal year 2006.
        TAS Customer Satisfaction surveys provide some evidence that the
    quality and nature of taxpayer service has an impact on taxpayer
    attitudes toward the tax system. When a taxpayer brings an eligible
    case to TAS, he is assigned a case advocate who works with him
    throughout the pendency of the case. Taxpayers have a toll-free number
    direct to that case advocate, and each TAS office has a toll-free fax
    number. TAS employees are required to spot and address all related
    issues and to educate the taxpayer about how to avoid the problem from
    occurring again, if possible. This level and quality of service drives
    TAS's high taxpayer satisfaction scores,\27\ which averaged about 4.35
    on a scale of 5.0 in fiscal year 2004 and fiscal year 2005.\28\ Most
    importantly, 57 percent of taxpayers stated that they felt better about
    the IRS as a whole after coming to TAS. Even among taxpayers who did
    not obtain the result they sought, an impressive 41 percent reported
    that they had a more positive opinion of the IRS because of their
    experience with TAS.
    ---------------------------------------------------------------------------
        \27\ Taxpayer Advocate Service customer satisfaction survey data
    for the period from October 2003 through September 2005, as collected
    by The Gallup Organization.
        \28\ Last year, TAS began using a new vendor to conduct its
    customer satisfaction surveys. We have not yet refined our new measure
    to make its results comparable to those achieved for years covered by
    the prior vendor.
    ---------------------------------------------------------------------------
        I am concerned that with the increasing volume, complexity, and
    urgency of TAS's caseload, the cycle time for our cases has begun to
    increase. If the balance between our staffing and the number of cases
    we handle continues to deteriorate, TAS is in jeopardy of becoming part
    of the IRS problem rather than the advocate for the solution, as
    Congress intended.
                                   conclusion
        Compared to the IRS of ten years ago, the IRS of today is a more
    responsive and effective organization. On the customer service side,
    the IRS Restructuring and Reform Act of 1998 and the IRS response has
    brought about fairly dramatic improvements. On the enforcement side,
    the IRS has been stepping up its enforcement of the tax laws over the
    past five years, particularly with regard to corporate tax shelters and
    high-income individuals.
        But the IRS can, and should, do better. To increase voluntary
    compliance, it should incorporate an ongoing taxpayer-centric
    assessment of taxpayer service needs into its strategic plans. It
    should conduct research into the causes of noncompliance and apply the
    resulting knowledge to IRS enforcement strategies, including those
    pertaining to the cash economy. Finally, it must have sufficient
    resources to move forward with its technological improvements, on both
    a short-term and a long-term basis.
                       appendix: taxpayer service issues
    the irs needs additional funding to allow for the implementation of new
                initiatives designed to improve taxpayer service
        Over the past two years, in response to a directive from this
    Committee, the IRS--through its Taxpayer Assistance Blueprint (TAB)
    team--has engaged in extensive research into the needs, preferences,
    and willingness of taxpayers to use taxpayer services.\1\ The TAB is a
    strategic document that contains a number of recommendations that, if
    implemented, will improve taxpayer service for many taxpayers. Many of
    the TAB recommendations focus on strengthening electronic service
    delivery options, with a focus on the irs.gov website. The goal is to
    provide increased service capabilities through the least costly
    electronic delivery channel, thereby reserving the more costly
    telephone and walk-in services for those taxpayers in need of
    additional assistance. As the IRS restructures the delivery of services
    and recognizes savings from increased efficiency, the IRS should
    reinvest these savings back into taxpayer service programs and
    initiatives to further improve on service delivery, including person-
    to-person and face-to-face assistance.
    ---------------------------------------------------------------------------
        \1\ Internal Revenue Service, The 2007 Taxpayer Assistance
    Blueprint Phase 2 (April 2007).
    ---------------------------------------------------------------------------
        Moreover, the TAB report contains a number of recommendations that
    can have an immediate impact on the quality of taxpayer service. While
    the IRS will begin implementing these and other initiatives during
    fiscal year 2007, additional funding is needed in order to implement
    the proposed changes fully.
        Online Taxpayer Tools.--During fiscal year 2008, the IRS is
    scheduled to launch the Internet Customer Account Services (I-CAS)
    platform. I-CAS will provide taxpayers with direct access to account
    information and services.\2\ The first phase of the I-CAS rollout will
    provide taxpayers online access to account and return transcripts. The
    second phase will allow taxpayers to submit electronic versions of
    forms for change of address, disclosure authorization, and extension to
    file forms. With additional funding, future I-CAS capabilities could
    include explanation of account issues, movement of payments, and issue
    diagnosis and resolution.\3\ Spanish versions of I-CAS and ``Where's My
    Refund'' are also planned for fiscal year 2008.\4\ With additional
    funding, the IRS could expand to other languages.
    ---------------------------------------------------------------------------
        \2\ Id. at 82.
        \3\ Id.
        \4\ Id.
    ---------------------------------------------------------------------------
        Improvements in TAC Services.--During fiscal year 2007, the IRS is
    testing a Facilitated Self-Assistance Model (FSM) in 15 Taxpayer
    Assistance Centers (TACs) locations. FSM is designed to help taxpayers
    who have indicated a willingness to use alternative service channels,
    such as telephone or computer assistance, to learn how to effectively
    use those channels--thereby allowing TAC employees to focus on services
    taxpayers have indicated they want to receive in person. The FSM will
    provide taxpayers coming into a TAC with the option of using a self-
    assisted service to resolve a tax-related question. The TACs will be
    outfitted with workstations containing computers and telephones. This
    will allow taxpayers to access the irs.gov website or use the toll-free
    telephone line to receive assistance. TAC employees will be available
    to answer questions and provide assistance to taxpayers willing to use
    the workstations.\5\ At any point during the process, the taxpayer will
    be able to request assistance from a TAC employee.
    ---------------------------------------------------------------------------
        \5\ The IRS designed the FSM model to ensure that taxpayer
    information is protected from unauthorized access and all taxpayers
    using the self-assistance options are provided with proper notification
    and information to make them aware that their computer usage is being
    monitored and recorded for research purposes.
    ---------------------------------------------------------------------------
        After completing their transaction using the workstation, taxpayers
    will be asked to complete a brief survey designed to assess the
    effectiveness of the FSM and satisfaction with the experience. The
    survey will also collect demographic user information to enhance the
    IRS's understanding of taxpayer needs, preferences, and behaviors. The
    goal of FSM will be to help some taxpayers become more comfortable
    using online and telephone alternatives to answer their questions or to
    obtain information through forms, publications, and other guidance. TAC
    employees can focus on those taxpayers who require face-to-face
    assistance or those services (such as payments or account resolution)
    that taxpayers cannot or are unwilling to address through alternate
    channels.
        The IRS is also piloting a test to install payment kiosks in TACs.
    Currently, most TACs will accept cash payments from taxpayers who do
    not have, or are unable to obtain, a check or money order.\6\ TAC
    employees must then convert the cash payment to a bank draft or money
    order.\7\ This is particularly burdensome in smaller TAC offices where
    there are only one or two employees and one must leave the office in
    order to convert the cash payment. The IRS is testing the use of a
    kiosk located in the TAC that would allow a taxpayer to convert a cash
    payment into a money order without having to leave the TAC. The IRS
    will test these kiosks in two locations this year.
    ---------------------------------------------------------------------------
        \6\ IRM 21.3.4.7.2, Cash Payments (Jan. 10, 2007).
        \7\ IRM 21.3.4.7.2.3, Converting Cash Payments (Jan. 10, 2007).
    ---------------------------------------------------------------------------
        FSM and the kiosks have the potential to save both the taxpayer and
    the IRS time. If FSM and the kiosks prove to be effective, the IRS will
    likely need additional funding to install these features in all TACs.
              the irs should not reduce critical taxpayer services
        The TAB report puts forth a number of recommendations designed to
    improve taxpayer service. Although the report provides the IRS with
    valuable information regarding the needs, preferences, and willingness
    of taxpayers to use certain services, it is only a starting point. The
    IRS must continue its research efforts to determine how best to
    strengthen taxpayer services.
        For example, the Taxpayer Advocacy Panel (TAP) has just conducted a
    survey that will shed light on the needs and preferences of those who
    visit a TAC. The methodology of the TAP survey differs from prior
    surveys in that it will attempt to survey taxpayers who attempted to
    visit a TAC but were unable to obtain assistance for such reasons as
    the line was too long or the TAC office was closed. The TAP survey
    gathered some basic demographic information, and it inquired about why
    the taxpayer was visiting the TAC and whether the taxpayer was
    satisfied with the service received. If the taxpayer did not receive
    any service, the survey will ask why none was provided. In addition,
    the TAP survey asked specifically why the taxpayer chose to visit the
    TAC instead of using a different IRS service and whether there were any
    services that were unavailable to them during their visit. The TAP
    survey results will provide the IRS with information useful not only in
    improving TAC services but in improving other taxpayer services as
    well.
        As the IRS implements the TAB recommendations and conducts
    additional research, the IRS needs to maintain its current services
    until it is proven that the new service offerings are adequately
    meeting taxpayer needs. One of the effects of the IRS's focus on
    enforcement at the expense of compliance has been a reduction in
    taxpayer services that can have a dramatic impact on taxpayers.
    IRS Has Substantially Reduced the Number of Returns It Prepares at the
            TACs
        The IRS historically has prepared tax returns for low income
    taxpayers at its TACs. Low income taxpayers generally qualify for the
    earned income tax credit (EITC), which is a refundable credit that caps
    out at $4,536 in 2006. Studies show that the average overclaim rate for
    EITC benefits is between 27 percent and 32 percent.\8\ IRS personnel
    who prepare tax returns are trained to ask questions that minimize the
    likelihood of EITC overclaims and thus can save the government hundreds
    of dollars per return. Yet to free up resources for other program
    initiatives, the IRS has reduced the number of tax returns it helps low
    income taxpayers prepare in its walk-in sites by almost 40 percent over
    the past four years. The number of returns prepared dropped from
    665,868 in fiscal year 2003 to 406,612 in fiscal year 2006.\9\
    ---------------------------------------------------------------------------
        \8\ Internal Revenue Service, Compliance Estimates for Earned
    Income Tax Credit Claimed on 1999 Returns 3 (Feb. 28, 2002).
        \9\ Wage and Investment Operating Division, Business Performance
    Review Fiscal Year 2006.
    ---------------------------------------------------------------------------
        IRS data for tax years 2002 through 2004 suggest that EITC returns
    prepared by IRS TACs may be significantly more compliant than self-
    prepared and commercially prepared returns. As compared with TAC-
    prepared returns, Discriminant Function (DIF) scores were between 21
    and 26 percent higher for self-prepared returns and between 25 and 31
    percent higher for returns prepared by commercial preparers.\10\ The
    DIF score is an estimate of the likelihood of non-compliance on a
    return. A higher score indicates a higher likelihood of non-compliance.
    ---------------------------------------------------------------------------
        \10\ IRS Compliance Data Warehouse, Individual Returns Transaction
    File data for tax years 2002-2004.
    ---------------------------------------------------------------------------
        These findings are corroborated by examination results for EITC
    returns for these tax years. As compared with TAC-prepared returns,
    average audit assessments among EITC returns for tax years 2002-2004
    ranged from about $640 to $1,300 higher for self-prepared returns and
    from about $820 to $1,300 higher for commercially prepared returns.\11\
    Similarly, a study conducted in 1996 that examined the relationship
    between IRS return preparation and compliance over a ten-year period
    showed that an increase in the number of returns prepared by the IRS
    correlates with substantial improvements in compliance among filers of
    individual returns. Indeed, taking into account the indirect effects of
    IRS return preparation, the study estimated the return on investment
    for each dollar the IRS spent on return preparation was 396:1.\12\
    ---------------------------------------------------------------------------
        \11\ IRS Compliance Data Warehouse, Audit Inventory Management
    System data for tax years 2002-2004.
        \12\ See Alan H. Plumley, Pub. 1916, The Determinants of Individual
    Income Tax Compliance: Estimating The Impacts of Tax Policy,
    Enforcement, and IRS Responsiveness 41 (Oct. 1996).
    ---------------------------------------------------------------------------
    The IRS Is Declaring Increasing Numbers of Issues ``Out-of-Scope''.
        In my 2004 Annual Report, I raised concerns about the increasing
    number of issues declared ``out-of-scope'' in TACs, because limiting
    the issues TAC employees are able to address reduces the level of
    service available to taxpayers.\13\ For example, despite the number of
    taxpayers in certain states with taxable income from farming
    activities, I received a complaint at a ``town hall'' meeting in Fargo,
    North Dakota last year that questions about Schedule F, the form used
    to report farming income and expenses, are considered out-of-scope at
    IRS walk-in sites. I was astounded, but my staff has since confirmed
    that is the case.\14\
    ---------------------------------------------------------------------------
        \13\ National Taxpayer Advocate 2004 Annual Report to Congress 12
    (Most Serious Problem: Taxpayer Access--Face-to-Face Interaction).
        \14\ IRM 21.3.4-1, Scope of Services (Feb. 16, 2007).
    ---------------------------------------------------------------------------
        One of the reasons the IRS maintains a geographic presence is to
    allow taxpayers to obtain assistance with needs that may be different
    from the needs of taxpayers in other regions. Therefore, TAC out-of-
    scope questions could differ according to taxpayer needs by geographic
    region. Questions about farming may be appropriately considered out-of-
    scope in New York City--an area where complex financial reporting
    questions may be routine. In Fargo, North Dakota, it is fair to expect
    that farming questions are ``ripe'' for consideration.
    TACs Are Not Adequately Responding to Emergency Transcript Requests.
        Under current IRS policies, taxpayers who request a copy of a
    return transcript should have the transcript mailed to their address
    within 10 days.\15\ If a taxpayer is requesting a hardship exception,
    she must provide verification to show why she is unable to wait the
    normal processing time to obtain her transcript. While these exceptions
    should be ``rare'' and require managerial approval,\16\ the procedures
    for obtaining an exception are not operating as intended. One example
    comes from our Omaha office, where a taxpayer went to a TAC requesting
    a return transcript. The taxpayer was scheduled for surgery the next
    day and needed a copy of a transcript to prove he was financially
    eligible to receive assistance. The TAC employee indicated that this
    was not an emergency and the taxpayer would receive his transcript in
    two weeks. Luckily, the Omaha TAS office was able to immediately
    provide the requested transcript. The current IRS procedures for
    hardships are clearly not working. Taxpayers who are in need of
    transcripts for court proceedings, medical procedures, or student loans
    are being turned away and instead are coming to TAS for assistance.
    This reduction in taxpayer service is negatively impacting taxpayers
    and forcing them to turn to TAS for assistance that the IRS should be
    providing.
    ---------------------------------------------------------------------------
        \15\ IRM 21.3.4.14.4, Tax Return and Tax Account Transcript
    Requests (Jan. 16, 2007).
        \16\ Id.
    ---------------------------------------------------------------------------
    Small Business Outreach Has Declined.
        IRS data show that self-employed taxpayers account for the largest
    chunk of the tax gap and indicate that the tax compliance rate for
    self-employed taxpayers runs at about 43 percent.\17\ Much of the
    underreporting is deliberate, but some is not. For example, many small
    businesses are started by individuals who lack detailed knowledge of
    the tax laws and do not have the resources to hire tax attorneys or
    accountants. When they hire a few workers, they often do not realize
    that they are assuming tax reporting, tax withholding, and tax payment
    obligations, and they often do not understand enough about the details
    of complying with the requirements to do so with reasonable effort.
    ---------------------------------------------------------------------------
        \17\ See IRS News Release, IRS Updates Tax Gap Estimates, (Feb. 14,
    2006) (accompanying charts).
    ---------------------------------------------------------------------------
        After enactment of the IRS Restructuring and Reform Act of 1998,
    the IRS developed a function known as Taxpayer Education and
    Communications, or ``TEC.'' TEC was the IRS's outreach arm to small
    businesses to try to educate them about the complexity of their tax
    obligations. For 2002, TEC was named the Small Business
    Administration's agency of the year for what the SBA called its
    outstanding progress in creating an effective education and compliance
    assistance program for small business and self-employed taxpayers.\18\
    Yet in the name of achieving ``efficiencies,'' TEC was ``realigned'' in
    February 2005 through a merger with other outreach functions and
    redesignated as ``Stakeholder Liaison.'' Prior to the realignment, TEC
    had 536 employees. After the realignment, Stakeholder Liaison staffing
    included 219 employees.\19\
    ---------------------------------------------------------------------------
        \18\ See Closing the Tax Gap and the Impact on Small Business,
    Hearing Before the House Comm. on Small Business, 109th Cong. (Apr. 27,
    2005) (testimony of John Satagaj, President and General Counsel, Small
    Business Legislative Council).
        \19\ IRS Small Business/Self Employed Division response to Taxpayer
    Advocate Service Information Request (Sept. 5, 2006).
    ---------------------------------------------------------------------------
        In my view, the reduction in TEC staffing will reduce tax
    compliance on the part of small businesses, result in more IRS audits
    of small businesses, and make more small businessmen and women feel
    like the government is playing ``gotcha'' with them by enacting complex
    requirements and then failing to help them understand how to comply.
    IRS Telephone Assistors Are Answering a Reduced Percentage of Calls and
            Taking Longer to Do It
        In 2003, the IRS answered 87 percent of all calls. This percentage
    dropped to 84 percent in 2006 and to 82 percent through March of this
    year's filing season. The average time it took the IRS to answer calls
    increased from 3.1 minutes in 2006 to 4.4 minutes so far this filing
    season.\20\ While the level of service on IRS phone lines is
    substantially better today than it was in the 1990s, we are moving in
    the wrong direction.
    ---------------------------------------------------------------------------
        \20\ Government Accountability Office, GAO-07-673, Internal Revenue
    Service: Interim Results of the 2007 Tax Filing Season and the Fiscal
    Year 2008 Budget Request 20 (April 2007).
    ---------------------------------------------------------------------------
    the irs should make it possible for taxpayers to prepare and file their
                tax returns electronically without paying a fee
        Electronic filing of tax returns brings benefits to both taxpayers
    and the IRS.\21\ From a taxpayer perspective, e-filing eliminates the
    risk of IRS transcription errors, pre-screens returns to ensure that
    certain common errors are fixed before the return is accepted, and
    speeds the delivery of refunds. From an IRS perspective, e-filing
    eliminates the need for data transcribers to input return data manually
    (which could allow the IRS to shift resources to other high priority
    areas), allows the IRS to easily capture return data electronically,
    and enables the IRS to process and review returns more quickly.\22\
    ---------------------------------------------------------------------------
        \21\ See S. Rep. No. 105-174, at 39-40 (1998).
        \22\ The IRS Restructuring and Reform Act of 1998 directed the IRS
    to set a goal of having 80 percent of all returns filed electronically
    by 2007. See Internal Revenue Service Restructuring and Reform Act,
    Pub. L. No. 105-206,  2001(a)(2), 112 Stat. 685 (1998). Although the
    IRS was not able to achieve this goal, we believe Congress should
    reiterate its commitment to seeing the IRS increase the e-filing rate
    as quickly as possible.
    ---------------------------------------------------------------------------
        In my view, the IRS should place a basic, fill-in template on its
    website and allow any taxpayer who wants to self-prepare his or her
    return to do so and file it directly with the IRS for free.\23\
    ---------------------------------------------------------------------------
        \23\ See National Taxpayer Advocate 2004 Annual Report to Congress
    471-477 (Key Legislative Recommendation: Free Electronic Filing for All
    Taxpayers).
    ---------------------------------------------------------------------------
        Some representatives of the software industry have taken the
    position that such a template would place the IRS in the position of
    improperly competing with private industry or, worse, create a conflict
    of interest between the IRS's role of tax preparer and tax auditor.
        This is nonsense. Since the inception of the tax system, there have
    always been two categories of taxpayers--those who are comfortable
    enough with the rules to self-prepare their returns and those who turn
    to paid professionals for assistance. In the paper-filing world, the
    IRS has always made its forms and instructions universally available
    without charge to all taxpayers, and those taxpayers who require help
    have always been free to seek the assistance of paid preparers.
        Imagine that, shortly after the income tax was enacted, a large
    group of bricks-and-mortar tax preparers had launched a lobbying
    campaign to try to persuade Congress to prohibit the IRS from making
    forms and instructions available to the public on the ground that the
    availability of these materials improperly placed the government in the
    position of competing with private industry. Or on the ground that it
    created a conflict between the government's role as preparer and
    auditor. Congress almost certainly would have rejected such arguments
    as ludicrous. Yet those are exactly the same conceptual arguments being
    raised today by those who contend that the government's provision of a
    basic web-based, fill-in form to all taxpayers would undercut the
    private sector.
        The answer to these arguments in today's electronic environment
    should be the same answer that Congress would have provided 80 years
    ago in a paper environment. For those taxpayers who are comfortable
    preparing their returns without assistance, the government will provide
    the means to do so without charge. For those taxpayers who do not find
    a basic template sufficient and would prefer to avail themselves of the
    additional benefits of a sophisticated software program, they are free
    to purchase one.
        A brief personal anecdote. Although I prepared tax returns
    professionally for 27 years before I became the National Taxpayer
    Advocate and don't need assistance from others to prepare my return, my
    government salary places me above the income cap to qualify to use Free
    File products. To prepare my return electronically last month, I
    therefore purchased tax preparation software. When I completed
    preparing my return, the software program informed me that, to file
    electronically, I would have to pay an additional fee. Although I
    deeply believe that e-filing is best for both taxpayers and the IRS for
    a host of reasons, I resented the notion that I would have to pay
    separate fees to prepare my return and to file it, so I printed out my
    return and mailed it in.
        I am hardly alone. IRS data shows that about 40 million returns are
    prepared using software yet are mailed in rather than submitted
    electronically.\24\ This is a shame, because the practice delays the
    length of time for processing refunds, it requires the IRS to devote
    additional resources to entering the data manually when it receives the
    return, and it creates a risk of transcription error.
    ---------------------------------------------------------------------------
        \24\ IRS Tax Year 2004 Taxpayer Usage Study (Aug. 26, 2005).
    ---------------------------------------------------------------------------
        There is no reason why taxpayers should be required to pay
    transaction fees in order to file their returns electronically. A free
    template and free direct filing mechanism would go a long way toward
    addressing this problem and would result in a greater number of
    taxpayers filing their returns electronically. When taxpayers elect to
    use commercial software but print out their returns for mailing, the
    IRS should require software developers to convert data to 2D bar codes,
    so that all tax information can be scanned into IRS systems.\25\ Both
    taxpayers and the government would stand to benefit from these
    improvements.
    ---------------------------------------------------------------------------
        \25\ More than 20 states currently use 2D bar-coding for personal
    income tax forms. See Federation of Tax Administrators compiled data
    http://www.taxadmin.org/fta/edi/ecsnaps.html.

        Senator Durbin. I would like to now invite Mr. White and
    Mr. Powner from the Government Accountability Office to join us
    at the panel. Although they did not have opening statements,
    they are prepared to answer questions. They have done extensive
    research on the operations of the Internal Revenue Service.

                   INTERNAL REVENUE SERVICE RECRUITMENT TOOLS

        Mr. Brown, did you happen to see the article printed in the
    New York Times on April 16? It was by David, it appears to be,
    Schizer, dean at Columbia Law School, and he talked about the
    need for professional personnel at the IRS.
        Mr. Brown. I believe I did see this article, yes.
        Senator Durbin. It was interesting, some of the things he
    suggested, that in order to attract the kind of skill that we
    may need at the IRS to deal with the complexity of filings he
    said that perhaps we should do more in repaying student loans,
    student loan forgiveness.
        First, could you comment on the need for that type of
    professional person and whether or not student indebtedness has
    become a factor?
        Mr. Brown. Indebtedness is a factor and I think he was
    referring to the chief counsel's side of the organization.
        Senator Durbin. That is right.
        Mr. Brown. Which is where our lawyers reside. Don Korb, who
    is our Chief Counsel, has taken a number of aggressive steps to
    attract top legal talent. Don can probably better address that
    than I could, but I used to work in the Chief Counsel's
    organization, so I am familiar with some of the things they do.
        They offer bonuses when people come on. They accelerate the
    pay raises that people can get. It is difficult when you come
    out of law school. You tend to owe quite a bit of money, and
    our salary is not commensurate with what law firms offer. So it
    is hard, and with an increasingly complex Tax Code it is
    difficult to attract people of the quality we need.
        Senator Durbin. Are you using student loan forgiveness now
    to attract professional personnel?
        Mr. Brown. I do not know the answer. I will find out an
    answer and get back to you.

                        VOLUNTEER INCOME TAX ASSISTANCE

        Senator Durbin. Tell me about this, is it ``VEE-tah'' or
    ``VIE-tah'' program?
        Mr. Brown. ``VIE-tah,'' volunteer income tax assistance.
        Senator Durbin. We hear from Mr. George that 56 percent of
    the returns are done accurately, are assembled accurately. That
    sounds like a pretty low number for a service being provided by
    our tax collecting agency.
        Mr. Brown. We are constantly trying to improve that number.
    As Russell has indicated, that number actually has improved to
    that point. I think you have got to recognize that the Code is
    quite complex. These people are volunteers. They are trained by
    us. We have clearly got to do a better job training them.
        I would point out that there are errors on returns and
    there are errors on returns, and it sort of depends how
    fundamental the error is on the return. I think Nina would
    probably have an opinion on this subject as well because Nina
    has looked very closely at this issue.
        Senator Durbin. I have always had a theory, incidentally. A
    few years ago my accountant in Springfield, Illinois, passed
    away and I decided as a lawyer who took tax courses in law
    school to just do my own returns. If every Member of Congress
    did their own personal returns, tax simplification would become
    a crusade on Capitol Hill. There is no doubt in my mind. What
    appears to be so simple is not, and we, guilty as charged, have
    created it in this situation.

                             FELONY FAILURE TO FILE

        Let me ask you about this, the whole question of policy
    changes that you think will lead to more compliance. One of
    them was upgrading the penalty for willful failure to file
    taxes to a felony. Now, what percentage do you think that
    represents in terms of current noncompliance?
        Mr. Brown. Oh, I think that is an outlier, but it is more
    symbolic. Right now it is a misdemeanor. I worked for a number
    of years at the Justice Department as an attorney and, frankly,
    you cannot interest assistant U.S. attorneys in prosecuting
    misdemeanors. Perhaps in the drug area, but not in the tax
    area. They just do not want to spend time on that. They have
    too many cases competing on their docket.
        What we are asking here is if you have willfully failed to
    file for 3 of the past 5 years, and there is an omission of
    more than $50,000, we are asking that failure be made a felony.
    We think that would lead to more compliance. I cannot tell you
    how much more, but there is symbolism there that we think is
    quite important.

                             LEGISLATIVE PROPOSALS

        Senator Durbin. What other changes are you proposing?
        Mr. Brown. Credit card reporting. If you ran a dry cleaning
    business and you take forms of payment as both cash and credit
    cards, we would like the aggregate dollar amount at the end of
    every year for your credit card receipts. That reporting will
    enable us to do two things. It may be that, given that we know
    from that industry, that payments are relatively divided
    evenly, 50 percent cash, 50 percent credit cards. We know not
    to audit you if it appears that you are in compliance. Or it
    would help us say, ``there is something amiss here, please
    explain.''
        Senator Durbin. Are there any other proposals that you
    think would have a significant impact on compliance?
        Mr. Brown. Well, we have a number. We have 16 of them. I
    think the basis reporting for security transactions is one that
    would be quite helpful. I can tell you from personal
    aggravation when I went to sell a mutual fund, it is difficult
    to calculate your basis. It is very difficult. I think that
    proposal helps both the consumer and it helps us, because the
    only information we have reported to us is the total sale
    price. We do not know what your gain is. So unless we start an
    audit, it is difficult to get to the proper number. So I think
    that would be helpful as well.

                             PREPARATION OF RETURNS

        Senator Durbin. I noticed here that, of course, the
    Internal Revenue Service is in competition with private
    companies when it comes to the preparation of tax returns. It
    appears that the number of people who utilize the services of
    the IRS is not increasing, may be decreasing some, in
    comparison to private companies. Can you give me some frame of
    reference there, percentage of those who are using private
    companies for preparation of returns?
        Mr. Brown. Our estimates are that 85 percent of people now
    either use a paid preparer or software to prepare their return.
    So you are down to about 15 percent left trying to navigate the
    system on their own or coming to us to use a volunteer outfit.
        Senator Durbin. What is your experience with those who do
    come in? Are they satisfied customers?
        Mr. Brown. I think they are by and large satisfied
    customers. I think that we have got over 12,000 sites around
    the country that do this now, 12,000 volunteers that do this
    for us now, and I think people are largely satisfied. They also
    serve segments of the population that may not be as fluent with
    computers and that sort of thing.
        Senator Durbin. Senator Allard.

                       STATEMENT OF SENATOR WAYNE ALLARD

        Senator Allard. Thank you, Mr. Chairman. I would like to
    make my statement a part of the record if I might, please.
        [The statement follows:]

                   Prepared Statement of Senator Wayne Allard

        I would like to thank Chairman Durbin for holding today's
    hearing.
        The American people are no stranger to taxes or the IRS.
    The first income tax was enacted by President Lincoln and
    Congress in 1862, to help finance the Civil War. While this
    income tax was later repealed, today we have a tax code that is
    very cumbersome and in need of reform.
        Recently, I had the pleasure of meeting with several
    constituents from Colorado. We discussed a very troubling
    occurrence involving the IRS and many landowners in Colorado.
    In many of these meeting I heard how frustrating and
    intimidating it can be to deal with the IRS. American citizens
    should not live in fear of their government. Taxpayers have a
    right to expect honesty and integrity in their dealings with
    the IRS.
        According to the IRS' own mission statement, the IRS
    provides America's taxpayers top quality service by helping
    them understand and meet their tax responsibilities and by
    applying the tax law with integrity and fairness to all.
        For some time now I have been concerned by increasingly
    hostile IRS actions towards conservation easements. It would
    appear that the IRS is attempting to dramatically narrow the
    number of legitimate conservation easements by applying a
    standard that has been struck down by federal courts two
    different times.
        Colorado is a national leader in conservation, and it is an
    issue of great importance to our state's economy and quality of
    life. It is also critical to our farmers and ranchers whose
    lands provide important agricultural products, wildlife
    habitat, water resources, and scenic vistas our state is famous
    for.
        While I support investigation and enforcement of legitimate
    fraud, we must not target honest taxpayers, and Colorado's
    reputation should not be tarnished. There is a significant need
    for conservation easements in Colorado, and a few abuses should
    not end the charitable tax credit for everyone.
        I have been in communication with the IRS over this matter
    for some months. Therefore, I will follow up with our panel in
    more detail during our question and answer period.

                             CONSERVATION EASEMENTS

        Senator Allard. In Colorado one of the important programs
    that we have going there is conservation easements. It has been
    called to my attention that there has been a small amount of
    fraud. There is one person maybe, an assessor. But a large
    percentage of what is happening in Colorado I believe is
    probably not related to this limited fraud. Yet the reputation
    is spreading in Colorado that you are after the whole, meaning
    the Internal Revenue Service, is after the whole conservation
    easement process, period.
        The last figure I got was 250 potential cases that were
    identified by IRS and now you are up to 290. So my question is,
    you continue to identify these individuals, but how many of
    these audits or how many of these 290 potential violations have
    had audits where you have closed it and delivered a revenue
    agent report?
        Mr. Brown. I do not know the precise number of how many
    have been closed. I do know that your number is correct on how
    many are underway. I do know that of the ones I have been
    briefed on, they have found some instances of abuse, not across
    the board, but they have found some instances of abuse.
        Senator Allard. Yes. Well, some individuals that are
    involved, both ranchers and the environmental groups that have
    helped encourage conservation easements, have recognized that
    there was particularly one, a couple of guys or one guy that
    was involved with some problems. But if you look at their
    cases, they obviously were not areas where there was a
    conservation easement need. You could easily identify that.
        I would encourage you to try and, let us get these resolved
    as quickly as possible and make a quick determination how
    extensive this is, because it is creating some problems. So I
    am getting complaints back in my office on that.
        So the next question I have is, and this gets back to our
    conservation easement, what specific guidance does the Internal
    Revenue Service have in using to evaluate whether a
    conservation easement has conservation purpose?
        Mr. Brown. We publish forms and other booklets that offer
    tests. Generally it is a three-part test----
        Senator Allard. Can I interrupt you there?
        Mr. Brown. Sure.
        Senator Allard. Here is what I understand that you have
    stated on that issue. You say: ``The presence of endangered
    species has never been a requirement for a conservation
    easement.'' Then you go further down and you state: ``But the
    IRS also states endangered species are a factor that can
    demonstrate a conservation purpose.''
        So when you have individuals look at that, there is some
    confusion about how in the world you evaluate a conservation
    easement, because it seems to be a contradiction of fact there.
        Mr. Brown. Yes, and apparently when we did a briefing out
    there for people who are interested in taking these credits,
    the revenue agent was less than crystal clear, and I apologize
    for that. We will do our best to make sure that people do
    understand what is required here.
        Senator Allard. Yes, because we have--well, one of the
    areas of concern is the sage grouse. Well, the sage grouse in
    some parts of Colorado has been classified endangered. Well,
    it's the Gunnison grouse, and then there is the regular sage
    grouse, a similar bird. But it has not been classified as
    endangered by--it is not on the endangered species list, but it
    is recognized as one of the 10 most endangered birds in North
    America by the Audubon Society.
        So I guess the question comes up, well, how do you treat
    grouse habitat? So you can understand the vagueness on here,
    and the quicker we can get that clarified the more appreciative
    I think and the better compliance you will get from these
    processes that set up a conservation easement. If you could
    help us out on that I would appreciate it.
        Mr. Brown. We shall.

                              QUALIFIED APPRAISERS

        Senator Allard. Now, one of the problems is qualified
    appraisers also. I had one individual come in to me who had a
    qualified appraiser, he is touted as being one of the best in
    Colorado for appraisals. The State of Colorado was involved in
    it. They did their own appraisal work and everything. Then the
    Internal Revenue Service comes back and they say the appraisal
    is not right.
        So my question, so it brings up the question, are your
    appraisers truly qualified and do they meet the provisions that
    are defined in the Pension Protection Act--this was a bill
    signed into law by President Bush in August 2006--about
    following the uniform standards of professional practice? Do
    you have that qualified appraiser that visits with these folks?
        Mr. Brown. I believe all of our appraisers are qualified. I
    am going to go back and check and we would be happy to come up
    and brief you thoroughly on this.
        Senator Allard. You may believe them qualified, but I want
    to see whether they meet the qualifications that are laid out
    within that particular provision.
        Mr. Brown. We will be happy to get you that.
        Senator Allard. Okay, thank you.
        So I see my time is running out here. So I will come back
    up with some other questions. Thank you.
        Thank you, Mr. Chairman.
        Senator Durbin. Senator Nelson.
        Senator Nelson. Thank you, Mr. Chairman, and thank you to
    the witnesses who are here today to testify. My opening remarks
    and my questions will be brief. I am here today to listen to
    your testimony. I think you are very knowledgeable. As we work
    to close the tax gap, I have questions about what the taxing
    authority has such difficulty in collecting the taxes that are
    owed. The power of the IRS, as they say, it is better to sin
    against God than it is the IRS because God forgives. I do not
    for one minute understand why the taxing agencies have so much
    trouble collecting taxes.
        As Governor, I had a tax commissioner and I do not believe
    that we had the same level percentagewise of tax collection
    issues. So I have never understood it.

                            PRIVATE DEBT COLLECTION

        But I want to touch briefly on a subject that is of
    interest to me. The IRS private debt collection initiative is
    obviously going to come up for discussion. I have long
    championed the effort to include that and to include within
    that program a preference for hiring service disabled veterans
    and other persons with disabilities to perform the debt
    collection work. In hiring in the Federal Government, there are
    various preferences offered by other agencies and I have worked
    with people from your office and my staff has worked with
    people from your office to try to put in place as part of the
    debt collection process a preference, a small preference by
    comparison, for firms that hire a certain number of individuals
    who are disabled, severely disabled.
        What, if any, reservations do you have about including the
    disabled veterans preference program? I did get a letter saying
    that you were not sure, some time ago from someone in the IRS,
    saying that they were not sure that the process would be as
    good. I do not think they meant that disabled people could not
    do as good a job, but I did not understand what was meant,
    either.
        Maybe you can give me your ideas about where the IRS is on
    this program now?
        Mr. Brown. Well, the program is done exclusively through
    phone calls.
        Senator Nelson. I mean on the preference.
        Mr. Brown. Oh, on the preference. I am going to have to go
    back and take a look. I know that you have an interest in this
    and I do not know what the obstacles are. I cannot think of any
    at the moment, but I would have to go back and ask if there are
    any potential problems.
        Senator Nelson. I cannot think of any at the moment either.
    But some of your staff did have some questions and some issues
    that we have tried to overcome and work through. I appreciate
    if you would--I have spoken to Secretary Paulson. I have spoken
    to Mr. Everson and I have worked with so many to try to get it
    done. I understand bureaucracy. Bureaucracy is full of ``we
    bees"--we be here when you come, we be here when you go. And I
    want to move beyond that, to where we get a commitment to do
    the kinds of things that we should be doing.
        Other agencies are able to do it. I do not understand the
    reluctance that I picked up along the way. Now, we have had
    some cooperation recently, but I have been 1\1/2\ years working
    to get that done and we have had to go around to get it into
    other legislation. But we want to make sure that there is no
    opposition to that or, if there is opposition, that we can
    understand what it is.
        Mr. Brown. Yes, sir, we will look into this.
        Senator Nelson. Mrs. Olson--Ms. Olson, in your testimony
    you discussed the enormous amount of IRS resources that are
    devoted to supporting the private debt collection program. You
    say funding for the private debt collection initiative should
    be redirected to fund collection activity by IRS employees.
        If they have not been able to do it before, what is the
    change where they can do it now?
        Ms. Olson. Well, sir, I covered in my annual report that I
    issued in December 2006 seven issues that the IRS could be
    doing better with the authority that they have right now, that
    do not raise the serious issues of privacy and perhaps
    violation of taxpayer rights or constitutionality of
    outsourcing tax collection.
        I would note that my organization, the Taxpayer Advocate
    Service, has been a leader in the IRS in hiring disabled
    persons.
        Senator Nelson. I did not mean to suggest you were not.
        Ms. Olson. No, but what I am saying is that the IRS I
    believe can do better in hiring disabled persons itself. Those
    are not positions that would be here today or gone tomorrow.
    There is a good side to the ``we bees,'' which is that you have
    constancy in the position.
        Senator Nelson. Absolutely.
        Ms. Olson. So I believe that the IRS, with a 2 percent or 3
    percent real funding increase both in enforcement and taxpayer
    service, could be hiring many of these people and giving them
    secure and meaningful employment, without violating taxpayer
    rights or costing the Government money, 20 cents to 25 cents on
    the dollar. We do not cost that much.
        Senator Nelson. Well, the cost per collection is paying
    money out of money that you otherwise do not have. So at the
    end of the day there is a net gain, unless you could do it
    better a different way.
        One final thought. My time is running out here, but one
    final thought about this is that when it comes to privacy the
    issue generally of privacy has been handled at the State level
    because the States are outsourcing day in and day out and have
    had fairly good results in many cases. Foreign governments are
    today outsourcing. So outsourcing seems to have more legitimacy
    than I think you are giving it credit for. But if you could
    find a way to do what I am trying to do another way, I am
    interested. I can tell you that.
        Ms. Olson. Thank you.
        Senator Nelson. Thank you, Mr. Chairman.
        Thank you.
        Senator Durbin. Thank you, Senator Nelson.

                OBSERVATIONS OF GOVERNMENT ACCOUNTABILITY OFFICE

        Mr. White, what has the GAO found when it comes to the
    performance of the IRS as it relates to tax gap and efficiency?
    Can you give us your observations?
        Mr. White. Yes, Mr. Chairman. Let me talk about taxpayer
    service first. Over the last 8 to 10 years, we think we have
    seen a noticeable improvement in taxpayer service at IRS. If
    you look at things like telephone access, the ability to get
    through on the phones to a telephone assister, that is
    noticeably better than it was 8, 10 years ago. And the quality
    of the answers, the accuracy of the answers, is also noticeably
    better.
        In addition, there are new types of service, especially on
    the web site, that IRS is providing. So there are features on
    the web site now, such as where is my refund, that taxpayers
    can use to get answers to questions about their specific tax
    situation, that in the past they had to wait in a queue to get
    through to a live telephone assister. One of the beauties of
    the web site is that it is available around the clock 365 days
    a year. So that is the service side of the house.
        On the enforcement side of the house, we think that the IRS
    has made some progress on enforcement. The direct enforcement
    revenue has gone up. Things like the national research program,
    which has been a large effort to better understand compliance,
    do research on compliance, so that noncompliant taxpayers could
    be better targeted in the IRS's operational audits, which has
    two effects. It brings in more money; it also reduces the
    burden placed on compliant taxpayers because they do not get
    audited.
        On the other hand, the IRS's enforcement efforts are still
    on GAO's high risk list. We have got a $290 billion net tax gap
    out there and that has remained relatively constant in
    proportional terms for several decades now. So for that reason
    this area is still high risk.
        Senator Durbin. Mr. George, what would you say to that in
    terms of whether the IRS is aggressive enough on this tax gap
    and compliance issue?
        Mr. George. Mr. Chairman, I would say that they are doing a
    good job, but they could certainly do a better job, and that
    all of the tools that would be helpful in achieving this goal
    are not necessarily within the possession of the IRS. As was
    pointed out by an earlier witness, the complexity of the Tax
    Code is a major component of the reason why the tax gap is as
    large as it is. If you had a very simple Tax Code, we believe
    that people would be more inclined to abide by it. But given
    the fact that they do not necessarily understand their
    requirements, they do not necessarily pay what it is that they
    owe.
        As was pointed out by Mr. Brown, some of the proposals that
    the IRS has proposed would certainly help address the issue.
    For example, third party reporting. In the instance that he
    gave, it was related to the cost basis of stocks. That could be
    extended to various other components of the economy. Would it
    cost much more to do this? Most definitely. Would it achieve
    much more in terms of receipts to the Treasury? Most
    definitely. So this is a policy call that the Congress, working
    with the administration, needs to work out. But nonetheless,
    that among other ideas would certainly get to this issue.

                            PRIVATE DEBT COLLECTION

        Senator Durbin. Let me ask you, Mr. Brown, about this
    contracting out. This has come up a few times. I understand
    there are some private debt collection operations being used by
    the IRS. I understand that you terminated one company,
    Linebarger Goggans. Is that the name?
        Mr. Brown. Yes.
        Senator Durbin. Why were they terminated?
        Mr. Brown. At the 1 year mark of the contract, we had the
    right to unilaterally renew or terminate with regard to all
    three of the contractors. We had a high degree of confidence in
    two of them; we thought they were doing very, very well. We
    decided to continue with just the two of them. We thought that
    they were performing very well, honoring taxpayer rights,
    implementing the program the way we envisioned.
        With the third one, it is not to say that they were failing
    in some regard. They just, in our view, were not performing at
    the same level as the other two companies.
        Senator Durbin. You or someone, I think it might have been
    your testimony or someone else, noted with some pride that the
    cost of collection was down from 46 cents per $100 to 42 cents
    over the last--the third lowest figure in the last 25 years. So
    tell me what role you believe that contracting out plays if
    your collection rates internally are improving at this rate?
        Mr. Brown. It is work we would not get to. I mean, that
    really is the point of the program, that these are cases that
    we would not get to with our staffing. If you were to give us
    more staffing, these are not the cases we would turn to next.
        Senator Durbin. Would these be the more complicated cases?
        Mr. Brown. No, in fact it is the opposite. These are
    simpler cases. These are cases that really are going to be what
    we call ``full pays.'' The PCA can only do two things. They can
    either get the taxpayer to pay in full or they can get the
    taxpayer to pay in full over time.
        Senator Durbin. It sounds to me like those are the easiest
    ones for IRS employees to deal with.
        Mr. Brown. They are the easiest, but they are also--they
    tend to be smaller dollar and cases with a smaller degree of
    probability of success because of the age of the case and that
    sort of thing. We tend to work on cases that are more risky and
    higher dollar with our revenue officers.
        Senator Durbin. So what kind of cost comparison have you
    done between performing these services in house as opposed to
    contracting them out?

                         COMPARISON OF IRS TO PCA COSTS

        Mr. Brown. We are attempting to do that now and we should
    have some sort of good cost comparison later this year. I would
    note, though, that our employees have collection tools that are
    not available to the private sector. We have the power to file
    a notice of lien. We can file a notice of levy. We can levy on
    people's bank accounts. They do not have any of these
    authorities, so it is hard to do a complete apples to apples
    comparison.
        Senator Durbin. So do you think this decision on
    contracting out should be driven strictly on monetary terms? If
    the IRS can say to the taxpayers, ``we can hire employees to do
    this work and bring back more revenue to the Government at a
    lower cost than doing it contracting out,'' then you should
    hire employees as opposed to contracting out?
        Mr. Brown. I think we have a large problem with the tax gap
    and this is a slice of money that we are not going to get to
    any time soon.
        Senator Durbin. With the current workforce.
        Mr. Brown. That is correct. But also, we can only hire so
    many people so fast. We have sort of a rule of thumb at the
    IRS, between attrition and what we call initiative hiring. If
    we go beyond 15 percent, we hurt our current year's performance
    and we tend to start losing control of our training. And the
    IRS is a bad place to lose control of the training of your
    employees.
        Senator Durbin. Do you know what the training is at some of
    the private collectors?
        Mr. Brown. Yes.
        Senator Durbin. Well, it turns out the Buffalo Times
    described the training process for employees at one of the
    companies as a 2-week training course. Is that what you think
    is adequate for the job of collecting for the IRS?
        Mr. Brown. No. The IRS, though, has collection tools that
    are not available. These people in the private debt collection
    outfits can only write letters or make phone calls and enter
    into what we call full pay agreements with the taxpayer. So
    they are good at locating taxpayers, calling taxpayers, and
    then trying to convince them to pay in full.
        Senator Durbin. I do not want to dwell on this, but I do
    want a direct answer. Will you compare the cost of hiring new
    employees to do this as opposed to contracting out?
        Mr. Brown. We are in the process of doing that, sir.
        Senator Durbin. Good. Thank you.
        Senator Allard.
        Senator Allard. Thank you.
        I would like to follow up on that a little bit. You had two
    contractors who were performing very well, you were pleased.
    You had a third contractor who was not performing and you ended
    the contract. Now, if you have a civil--if you have three civil
    service employees and you have two of them that are performing,
    fine. But if you have one that is not performing, is it easy to
    dismiss them?
        Mr. Brown. It would depend on what you define as ``not
    performing.'' Generally it is----
        Senator Allard. You hit the problem right there. I mean,
    your response was it is very difficult because you cannot
    define it. I can tell you that I have had numerous complaints
    to us over the years, being in both the House and here, from
    nonperforming Federal employees. And you ask about disciplinary
    action: Well, we cannot do that, we cannot take care of them;
    they are protected by the civil service system.
        So here you had a nonperforming entity. You took care of it
    with a contract and now you can replace it with a performing
    entity. It seems to me like there is a cost there that I hope
    gets figured into the figures. And I just wanted to make that
    point.

                             CONSERVATION EASEMENTS

        I want to get back to what we were talking about with the
    conservation easements. We were talking about auditing. How
    many cases--okay. What are the methods the IRS is using to
    expedite the process of resolving the cases? I do not know as I
    got that question put to you. Do you have a response to that?
        Mr. Brown. Well, they are underway. It sort of depends. It
    is a complicated answer. But if it is a valuation question and
    it is an appraiser versus an appraiser, those tend to take
    longer. If it is a question of an interpretation of whether the
    easement was entered into for proper legal purposes, it is a
    more straightforward answer and those cases can be resolved
    more quickly.
        Senator Allard. Okay. If you can get us some more specifics
    on that, I would appreciate it very much.
        Mr. Brown. We would be happy to.
        [The information follows:]

        The Service's engineering staff analyzed the sales of
    several Colorado properties encumbered with conservation
    easements to determine if commonalities exist among these
    properties. This analysis has been used as a guide in
    determining the accuracy of claimed valuations of the donated
    conservation easements.
        The Service has also improved coordination between the
    Examination personnel and the Foresters and Engineering staff;
    as a result, revenue agents typically issue examination reports
    to taxpayers within two weeks from the date on which the agents
    receive the associated engineering valuation report. In
    addition, we have assigned some of our appraisers to work full-
    time on these cases. Where cases involve only a valuation
    issue, we are exploring all available administrative
    resolutions.
        To better educate IRS personnel on the issues involved in
    conservation easements, we have implemented a web-based
    training module. We also continue to conduct workshops with
    field personnel and to provide technical guidance to those
    employees working conservation easement returns.

        Senator Allard. Okay. Then I have been told by a
    constituent in Colorado that the IRS has been asking audited
    landowners for a second extension of the statute of appeals for
    their case. Can you confirm that?
        Mr. Brown. I am not aware.
        Senator Allard. You will have to answer that question?
        Mr. Brown. We are going to have to answer that.
        [The information follows:]

        Our field personnel have requested statute extensions on
    193 Colorado returns and second statute extensions on 45 of
    those returns. For the majority of returns for which we have
    sought only one extension, the statute of limitations will
    expire on April 15, 2008. Therefore, we expect to request
    second extensions for many of these returns. In addition, many
    returns require an extension while in Appeals or in the TEFRA
    Suspense Unit.
        Requests to extend the statute--even a second time--are not
    unusual in valuation cases, because valuation issues often
    require more time to resolve than other issues.

        Senator Allard. Okay, very good.
        Well, that is pretty much--the final question: Do you have
    any expectations of when you might conclude those
    investigations that are going on in Colorado right now?
        Mr. Brown. As quickly as possible, and we will come back to
    you with a more detailed answer on that.
        Senator Allard. I would appreciate that.
        [The information follows:]

        We do not have firm closure dates on any of the returns
    currently in process. Each property is unique and therefore we
    cannot merely apply positions taken in previous cases to
    subsequent cases without additional work. Rather, we must
    inspect, evaluate and consider each case on an individual
    basis, including conducting interviews with the donors and
    contacting third parties, as necessary. There are approximately
    170 open cases that need appraisals of which 145 involve only a
    valuation issue. Of the 170 cases awaiting appraisals, we
    currently expect to complete appraisals for approximately 150
    cases by March 2008 and the remaining 20 cases by August 2008.

                        INFORMATION SHARING WITH THE SSA

        Senator Allard. Now, getting back, there was a question on
    identity theft by Senator Nelson from Nebraska. One of the
    problems I have run into is the sharing of information. Even
    though in the Homeland Security Department we tried to break
    down these stovepipes so there was some sharing of information,
    I have run across the situation, I have been informed that the
    Social Security Administration does not share their information
    with Homeland Security. The question I have to you is that if
    there is fraud do they share that information with you, and do
    they communicate? Does the Social Security Administration
    communicate openly with the Internal Revenue Service on this?
        Mr. Brown. I am going to have to go back and get an answer.
    Social Security can share information with us. Going the other
    way, we have a prohibition in the Internal Revenue Code called
    section 6103 that prohibits us from sharing tax return
    information with other organizations without specified law
    enforcement purposes.
        Senator Allard. I can understand that. But here is the
    problem that has been called to my attention by Secretary
    Chertoff and others, is that lots of times a taxpayer will not
    know that his ID has been stolen until a revenue officer knocks
    on his door maybe 3 or 4 months after his ID has been stolen--
    he did not know it--and he says, why are you not paying all of
    your taxes?
        So I am trying to figure out why we cannot get an earlier
    notification to the taxpayer that there is some irregularity
    showing up on that ID using the Social Security number. Do you
    have any comment on that?
        Mr. Brown. Well, it does happen, there are some delays.
    Generally we wait for a return to be filed, and then if W-2s
    are coming in with the wrong Social Security number, indicating
    that you have got, for example, more income than just what your
    Senate salary is, we then have to unravel it. That generally
    involves contacting the taxpayer, having the taxpayer
    authenticate that he really is the proper owner of the Social
    Security number and somebody else is misusing it.
        It generally is a process that takes several months to
    unravel. We need to do better at this.
        Senator Allard. Now let us turn it around. If the Social
    Security happens to get, they have the same number come in and
    all of a sudden they find that there are two names on the same
    number, are they notifying you?
        Mr. Brown. We do receive information from Social Security
    on that.
        Senator Allard. So that is getting shared with you, because
    I have been told that there might be some language in
    legislation somewhere that prevents that from happening.
        Mr. Brown. I am not aware of that, but we will get back to
    you.
        Senator Allard. Research that.
        Mr. Brown. We will research that for you.
        Senator Allard. Will you please, because if it is there I
    think that is a stovepipe we need to break down. I know there
    is this issue of identity and privacy, but if somebody has
    stolen your ID you have already lost your privacy and you do
    not want the victim to be victimized time and time and time
    again because of some provision here that prevents us from
    getting an early resolution on the victim and what has happened
    to the Social Security number.
        Mr. Brown. Yes, sir. We will get back to you on that.
        [The information follows:]

        We are not aware of any legislation that prohibits SSA from
    sharing information with IRS when they determine that the same
    SSN is being used by more than one individual. For example, the
    Combined Annual Wage Reporting System (CAWRS) MOU between IRS
    and SSA states ``SSA will convert the wage data to electronic
    format where necessary and furnish IRS with this data and
    validated SSNs and names where possible, or indicate which
    SSNs/names are not valid.''
        We generally find out that two taxpayers are using the same
    Social Security Number when a tax administration issue arises.
    Most of these cases are resolved in conjunction with the SSA
    through the Scrambled SSN process.
        The Strategic Plan from the President's Task Force on
    Identity Theft briefly discusses the various laws that regulate
    the sharing of SSN information.
        No single federal law regulates comprehensively the private
    sector or government use, display, or disclosure of SSNs;
    instead, there are a variety of laws governing SSN use in
    certain sectors or in specific situations.
        In the public sector, the Privacy Act of 1974 requires
    federal agencies to provide notice to, and obtain consent from,
    individuals before disclosing their SSNs to third parties,
    except for an established routine use or pursuant to another
    Privacy Act exception \1\. A number of state statutes restrict
    the use and display of SSNs in certain contexts \2\. Even so, a
    report by the Government Accountability Office (GAO) concluded
    that, despite these laws, there were gaps in how the use and
    transfer of SSNs are regulated, and that these gaps create a
    risk that SSNs will be misused.\3\
    ---------------------------------------------------------------------------
        \1\ 5 U.S.C.  552a.
        \2\ See, e.g., Ariz. Rev. Stat.  44-1373.
        \3\ Social Security Numbers: Federal and State Laws Restrict Use of
    SSNs, Yet Gaps Remain, GAO-05-1016T, September 15, 2005.
    ---------------------------------------------------------------------------

                            PRIVATE DEBT COLLECTION

        Senator Allard. Okay, thank you.
        I guess my time is used up, Mr. Chairman.
        Senator Durbin. I would like to--there is one fact that I
    left out of this question or this conversation about private
    debt collection which is important. I think you have said, Mr.
    Brown, that the debts that are being collected by the private
    agencies are the easier ones; the more complicated debt
    collections are taking place within the Internal Revenue
    Service. Is that correct?
        Mr. Brown. Yes.
        Senator Durbin. And then the numbers you have given us are
    that it costs 42 cents to collect every $100 of tax revenue in
    these more complicated cases. Can you tell me how much the
    private debt collection companies charge the Federal Government
    on the easier cases for every $100 they collect?
        Mr. Brown. Well, the commissions to date have been running
    about 18 to 19 percent.
        Senator Durbin. So the comparison figures would be roughly
    42 cents to $19 for every $100 collected?
        Mr. Brown. Well, again the comparisons are not pure. We
    have collection tools that they do not have available to them.
    They make outbound phone calls. Most of our calls are inbound.
    We get people's attention. We tell you we are about to levy on
    your bank account, you tend to call us. You tend to react. They
    do not have any powers other than the powers of persuasion by
    calling you and writing you letters.
        Senator Durbin. But you are suggesting then that that
    explains why they are charging 40 times as much as a person who
    works for you?
        Mr. Brown. Well, I think the premise of the program was
    that these were dollars we were not otherwise going to get to
    collect. We did not have sufficient resources to get to this
    slice of debt.
        Senator Durbin. I think we are back to the same circle.
    These are the easier dollars to collect, with employees you
    could collect them. You are contracting out and paying 40 times
    as much for every dollar collected for the Treasury. So I just
    want to put it in that perspective because there was an image
    created of people who were at their desks not performing, where
    it turns out that the people who were at their desks are
    performing a lot better than the private collection agencies.
        Mr. Brown. Our employees do very well in terms of
    collecting money. I am not disputing that point. We think we
    are the finest in the world at collecting money.

                       PROTECTION OF PERSONAL INFORMATION

        Senator Durbin. Let me move to the issue of privacy, which
    Senator Allard has alluded to. Could you tell me about concerns
    that you might have over the protection of privacy information,
    personal information, of those who are dealing with the
    Internal Revenue Service?
        Mr. Brown. Yes. We are extraordinarily worried about this
    sort of thing. We have 52,000 employees that have laptop
    computers and we have a far-flung workforce that is out in the
    field every day attempting to collect taxes and undertaking
    audits of taxpayers. We have had a concerted effort and we have
    now managed to encrypt, fully encrypt, every laptop that is
    issued to an employee. There is no human element. If the laptop
    is lost, the information is now encrypted and cannot be
    accessed.
        Senator Durbin. If I am not mistaken, the inspector general
    has just issued an audit report. Can you tell us what you found
    about computers at the IRS?
        Mr. George. Yes, Mr. Chairman. We issued this report last
    month, which found approximately 490 laptops and other personal
    devices were lost. We estimate those items contained
    approximately 2,800 personally identifiable information on
    taxpayers, and that is an estimate; that the procedures that
    were to be followed in terms of reporting the losses were not
    necessarily followed in many of the cases; and that this was
    again a statistical sampling, so we do not know the exact
    extent of the problem.
        But the bottom line is it only takes one computer, laptop,
    BlackBerry, what have you, to truly cause disruption in
    someone's life.
        Senator Durbin. Mr. Brown, after you learned this what did
    you do?
        Mr. Brown. Well, this is what we did. We undertook this
    effort to encrypt every laptop and also to make sure that data
    exchanges with States and cities and that sort of thing were
    also secured properly.

                           ESTATE AND GIFT ATTORNEYS

        Senator Durbin. I would like to ask you a question if I
    might about, there was a disclosure recently. The
    administration announced its intention to eliminate the jobs of
    nearly one-half the lawyers at the IRS who audit tax returns
    for those subject to gift and estate taxes by October of last
    year. Did that happen?
        Mr. Brown. Actually what the IRS did was offer a buyout,
    and 86 estate and gift tax employees out of a workforce of
    several hundred did raise their hand and actually availed
    themselves of that buyout.
        Senator Durbin. The report we have is that these estate tax
    lawyers are responsible for overseeing audits of estate tax
    filings, which are the most productive and cost effective
    audits in the entire Internal Revenue Service system,
    generating approximately $2,200 for taxpayers in unpaid tax
    funds every hour that they go to work.
        So how do you feel, or do you feel that the elimination of
    attorneys doing this audit work on estate taxes is going to
    help us narrow the tax gap and help us increase compliance?
        Mr. Brown. The average is about $2,200 per hour per audit.
    The median is about $200. Ten percent of the audits generate 90
    percent of the work. Not every audit is a productive audit. The
    trick is to make sure we are working on that 10 percent and
    make sure we have very good coverage of those cases so that we
    garner the most dollars.
        The idea is to take the 86 bodies and shift them to high
    income audits in other areas where we also tend to do very well
    in terms of dollars per hour.
        Senator Durbin. Better than $2,200 an hour?
        Mr. Brown. In some categories we do. Audits over $1
    million, we tend to do as well.
        Senator Durbin. What is the signal? One time you tell us
    you want to make a felony out of willful failure and then the
    signal is we are going to have fewer auditors in certain
    divisions. What is the signal to those who are filing returns
    in those divisions?
        Mr. Brown. The signal is that we want to maximize the use
    of our resources and where 90 percent of your audits are not
    productive audits, we want to go to where we have places where
    we have what we call lower no-change rates.
        Senator Durbin. I think it is a mixed signal.
        Mr. Brown. I would have to disagree. I think that where
    only 10 percent of your audits are really counting, we want to
    go to a place where a much higher percentage is counting.
        Senator Durbin. Senator Allard.
        Senator Allard. Thank you, Mr. Chairman.
        Nina Olson, you have not answered any questions. I hate to
    see you get by with that.

                               ID THEFT AND TAXES

        You have made in your comments that you wanted to maximize
    voluntary compliance. I look at your mission statement, which I
    think says a lot differently. And when you think about it, they
    mean a lot differently. Your mission statement that you have
    with the Internal Revenue Service says ``Helping taxpayers to
    understand and meet the tax responsibilities by applying tax
    law with integrity in fairness to all.''
        This brings me around to, what happens to a victim when we
    have the identity theft and they are assessed this tax? Do you
    have them plugged into the computer and the computer keeps
    kicking out these notices that you owe the money, or is there
    some attempt to quickly resolve this problem that you have with
    the individual whose ID has been stolen? How is that handled?
        Ms. Olson. Well, first I would like to say my
    organization's mission is ``Help taxpayers solve their problems
    with the IRS.'' So I have a sub-mission here.
        Senator Allard. Okay.
        Ms. Olson. And many of our cases are, we have a fair number
    of identity theft cases. What generally happens is if someone
    else is using a Social Security number that belongs to the
    taxpayer, say on a W-2, that that W-2 will be processed through
    Social Security and eventually the IRS will get that
    information, and we will look to see whether those dollars show
    up on the true Social Security number owner's tax return. When
    we do not see those dollars there because the taxpayer did not
    earn them, they are not his or her dollars--somebody else did--
    we will send--we do not know that yet. We have to send that
    taxpayer a notice saying: You did not put dollars on that you
    should have; come in and talk to us.
        The problem there is that we--until we do that notice, we
    will not know that there has been some act of identity theft.
    What then happens with the taxpayer unfortunately is sometimes
    they get caught in the IRS and IRS employees are not able to
    straighten out quickly who is the correct owner of the income
    of that Social Security number, and they are asked to supply
    lots of information.
        Once we determine that this taxpayer owns that number, we
    still have to work with Social Security to make sure that, if
    it is even more confusing, that Social Security does not freeze
    that number and cause the taxpayer to use a temporary number.
    And we have no control over that.
        In other instances--and I think this is something that----
        Senator Allard. Can you communicate with Social Security?
        Ms. Olson. We do communicate with Social Security. On a
    case-by-case basis, IRS employees and Taxpayer Advocate Service
    employees communicate with Social Security on a case-by-case
    basis.
        We have also been trying, the IRS Identity Theft Office has
    been trying to come up with a list of documents that either IRS
    will accept or that Social Security will accept, saying this
    taxpayer owns this number, or even giving us the authority to
    say, yes, we have looked at these documents, we think this is
    the taxpayer's own number, so we can move on.
        Senator Allard. I would encourage you to move forward on
    that, because in 3 years and then all of a sudden to have
    somebody at your door. And then sometimes they spend lots of
    money just to get an accountant, to come back. And they do not
    work cheaply.
        Ms. Olson. Right.
        Senator Allard. So it seems to me like somehow or the other
    it would be appropriate if we could give--if they have to hire
    professional help, for example, are they allowed to write that
    off as an expense or not?
        Ms. Olson. It would probably be for an individual a
    miscellaneous itemized deduction. I do not know how identity
    theft would come up in a business, but it could be a business
    expense.

                         RELIEF FROM ID THEFT EXPENSES

        Senator Allard. That is what I am trying to figure out, if
    there is--maybe we need some legislation that would give those
    kind of individuals some relief.
        Ms. Olson. I think something that is very important that
    the IRS is working on is, once we know that somebody's number
    has been compromised we put an indicator on our accounts for
    future years, because often once the number is out there we are
    going to see W-2s coming----
        Senator Allard. Yes, you are going to see more coming
    through.
        Mr. George. Then we could at least, instead of sending an
    auditor out to that person or a letter out saying, you owe us
    money, saying we are seeing this happen again. I think we need
    legislative authority for that, to communicate in that way. But
    we can at least know internally that that taxpayer is not
    earning that money.
        Senator Allard. I might have my staff work with you on
    that. That might be some common sense legislation that we can
    work on and maybe help those that are suffering from this
    crisis that occurs with identity theft if we can help them out.
        I see my time just expired.

                       ELECTRONIC FRAUD DETECTION SYSTEM

        Senator Durbin. I would like to ask one last question. Mr.
    Brown, it appears that there was some lapse in terms of the
    systems that were being used, the electronic systems being
    used, and according to the inspector general $318 million in
    fraudulent refunds were issued in May of last year. Could you
    tell us what you are doing to recover that money?
        Mr. Brown. Well, we are not going to be able to recover the
    majority of that money. What you are referring to is the
    electronic fraud detection system that stops fraudulent
    refunds, what we deem fraudulent refunds, from going out. And
    once the money is out, it is extremely difficult to recover.
        That system did not come up. We had a mistake there that
    should not have occurred and we have taken action both with the
    contractor and with our employees to make sure that does not
    happen again. The system did come up on schedule this year and
    it is functioning properly this year.
        Senator Durbin. But no effort was made to recover the
    money?
        Mr. Brown. There has been some effort, but it is extremely
    difficult to recover the money once it is gone.
        Senator Durbin. There was also the hiring of some
    consultants, as I understand it, to--perhaps the inspector
    general can comment on this. Are you familiar with it?
        Mr. George. Not about the hiring of consultants, except for
    MITRE Corp., to look at what occurred in the past and to look
    at what they were attempting to do to remedy the situation.
        But Mr. Chairman, this is symptomatic of a problem that has
    historically troubled the IRS. Most of their purchases and
    efforts to modernize their systems have been behind schedule,
    have cost more than were contracted for, and have failed to
    deliver what was promised. This, the EFDS, as they call it,
    electronic fraud detection system, was certainly an example of
    that.
        Senator Durbin. Mr. Powner, you have not had a chance to
    speak and I think this is your area of expertise. What would
    you say?
        Mr. Powner. Well, if you look at the EFDS system and what
    happened with that, it was a little bit different. We oversee
    the business system modernization program for this committee
    and if you look at how this business systems modernizations are
    overseen from a project management and governance perspective,
    there is a lot of oversight that occurs. EFDS was actually
    flying under the oversight radar screen, so executives were not
    engaged on this system.
        A couple things happened incorrectly. One is the system did
    not work when they deployed it, but you could not reactivate
    the legacy system. That is also a basic 101 misstep when you
    are deploying a new system. So there are several missteps that
    occurred here, not only with deploying the new one, but they
    could not reactivate the old system.

                       TECHNOLOGY IMPROVEMENTS AT THE IRS

        Senator Durbin. So step back from this particular case and
    tell me what your general impression is of the technology
    improvements at IRS?
        Mr. Powner. Well, in terms of the business systems
    modernization, that is an area where IRS has improved
    significantly over the years. Now, are there still concerns
    there? Yes, absolutely. If you look at the latest release of
    the CADE, which is really the linchpin for the modernization,
    we were late, the IRS was late on that, and there are cost
    overruns and schedule slippages that are still ongoing.
        If you compare that historically, though, they have
    improved dramatically over the years. Now, are we still
    concerned going forward? Yes, we are concerned because there
    still is not the basic internal management capacity to manage
    the modernization effort that you would like to see, and the
    complexity is only going to increase over time.
        Senator Durbin. Mr. Brown, would you like to have the last
    word on that?
        Mr. Brown. I think the assessment is accurate. We have done
    a much better job over the years, but we have occasional slip-
    ups. This was one where we did not exercise proper management.
        Senator Durbin. Well, thank you for your testimony and your
    candor on that.
        Do you have another question?

             COLLECTION NOTICES FOR DELINQUENT DEBT OF $100 OR LESS

        Senator Allard. Yes, Mr. Chairman, I have just one issue I
    would like to follow up on. This is the amount of collections
    where you send out notices where the amount owed is $100 or
    less. I think we sent you a request on this earlier and you
    said that was impossible to determine. Well, do you not have a
    computer that is capable of sorting out due amounts of $100 and
    less? Can you get us a total number on that?
        Mr. Brown. Yes. It is roughly 5.2 million notices were sent
    out last year for less than $100.
        Senator Allard. 5.2 million, okay. Then what do you do with
    the $100 or less? Do you--these get turned over to collectors?
    Is that what they do? You send out a notice, I am assuming you
    send out a notice, and then how many respond on those?
        Mr. Brown. I do not have the precise numbers. We are not
    able to tell you how many dollars come in, but the vast
    majority. And remember, it is not----
        Senator Allard. Most of them respond?
        Mr. Brown. Most, the vast majority respond. If they do not
    respond, if they are getting a refund in the following year, we
    would offset the refund. There are other ways to get the money.
        Senator Allard. I see. Okay. Well, here is one of the
    things that I have had explained as a frustration. I have had
    taxpayers say, well, we--they claimed we owed a certain amount,
    it was under $100, it was $50 or $75, and to go to our
    accountant and have him hassle with the IRS just costs us money
    or it costs us to deal with it, so we are just going to pay it.
        So there is, somehow or the other there is a balance there.
    I am trying to figure out where you feel that balance is.
        Mr. Brown. Many of the notices are generated by things like
    math errors. You simply added up the columns incorrectly. You
    added it, it came to $600 of income and the math actually
    should be $800 of income, and therefore you owe us another $50.
    So they are relatively straightforward things and most
    taxpayers I think see that and just comply.
        Senator Allard. The more of them that use these computer
    programs, I would think math errors are less.
        Mr. Brown. We are very much in favor of those automated
    programs.
        Senator Allard. Turbotax is not too difficult to use.
        Mr. Brown. They take the error rate down to----
        Senator Allard. Maybe you need Turbotax, Mr. Chairman.
        But those type of programs, yes.
        Well, I am interested in knowing some statistics about how
    many you send out and how many respond on the first notice and
    what percent then--of those that are left, what happens to that
    after that.
        Mr. Brown. We will get you those, sir.
        Senator Allard. Very good.
        Mr. Chairman, thank you.

                         ADDITIONAL COMMITTEE QUESTIONS

        Senator Durbin. Thank you very much, Senator Allard.
        Thanks to all the members of the panel. The record will be
    open for a week. There may be some questions submitted to you.
    I appreciate your testimony.
        [The following questions were not asked at the hearing, but
    were submitted to the Department for response subsequent to the
    hearing:]
                       Questions Submitted to Kevin Brown
                Questions Submitted by Senator Richard J. Durbin
                         taxpayer assistance blueprint
        Question. Improving taxpayer service is an important part of a
    comprehensive strategy to reduce the ``tax gap'' by helping taxpayers
    understand and meet their tax obligations.
        On April 11, 2007, the Taxpayer Assistance Blueprint, Phase 2 was
    published. This Blueprint is the joint response of the IRS, the IRS
    Oversight Board and the National Taxpayer Advocate to comply with a
    Congressional mandate for the development of a five-year strategic plan
    for the delivery of taxpayer service.
        The Senate Report that established the five-year strategic plan
    directive for taxpayer service delivery provides detailed requirements
    for the content of the plan, including a strong urging that the IRS use
    innovative approaches to taxpayer services including mobile units and
    virtual technology.
        Does the Blueprint include proposals for activities such as these?
        Answer. The Taxpayer Assistance Blueprint (TAB) recommendations are
    grounded in extensive research regarding taxpayer needs, preferences,
    and behaviors. Factors that influence taxpayer's choice of service
    delivery channels include: the specific type of service sought,
    demographic characteristics, awareness of channels, access to channels,
    habit, and channel performance. TAB research indicates that taxpayers
    generally prefer self-assisted services, such as those found on the IRS
    website, most often for transactional tasks like obtaining a form or
    making a refund inquiry. Taxpayers prefer assisted services, such as
    those available through telephones or Taxpayer Assistance Centers, most
    often for more complex interactive tasks, like responding to a notice.
    Telephone lines and the IRS website account for approximately 85
    percent of all channel contacts for the common service tasks surveyed.
    Investments that respond to this differentiated service approach in the
    two primary delivery channels will increase both taxpayer defined
    preference and value, and government value with efficiency gains. In
    contrast, the IRS Oversight Board 2006 Taxpayer Attitude Survey
    indicated that in response to the question ``how likely would you be to
    use each of the following services for help with a tax issue?'' 24
    percent of taxpayers indicated that it was ``very likely'' that they
    would use a tax assistance van, compared to 58 percent for toll free
    telephone services and 51 percent for the web channels.
        In view of this research, the TAB Strategic Plan focuses on
    enhancing the IRS website so it becomes the first choice of more
    taxpayers, while improving telephone service performance, increasing
    assistance to external partners (the source of the majority of
    prefiling and filing services), enhancing outreach and education to
    targeted populations, and improving the marketing of channel
    alternatives--specifically the electronic channel.
        As noted below, virtual technology will play an increasingly
    important role in service delivery. The TAB envisions continued
    research on taxpayer expectations for and interest in virtual service
    delivery channels such as Voice over Internet Protocol and Text
    Messaging. Also, in recognition of the unique challenges presented by
    the face-to-face service environment, the TAB Strategic Plan recommends
    development of a Facilitated Self-assistance Model to provide taxpayers
    coming to a Taxpayer Assistance Center (TAC) the option of using self-
    assistance workstations to resolve their tax issues. The TAB Strategic
    Plan also calls for a TAC Geographic Footprint Initiative that includes
    a detailed process to analyze existing TAC locations for effectiveness
    in meeting service demands and using the process to make future
    investment decisions, including the relative value of mobile units or
    other alternative service delivery options.
        Question. Please share some examples of innovative approaches the
    IRS is currently using or developing to meet taxpayer service needs.
        Answer. The IRS has developed an effective business model for
    alternate service delivery to individuals challenged by income,
    language, age, or disability to meet their Federal tax obligations. The
    Stakeholder Partnerships, Education and Communication (SPEC) function
    supports over 300 community-based coalitions and thousands of local
    partnerships to extend outreach and assistance services. As a measure
    of this model's success, the United Way of America recently announced
    they were investing $1.5 billion over five years in this partner-based
    initiative. Virtual technology will play an increasingly important role
    in service delivery. TAB included a prospective virtual technology
    application, interactive web services, in its conjoint or ``trade off''
    research. The Taxpayer Services Program Management Office, the function
    tasked with facilitating the implementation of TAB recommendations,
    will continue research on taxpayer expectations for and interest in
    virtual service delivery channels such as Voice over Internet Protocol
    and Text Messaging. In addition, TAB recommends enhanced alternate
    service delivery capabilities through increased support to its
    extensive community-based partner network and exploration of greater
    Federal Agency partnering and coordination to create shared service
    infrastructure.
                  delivery of interactive taxpayer assistance
        Question. As an element of the Taxpayer Assistance Blueprint, the
    IRS recommended a migration strategy to move taxpayers away from
    Taxpayer Assistance Centers (TACs) and toward electronic, self-assisted
    services. I understand the IRS plans to implement these Facilitated
    Self-Assistance Models in 15 selected sites, including two locations in
    my home State of Illinois. Under the model, taxpayers who come to the
    TACs for in-person help will be directed to in-house telephones and
    computers where they can access both the IRS website and phone
    assistors.
        The National Taxpayer Advocate's Report to Congress for 2006
    provides some data drawn from the IRS Oversight Board's 2006 Service
    Channel Survey. I think it elucidates the concern that migrating away
    from Taxpayer Assistance Centers (TACs) may be problematic. It states:

        ``Nearly 25 percent of taxpayers do not have Internet access, with
    more than twice as many taxpayers over 60 not having Internet access as
    those 60 or younger. Approximately 75 percent stated they were not
    secure sharing personal information via the Internet. Among taxpayers
    who have used IRS services in the last two years, about 45 percent of
    those who called IRS and more than 75 percent of those who visited the
    IRS stated that they would not use the IRS website.''

        How do you respond to concerns that migrating to self-assisted
    center may be laying the groundwork for an expanded effort to move
    persons away from face-to-face interactive contact and toward telephone
    and Internet access?
        Answer. The Taxpayer Assistance Blueprint (TAB) recommendations are
    grounded in extensive research regarding taxpayer needs, preferences,
    and behaviors. TAB research indicates that taxpayers generally prefer
    self-assisted services, such as those found on the IRS Web site, most
    often for transactional tasks like obtaining a form or making a refund
    inquiry. Taxpayers prefer assisted services, such as those available
    through telephones or Taxpayer Assistance Centers (TACs), most often
    for complex interactive tasks like responding to a notice. Telephone
    lines and the IRS website account for approximately 85 percent of all
    channel contacts for the common service tasks surveyed. The TAB
    recommendation is to differentiate transactional and interactive
    service tasks within the TAC and satisfy them with effective, but
    different resources.
        Question. Wouldn't a plan to scale back the number of TACs or
    replace them with self-help centers be an unwise cutback in customer
    service and a step backwards in achieving the goal of increasing
    compliance and shrinking the tax gap?
        Answer. Rather than ``self-help'' centers, TACs would become
    portals where skilled and expensive staff resources would be applied to
    complex service issues and transactional tasks would be satisfied by
    effective, but less costly, web or phone applications. This
    differentiated approach conforms to growing private and public sector
    practices, responds to taxpayer defined value, addresses service
    performance in areas such as wait and service times and first contact
    issue resolution, increases service efficiencies, and has a potential
    positive impact on compliance.
        The IRS plans to implement a limited deployment of the Facilitated
    Self-assistance Model at 15 locations in 2007 that will allow us to
    assess the effectiveness of this service delivery model. Adequate
    staffing, space, and technological infrastructure were considered in
    selecting these initial 15 locations. Demographic and geographic
    diversity were also analyzed to ensure adequate sampling for research
    and data gathering.
                            private debt collection
        Question. Is the private tax debt collection initiative generating
    greater returns at a lower total cost than the alternative of providing
    the IRS the additional resources it would need to collect the same tax
    debt on its own?
        Answer. Overall, the IRS's Return on Investment (ROI) is about 4 to
    1. ROI resulting from IRS enforcement programs ranges from $3 to $14
    for every additional $1 invested, depending on the type of enforcement
    activity. For example, labor-intensive activities such as the
    Collection Field Function have lower ROIs, and automated activities
    such as Automated Underreporter have high ROIs.
        We are performing a cost effectiveness study as recommended by GAO
    and in cooperation with the Taxpayer Advocate Service (TAS) in order to
    evaluate the program's impact on the collection of delinquent taxes and
    to serve as a comparison for program alternatives. We will issue the
    report from this study to GAO in August 2008. We project that the
    Private Debt Collection (PDC) ROI will range from 3.2:1 to 3.6:1 in
    fiscal year 2007 and from 4.0:1 to 4.3:1 in fiscal year 2008.
        Question. If the initiative were eliminated, what steps could the
    IRS take to collect the tax debt that the private collection agencies
    were pursuing under their contracts and would sufficient resources be
    available to allow the IRS to take any (or all) of these steps?
        Answer. If the program were eliminated, the IRS would continue to
    apply available resources to the highest priority work. Since these
    cases have already been through lower cost methods of collections at
    the IRS, they would remain unworked. The IRS would need a significant
    influx of resources over a number of years to be able to work enough
    inventory to get to these lower priority cases currently eligible for
    PCA placement. The President's Fiscal Year 2008 Budget request does not
    include funds to hire IRS workers to replace Private Collection Agency
    (PCA) employees should the Congress eliminate the program.
        Question. What is the cost to the IRS of managing the initiative
    and processing cases that the private collection agencies cannot
    handle?
        Answer. The projected fiscal year 2008 cost for administration of
    the PDC program is $7.35 million. We project that PDC will breakeven in
    April of 2008, including all start up costs. Of the $7.35 million,
    $5.84 million is for managing the initiative and consists of costs for
    the Referral Unit, Oversight Unit, Project Office, and Project Office
    contractors. The remaining $1.51 million is for IT costs.
        The PCAs are not assigned cases that meet criteria outside of their
    authority. These cases have already been through lower cost methods of
    collections at the IRS, and would remain unworked and uncollected if
    not assigned to the PCAs. However, there may be instances where the
    taxpayers make a decision about their account that causes the return of
    the case to the IRS (e.g., Offer in Compromise, Innocent Spouse status,
    Insolvency, Disaster relief) and the IRS works on a case originally
    assigned to a PCA. In these instances, the returned PCA cases are
    processed according to IRM procedures in the appropriate function of
    the IRS. There are other situations where the IRS Referral Unit (RU)
    must work an account because the taxpayer opted out of working with the
    PCA or entered into an installment agreement that was beyond the PCA's
    authority to monitor. As of the end of April 2007, 37,689 cases were
    assigned to the PCAs and approximately 220 (0.6 percent) requested to
    opt out of the program or entered into an installment agreement beyond
    PCA authority. Given the small number of these requests, no additional
    costs are required beyond what has already been budgeted for the RU.
                               electronic filing
        Question. Section 2001 of the Internal Revenue Service
    Restructuring and Reform Act of 1998 (Public Law105-206), specifies
    that it is the policy of Congress that paperless filing should be the
    preferred and most convenient means of filing Federal tax and
    information returns, it should be the goal of the Internal Revenue
    Service to have at least 80 percent of all such returns filed
    electronically by the year 2007, and the Internal Revenue Service
    should cooperate with and encourage the private sector by encouraging
    competition to increase electronic filing of such returns.
        It is now 2007. What are the experiences with e-filing?
        Answer. Based on the July 2006 results of our market research study
    called Findings From the 2006 Taxpayer Satisfaction Study for 1040 e-
    file conducted by Russell Research:
      --Practitioner e-file is the term used for taxpayers who e-file their
            tax returns electronically through an IRS-authorized Electronic
            Return Originator. Online filing is the term used for taxpayers
            who e-file their returns online via their home computers either
            by using an online company or with software through a third
            party transmitter. Practitioner e-file and Online filing with
            software are maintaining high levels of satisfaction (82
            percent and 83 percent respectively), but online filing with an
            online company is trending downward (from 83 percent to 74
            percent).
      --Three of the products (Practitioner e-file, online filing with an
            online company, online filing with software) continue to have a
            high number of user suggested improvements (simplify it and
            lower the costs).
      --Non-user interest in practitioner e-file, the online filing
            products and Free File showed little year-to-year change, but
            long-term trend data indicates a hardening of non-user
            resistance to products and suggests that future usage gains may
            come in small increments.
      --Non-users who were most resistant to adoption had generally
            negative impressions of the products in terms of their being
            better than other filing methods, being private and secure,
            being easy to use and being accurate.
      --A gap analysis of attitudes toward e-file in general continues to
            show that lack of belief in e-file is clearly playing a role in
            its non-adoption among non-triers and even lapsed users. These
            segments do not accept e-file's benefits of accuracy, privacy/
            security or ease of use, and these are the attributes of a tax
            filing method that they value most.
      --Another persistent barrier to the adoption of e-file is that not
            all practitioners offer or advocate the use of e-file at the
            same rate.
        The Free File program is a free federal tax preparation and
    electronic filing program for eligible taxpayers developed through a
    partnership between the Internal Revenue Service and the Free File
    Alliance LLC--a group of private sector tax software companies. Free
    File is an online option available through the irs.gov website. Based
    on the July 2006 results of our Free File research study called Report
    of Findings From the 2006 Free File Cognitive and Behavioral Research
    conducted by Russell Research:
      --Overall, users seem satisfied with Free File, with high intent to
            re-use (94 percent) and recommend (97 percent), high ratings of
            overall ease of use (94 percent) and low suggested improvements
            (30 percent).
      --Free File's convenience appeals to them most with cost being the
            secondary driver.
      --Other Free File program diagnostics results tell us that the site
            is generally easy to navigate (96 percent), that users have
            confidence in the security of their tax information (96
            percent), and that it's easy to select a company at the site
            (94 percent) with high intent to use the same company next year
            (91 percent).
        Question. What percentage of taxpayers in this filing season are
    submitting returns electronically?
        Answer. Per IRS's Research, Analysis, and Statistics (RAS) Weekly
    Tracking Report for individual income tax returns for the week ending
    May 4, 2007, of the 127.3 million total individual returns filed,
    electronic filing (e-file) represented 76.7 million returns (60
    percent) and paper represented 50.6 million returns (40 percent). Of
    the 76.7 million electronically filed returns, 54.7 million (71
    percent) were e-filed by practitioners and 22.0 million (29 percent)
    were e-filed online. Of the approximately 95 million taxpayers who are
    eligible to use the Free File program in the 2007 filing season, 3.8
    million actually used it. Numerous studies show taxpayers select a tax
    preparation ``channel'' (e.g. self-prepared, paid prepared, etc.) based
    on personal preferences and won't change. The current e-file rate of 60
    percent is 3 percentage points higher than last year, at this point in
    time. The relative proportion of e-file returns is expected to drop to
    58 percent by the end of the year as more returns with extensions are
    filed on paper.
        Question. What efforts can be taken to increase the level of
    electronic filing?
        Answer. The IRS's e-Strategy for Growth outlines plans to reduce
    taxpayer burden and continuously grow the e-file program. Key
    strategies include:
      --Make electronic filing, payment and communication so simple,
            inexpensive, and trusted that taxpayers will prefer them to
            calling and mailing.
      --Substantially increase taxpayer access to electronic filing,
            payment, and communication products and services.
      --Aggressively protect transaction integrity and internal processing
            accuracy.
      --Deliver the highest quality products and services as promised.
      --Partner with states and other governmental entities to maximize
            opportunities to reduce burden for our common-customer base.
      --Encourage private-sector innovation and competition.
        Question. What are the impediments that have hindered attaining the
    goal set nine years ago?
        Answer. In their 2005 annual report to Congress, the Electronic Tax
    Administration Advisory Committee has identified three major barriers
    to increasing electronic filing:
      --Electronic filing must be faster, easier, and more accurate than
            paper filing and the initial experience must be positive.
      --Electronic payments must be faster, easier, and more foolproof than
            paying by paper check and the first experience needs to be
            positive.
      --Electronic services offered by the IRS must be faster, easier, and
            more efficient than paper, telephone or fax-based
            communications.
                 mandatory e-filing by charitable organizations
        Question. The IRS recently implemented measures requiring that
    certain tax-exempt organizations electronically file their annual
    returns, and many nonprofits recommend amending federal laws to require
    mandatory e-filing of all charitable organizations that annually file
    with the IRS. In particular, the Panel on the Nonprofit Sector, an
    independent group of nonprofit leaders convened at the encouragement of
    the Senate Finance Committee to make recommendations to Congress,
    recommended that tax laws be amended to enable the IRS to move forward
    with mandatory e-filing for all charitable organizations and that
    funding be authorized to support implementation of the initiative, and
    encourage more complete filings by nonprofits and better oversight by
    the IRS. Organizations now required to file their returns
    electronically have needed to adjust from attaching documents to their
    returns to completing sections on the electronic returns.
        What challenges has the IRS experienced in implementing e-filing,
    particularly from organizations accustomed to attaching documents to
    their returns?
        What would the IRS need to do to implement broader e-filing
    requirements?
        Would the funding levels proposed by the President for fiscal year
    2008 permit the IRS to adequately serve groups now required to e-file
    and to move toward more extensive e-filing if approved by Congress?
        Answer. The IRS worked closely with stakeholders and filers to
    communicate the business rules with regard to attachments in advance of
    the implementation of e-filing. Recognizing that our filer community
    often chooses to include ``unrequested'' information about their
    organization and program services, we worked with the software
    development community to ensure the creation of ``General Explanation''
    pages that allow filers to include additional information that they
    believe is important. Moreover, the IRS has broadened the kinds of
    items that can be attached to e-filed returns to include such things as
    revised Organizing Documents and Articles of Dissolution.
        The primary limitation on proposing a broader e-filing mandate is
    statutory. Section 6011(e) of the tax code provides that IRS can
    require e-filing only if the taxpayer is required to file at least 250
    returns during the year. (This mandated threshold is for charitable
    organizations. Corporate taxpayers and partnership taxpayers have a
    different mandate.) The budget contains a proposal that all
    corporations and partnerships required to file Schedule M-3 would be
    required to file their income tax returns electronically. In the case
    of large taxpayers not required to file Schedule M-3 (such as exempt
    organizations), the Budget contains a provision to expand the
    regulatory authority to require electronic filing beyond the current
    250-return minimum. That provision would reduce the legal barriers (the
    250-return rule) that prevent enhanced e-filing.
        The President's fiscal year 2008 budget request provides adequate
    funding for the IRS to serve groups now required to e-file. In
    addition, the budget requests funding for developing and deploying the
    capability for the modernized electronic filing application to accept
    and process a subset of the 1040 family of forms. The funding would
    also allow a significant advancement toward establishing the capability
    to accept and process all 1040-related forms in multiple phases as the
    IRS works to retire the legacy e-file system. The IRS's modernized
    electronic filing application has been designed and built to be
    scalable for additional volumes resulting from increased e-filings due
    to new and/or changed mandatory thresholds.
                         business systems modernization
        Question. During fiscal year 2006, the IRS developed a new IT
    Modernization Vision and Strategy for the Business Systems
    Modernization (BSM) program along with a 5-year plan to guide IT
    investment decisions through 2011. While this presents a positive first
    step towards defining the agency's future plans for the modernization
    program, it does not fully address GAO's recommendation to develop a
    long-term vision and strategy for completing BSM.
        When does IRS anticipate completing this strategy, including
    establishing time frames for consolidating and retiring legacy systems?
        Answer. Building a credible and comprehensive long-term vision and
    strategy to modernize the information technology of the largest and
    most complex tax administration system in the world is an iterative
    process that we are developing, institutionalizing and maturing over
    time in lockstep with our business partners. Our goals as part of our
    Modernization Vision & Strategy (MV&S) effort are to provide the
    vision, creativity, and a repeatable process to rationalize our
    investments in a way that we are now aligning with OMB's
    recommendations for Segment Architecture (Domain Architecture). In
    fiscal year 2005, our first year of this effort, we accomplished many
    foundational activities, and selected an integrated set of IT
    investments using sound investment processes across the primary tax
    administration domains (submission processing, manage taxpayers
    accounts, customer service, reporting compliance, filing and payment
    compliance, and criminal investigation).
        During this past year, fiscal year 2006, the IRS improved and built
    additional capabilities to institutionalize the MV&S investment
    processes. We applied lessons learned to improve our development of
    technical solution concepts, added additional layers of functional and
    technical integration and sharpened our cost-estimation processes. In
    addition to covering the domains of tax administration, we added in a
    domain for IT security as well as a domain to cover our Internal
    Management Systems (to include our financial, human resource, and asset
    management applications). In parallel, we have been maturing our IT
    governance structure, and we have brought our governance committees
    into the MV&S process to oversee and approve the strategies, project
    proposals and prioritize at the domain level.
        This year we are expanding the depth and breadth of our MV&S
    processes. A new functional area domain is being added to cover the
    provision of IT infrastructure products and services. In addition, we
    plan to complete a comprehensive architecture and strategy for one of
    the primary tax administration domains. This process will entail a
    comprehensive analysis of current processes and systems, target
    processes and systems over the next five years, transition strategies
    to achieve the targets and performance measures to be achieved. This
    initiative will address plans for consolidating and retiring legacy
    systems within that domain which you asked about in your question
    above. We then plan to complete the comprehensive architecture work for
    the remaining domains during fiscal year 2008.
        It takes time and is very challenging to develop, communicate, and
    achieve organizational commitment to a vision and strategy for
    modernization that (1) addresses consolidation, transformation and
    retirement of hundreds of interrelated legacy systems; (2) incorporates
    modernized capabilities from new systems; and, (3) allows IRS to
    continue to provide systems for end-to-end tax administration that
    incorporate each years' new tax laws and policy. Previously the IRS has
    focused its IT modernization plans on dealing with the replacement of
    just key systems (e.g., CADE replacing the master files, the
    implementation of modernized e-file to both replace the legacy e-file
    system and handle additional forms types). The MV&S is about building
    the proper modernization plan for all of the IRS's IT, dealing with the
    more than 450 systems that support tax administration. The long-term
    goal is not to replace most of these systems, but, through concepts
    such as service-oriented architecture (SOA), to transform and
    streamline our IT environment over time while still being able to
    address new business needs that are identified through the MV&S
    process. Doing this right entails changes in a management paradigm that
    requires significant involvement from hundreds of people across the
    organization, entails embracing architectural and engineering concepts
    that have never been introduced in the past, and given the
    complexities, entails the use of an incremental approach. In addition,
    we must build and institutionalize capabilities within the IRS to make
    sound investment choices along the way so we can use our resources
    prudently. The good news is that the first two years of embarking on
    this effort have forged a much better working relationship between the
    business units of the IRS and MITS.
        Even as we formalize and drive these plans ever deeper across the
    domains, one must realize that the plans must also be flexible to
    support significant change. Business requirements, tax laws and tax
    administration policy can change radically over time. One example would
    be in submissions processing and, in particular, e-file. We have a
    roadmap for implementing Modernized e-file (MeF) that has the IRS
    implementing MeF for all major form types by 2014. However, if the IRS
    is directed to implement a direct-file option for individual filers, it
    will significantly change the implementation approach and direction for
    MeF. Whether direct filing with the IRS should be done is a policy
    issue, but a decision such as that would have major impacts on our
    modernization strategy.
        Lastly, your question addresses timeframes for consolidating and
    retiring legacy systems. These comprehensive architecture and
    strategies that we are developing for each domain will address timing.
        I understand that the latest release of the Customer Account Data
    Engine (CADE), the system that is intended to replace the antiquated
    Master File processing system, was put into production in March, about
    two months later than planned.
        Question. What was the impact of the delay on 2007 filing season
    processing?
        Answer. Prior to CADE's deployment, we executed what is known as
    our Technical Backout Plan in which we automatically routed and timely
    processed tax returns for CADE-eligible accounts in the legacy master-
    file cycle. Since CADE is not a customer facing system, this recovery
    maneuver is not evident to the taxpayer, so this action does not
    increase processing time and the taxpayer received the same service
    this year that they have received in past years under the legacy
    master-file cycle. That said, unfortunately, there were approximately
    20 million CADE-eligible taxpayers this year who could have received
    their refunds a few days earlier based on CADE-reduced cycle times had
    CADE been in production at the time they submitted their returns. There
    are no other effects to the taxpayer.
        Question. What, if any, impact has the delayed release had on the
    planned functionality of CADE and on future releases of CADE?
        Answer. The delay in delivering CADE Release 2.2 is having an
    effect on Release 3. While we have not completely finalized the changes
    in scope for the two sub-releases in Release 3, we are scaling back
    some of the functionality.
        The priorities for Release 3 will be to maintain the functionality
    to enable the capabilities to be delivered in conjunction with Account
    Management Services (AMS), update CADE with any necessary filing season
    changes, address some technical upgrades and design issues that have
    been uncovered as we have run CADE in operation, and add functionality
    that will enable CADE to process additional tax returns (in particular,
    we will be adding capabilities for CADE to process returns with Math
    Errors and Disaster Area Designations).
        While there will undoubtedly be less functionality increase in CADE
    Release 3 than originally planned, we believe that these steps we are
    taking to address the issues on CADE performance will enable us to
    ``catch up'' over the next few years, so we do not anticipate changing
    our planned retirement date of the individual master file in 2012.
        Question. How does this year's delay, and possible delays in future
    releases of CADE affect other systems, including the Accounts
    Management System?
        Answer. Based on our Technical Backout capability in CADE, this
    year's delay did not have any effect on other systems.
        As your question notes, possible delays in future releases of CADE
    can affect other systems, most notably Account Management Services
    (AMS). We view maintaining alignment between the CADE and AMS programs
    a central challenge and source of risk for the BSM Program going
    forward. Development of these two major modernization initiatives
    requires a level of coordination and cooperative execution that is
    higher than the IRS has required so far in our modernization efforts.
    We recognized this challenge in our initial planning for the AMS
    program and have taken a number of steps to put in place the
    organizational structure, resources and approaches needed to assure
    that CADE and AMS are successfully delivered as a coherent set of
    capabilities.
        For the Release 3 sub-releases of CADE (those that will be released
    in calendar year 2007), we have taken steps to ensure that
    functionality in CADE required for proper functioning of AMS is of high
    priority and will be delivered in those sub-releases. In particular,
    CADE is slated to deliver functionality that will support online
    address change in Releases 3.1 and functionality to support basic
    notices generation in Release 3.2. We do not anticipate any significant
    issues in delivering this functionality as part of these releases.
                                 irs workforce
        Question. According to IRS data, while the number of employees at
    the IRS has decreased by almost 20,000 since 1995, the number of
    managers who supervise these employees has increased over this same
    period. During the period between 2000 and 2005, the number of
    frontline bargaining unit employees, decreased by 4,756, a decrease of
    5.1 percent. During that same time, the number of managers and
    management officials increased from 12,514 to 12,684, an increase of
    170.
        Why does the IRS need more managers today than it needed six years
    ago when it now has 4,700 fewer front-line employees?
        How many enforcement dollars and impact could 170 managers generate
    if they were assigned inventories?
        Has the IRS considered returning any managers to front-line work?
        Answer. A review of IRS staffing for January of each year shows
    that while there was an increase in the number of managers and
    management officials between 2001 and 2002, since 2002 the number of
    employees in this category has steadily decreased. An updated snapshot
    of the IRS staffing shows a 5.4 percent decrease in the number of
    managers/management officials from January 2001 to January 2006. The
    current alignment of managers and employees has provided the
    appropriate focus to allow for increased enforcement revenues of nearly
    40 percent from $33.8 billion in 2001 to $47.3 billion in 2005. Audits
    of high-income taxpayers--those earning $100,000 or more--topped
    221,000 in fiscal year 2005, the highest number in the past 10 years.
    Total audits of all taxpayers topped 1.2 million last year--a 20
    percent jump from the prior year.
                narrowing the ``tax gap'' and misclassification
        Question. I am concerned about the misclassification of workers in
    certain industries as independent contractors. Many of these workers
    should be correctly classified as employees and income reported on W-2
    forms, not 1099 forms. This misclassification leads to the
    underreporting of self-employment taxes, which the IRS estimates
    accounts for $148 billion per year and 43 percent of the gross tax gap.
    Last year, the Senate Appropriations Committee, in S. Rept. 109-293,
    strongly urged the IRS to provide increased tax enforcement in
    industries where misclassification of employees is widespread. In 1984,
    the IRS reported that at least 15 percent of employers misclassified
    about 3.4 million workers as independent contractors with higher rates
    in several industries including construction.
        Is it your sense that the practice of misclassifying workers as
    independent contractors has increased since then?
        Answer. While we have not conducted a recent study, the Government
    Accountability Office (GAO) looked at this issue in its 2006 report,
    GAO-06-656, entitled, Employment Arrangements--Improved Outreach Could
    Help Ensure Proper Worker Classification. In this report, the GAO
    stated the number of independent contractors increased from 6.7 percent
    to 7.4 percent of the workforce from 1995 to 2005, and the number of
    independent contractors in the contingent workforce population rose
    from 8.3 to 10.3 million. The report also states that many workers are
    misclassified as independent contractors; however, no updated data was
    provided. Additionally, we have seen an increase in misclassification
    through our examination process and increased filings of Form SS-8,
    Determination of Worker Status for Purposes of Federal Employment Taxes
    and Income Tax Withholding. If the taxpayer accurately reports income
    received, whether as employee or an independent contractor, there is
    little consequence for the Social Security trust funds. The tax rates
    on wages and salaries, on the one hand, and self-employment income, on
    the other hand, are virtually identical. For self-employment taxes,
    however, work-related expenses incurred by the worker are deductible
    whereas similar expenses are not deductible by an employee.
        Question. Has the IRS prepared an updated estimate?
        Answer. We have not prepared an updated estimate. We are in the
    process of considering the possibility of undertaking the necessary
    research.
        Question. What enforcement resources are being devoted now or are
    planned in fiscal year 2008 to address this issue?
        Answer. The IRS office with primary responsibility for employment
    tax noncompliance devoted 9 percent of its fiscal year 2007 workplan to
    worker misclassification and plans to increase examinations of
    misclassification issues to 34 percent of its overall audit plan in
    fiscal year 2008.
        Question. You have described the 16 legislative proposals and 4
    administrative proposals for closing the tax gap. Is this issue a
    component of those? If not, why not?
        Answer. This issue was not included in these 16 legislative
    proposals or the 4 administrative proposals. However, the
    Administration's fiscal year 2007 revenue proposals did address the
    issue. In addition to 5 tax gap proposals, it provided for the Treasury
    Department to study the standards used to distinguish between employees
    and independent contractors for purposes of withholding and paying
    Federal employment taxes.
        Question. Where does addressing this problem fit within your
    strategy for narrowing the tax gap?
        Answer. In conjunction with the Treasury Department's tax gap
    strategy issued in September 2006, the IRS is developing a
    comprehensive strategy to address employment tax issues. This strategy
    will include the issue of misclassification of workers as independent
    contractors. However, the prohibition on general guidance on
    classification issues contained in section 530 of the Revenue Act of
    1978 limits the Treasury's ability to provide guidance in this area.
                       safe harbor and misclassification
        Question. Under Section 530 of the Revenue Act of 1978, the ``safe
    harbor'' provision, employers who ``reasonably'' misclassify their
    workers as independent contractors are protected against any liability
    for employment tax purposes. This includes any employer who can show
    that more than 25 percent of his industry classifies workers as
    independent contractors.
        I understand that once an employer is covered by the safe harbor
    provision, the IRS cannot pursue the employer for unpaid employment
    taxes even in the future as long as the situation has not changed in
    their industry, even if they are actually misclassifying.
        What is the impact of the ``safe harbor provision'' including the
    number of employers who qualify, the particular industries, the number
    of workers that represents, and the loss of revenue to the Federal
    treasury in the form of past and future liability?
        Answer. While we are unable to quantify the exact impact of the
    ``safe harbor provision,'' we know that employers that claim safe
    harbor provisions of Section 530 represent a subset of all worker
    misclassification. Section 530 applies not only to past years but also
    future years as long as the taxpayer continues to report the income to
    the workers as required and treat the workers consistently as
    independent contractors. Increasing noncompliance in an industry has
    the effect of increasing the possibility that most taxpayers in the
    industry will qualify for the safe harbor provision. GAO conducted the
    last study in this area in 1989. In this study they reviewed a sample
    of IRS worker reclassification examinations and determined that 40
    percent of the tax could not be assessed due to the safe harbor
    provision.
               recruitment and retention: student loan repayment
        Question. One of the biggest challenges facing Federal agencies is
    attracting and retaining well-qualified, high-performing employees.
    Student loan repayments are a valuable management tool to help agencies
    recruit highly qualified candidates into Federal service and keep
    talented employees in the Federal workforce.
        Federal law (5 U.S.C.  5379) provides agencies with discretion to
    establish and tailor a student loan repayment programs. Recently, OPM
    issued its annual report on the use of the tool across the Federal
    government last year. With each passing year, the use of this program
    continues to grow dramatically.
        In fiscal year 2006, 34 Federal agencies provided 5,755 employees
    with a total of nearly $36 million in student loan repayment benefits.
    This represents a 31 percent increase over fiscal year 2005 in the
    number of employees receiving student loan repayment benefits and a 28
    percent increase in agencies' overall financial investment in this
    valuable incentive. When compared to fiscal year 2002, agencies
    invested more than 11 times as much funding on student loan repayments
    in fiscal year 2006.
        How many IRS employees are currently benefiting from the student
    loan repayment program?
        What portion of the IRS' fiscal year 2008 budget proposal would be
    devoted to initiatives such as those suggested by Columbia Law School
    Dean David Schizer in his op-ed published in the New York Times on
    April 16, 2007? Are you willing to give serious consideration to his
    recommendations and provide a written evaluation to the subcommittee on
    the feasibility and cost of implementing these suggestions? By what
    date could that assessment be accomplished?
        Answer. While the IRS has not yet implemented a Student Loan
    Repayment Program, we have found thus far that the lack thereof has not
    hindered our ability to attract well qualified, highly motivated
    employees through the use of various student employment programs. In
    fiscal year 2006, 93 percent of these student program hires were to
    front-line positions.
        The Office of Chief Counsel, which hires the majority of the
    attorneys in the IRS, revamped its recruitment program a couple of
    years ago by conducting on-campus interviews at law schools throughout
    the country and increasing its visibility by having executives visit
    top schools. As a result, it has been very successful in recruiting law
    students for entry-level and summer-internship positions. This past
    year Counsel hired 36 entry-level attorneys and 25 summer legal
    interns. Over 3,000 law students and recent graduates applied for these
    positions. The applicants were highly qualified--over 70 percent of
    those hired last fall were in the top 30 percent of their class.
                      nonprofit election-related activity
        Question. 501(c)(3) organizations are permitted to engage in voter
    education and outreach activities, but are strictly prohibited from
    promoting or opposing any candidate for federal office. I understand
    that during the 2004 presidential campaign season, the IRS examined
    more than 100 charities and churches, questioning whether they had
    engaged in prohibited, partisan political activities. As a result of
    the investigations, the IRS sought to ensure that the nonprofit
    community engaged in legitimate election-related activities. Concerns
    have been expressed that the timing of the IRS's investigation
    discouraged legitimate voter education and registration efforts. There
    were also allegations that the investigations were provoked by
    politically motivated complaints.
        How does the IRS evaluate whether a complaint is legitimate or
    motivated by partisan politics?
        Is it possible for the IRS to expedite investigations to ensure
    they do not have a chilling effect on legitimate election-related
    activities?
        Looking ahead to the 2008 elections, what additional resources will
    the IRS need to ensure that charitable organizations understand and
    comply with restrictions on election-related activities?
        Answer. In both the 2004 and 2006 Political Activity Compliance
    Initiatives (PACI), the IRS endeavored to intercede quickly in
    instances of alleged prohibited political activity and to educate the
    organizations to prevent potential future violations. As we noted in
    our report on the 2004 initiative, the PACI Referral Committee,
    comprised of three career civil servant employees with extensive Exempt
    Organization tax law experience, determined whether the information the
    IRS received as part of a complaint supported a reasonable belief that
    the organization may have violated the political campaign prohibition
    of section 501(c)(3) and, therefore, warranted further IRS action.
    While these procedures are designed to weed out those complaints that
    are not legitimate, oftentimes it is only after examination that the
    validity of the complaint can be determined with certainty. We also
    note that a complaint from a partisan source may nonetheless be valid.
        The 2006 PACI included expedited timeframes for classification and
    case assignment. Because of the sensitivity of these cases and their
    highly factual nature, as well as procedural prerequisites (e.g., the
    church tax inquiry procedures), and in some cases the lack of
    cooperation from the taxpayer, it is not always possible to ensure the
    swift completion of these examinations.
        On June 1, 2007, the IRS released two documents to help tax-exempt
    organizations avoid prohibited political campaign intervention
    activities that can result in the loss of their tax-exempt status.
    Revenue Ruling 2007-41 sets out 21 factual situations involving tax-
    exempt organizations, including churches, and various activities that
    may or may not constitute prohibited political intervention. Second,
    the IRS released its Report on the Political Activity Compliance
    Initiative for the 2006 election cycle. The 2006 report details the
    types and numbers of allegations, which are roughly equivalent to those
    found in the 2004 cycle.
        In terms of funding, we believe the Administration's fiscal year
    2008 budget request for the IRS, which includes a $15 million increase
    for Tax-Exempt Entity Compliance, will allow us to effectively serve
    the public, including in the area of prohibited political activity, and
    we respectfully request your support for it.
                      implementation of new nonprofit laws
        Question. The Pension Protection Act of 2006, enacted last August,
    included what has been called the most sweeping legislation affecting
    tax-exempt laws since 1969. The IRS has already issued some guidance
    reflecting changes in the law; however, several aspects require
    additional guidance. Increased outreach and education will also be
    necessary to ensure that charities, many of which rely on voluntary
    staff and do not have tax professionals, are aware of the changes.
        What additional resources will be required to develop and issue
    needed guidance and web-based tools, educate IRS staff about the new
    rules, and ensure that individual taxpayers and charitable
    organizations have the necessary information to comply with the new
    rules?
        Answer. The IRS has been extremely proactive in its guidance and
    outreach efforts related to the implementation of the charitable
    provisions of the Pension Protection Act of 2006 (PPA). We have updated
    our webpage continuously to reflect the latest developments. We
    explained the PPA changes affecting exempt organizations and their
    contributors on a Tax Talk Today web cast; over 6,100 individuals
    viewed it. We continue to speak at numerous other outreach events for
    organizations involving the PPA changes. We educated our staff and the
    telephone call sites on the PPA changes so they can respond to taxpayer
    inquiries. We have begun to roll out a massive publicity campaign,
    directed especially to small organizations, concerning the new annual
    notice filing requirement, which is applicable to all small
    organizations that did not previously have a filing requirement.
        We made numerous changes to the 2006 Form 990 to implement PPA
    changes. We conducted two phone forums to explain these changes. The
    phone forums were open to all, and over 500 practitioners participated;
    we subsequently posted the script on our website, along with frequently
    asked questions. We issued guidance immediately following PPA's
    enactment addressing issues of critical importance regarding donor
    advised funds, supporting organizations, and procedures for being
    recognized as a publicly supported organization. We recently issued
    guidance on the procedures for section 501(c)(3) organizations to make
    their Forms 990-T available for public inspection. We will issue
    additional PPA guidance and outreach in the near future. We also will
    assist the Treasury Department on PPA mandated studies.
        Implementation of the PPA is important. We have devoted the
    resources required to issue all needed guidance in a timely fashion,
    and we intend to continue to do so until the act is fully implemented.
        We believe the Administration's fiscal year 2008 budget request for
    the IRS, which calls for a $15 million increase for Tax-Exempt Entity
    Compliance, will enable us to effectively serve the public, including
    in the area of prohibited political activity, and we respectfully
    request your support for it.
              effect of new non-cash charitable contribution rules
        Question. In 2004, Congress enacted new restrictions on charitable
    contributions of vehicles. Most recently, in 2006, Congress enacted new
    restrictions and reporting requirements on charitable contributions of
    clothing and household items as part of the Pension Protection Act.
        Has the IRS seen any changes in the amount and/or type of
    deductions being claimed since passage of these new rules?
        Answer. Internal Revenue Code  170(f)(12) went into effect for
    vehicle donations after December 31, 2004. Our Statistics of Income
    Division (SOI) collects this type of data. However, data for the 2005
    tax year (the first tax year where the change applied) has not yet been
    analyzed.
        Question. Has the volume of taxpayer queries increased since
    enactment of the rules?
        Answer. The Accounts Management Toll Free function experienced a 23
    percent increase in inquiries on deductions in fiscal 2005 compared to
    fiscal 2004. Questions received on deductions cover over 26 topics
    including contributions. The data we collect does not allow us to
    provide specific evidence on whether the increase was attributable to
    vehicle donations. In fiscal year 2006 the deduction queries returned
    to a level comparable to fiscal years before 2005.
                                     ______

                   Questions Submitted by Senator Ben Nelson
        Question. Do you support including a preference for companies
    willing to hire disabled veterans and other individuals with
    disabilities within the IRS Private Debt Collection (PDC) program?
        Answer. The IRS is considering a strategy that would give a
    preference to Private Collection Agencies (PCAs) that employ disabled
    veterans and individuals with disabilities.
        Question. Do you support an across-the-board hiring target for
    collection agencies within the PDC to create jobs for veterans and
    other persons with disabilities?
        Answer. In the short term, it may be difficult for the IRS to
    achieve an across-the-board hiring target for all collection agencies
    within the PDC program. Setting a predetermined target could jeopardize
    the program. If we were unable to find a contractor who meets the
    requirements, we could not enter into any qualified tax collection
    contract. PDC companies are often located in rural areas where there is
    a population base that allows them to employ highly qualified people at
    a low cost. These same rural areas may not have a large enough
    population of severely disabled and veterans to draw upon to achieve a
    set goal.
        Nonetheless, the IRS is considering an alternative strategy that
    could give a preference to PCAs that employ the severely disabled and
    veterans. We intend to revise our contract award determinations to
    provide incentives. The IRS intends to offer extra evaluation points
    for PCAs that employ a specified percentage of the severely disabled or
    veterans. We are still in the process of finalizing the Request for
    Quotations for the next contract and have not yet determined the
    required percentages or extra evaluation points. We believe that this
    will encourage the PCAs to hire the severely disabled and veterans to
    work IRS accounts without jeopardizing the PDC program.
        Question. What obstacles exist which prevent the IRS from
    developing a veterans/disability preference program for the PDC?
        Answer. The obstacle to a disability preference program based on a
    hiring target arises after the contract is awarded. The PDC program
    requires the use of long-term contracts with the PCAs. Preparing the
    PCA to process IRS cases requires a significant amount of time and
    resources by both the PCA and the IRS. The contract period must be of
    sufficient time to allow the PCA and IRS to recover their expenses. We
    have determined one year to be the minimum time period for a contract
    to be cost effective.
        The IRS implied obligation under a preference program would be to
    terminate a contract with disability preference if the contractor
    failed to meet the agreed upon condition. If after contract award, a
    contractor, otherwise qualified, is unable to fulfill the agreement to
    hire the required quota of severely disabled for positions to provide
    contract services, the contract would have to be terminated for breach
    of contract. The cost to cancel a contract after 90 days would
    dramatically increase the cost of administering the PDC program. We
    believe that an incentive as described above will encourage the PCAs to
    hire the severely disabled and veterans to work IRS accounts without
    jeopardizing the PDC program.
        Question. What amount of the fiscal year 2008 appropriation does
    the IRS plan to devote to the PDC program? (Or, as fiscal year 2008
    appropriations are as-of-yet unknown, how much has the IRS budgeted for
    administration of the PDC program in fiscal year 2008?)
        Answer. The current projected fiscal year 2008 cost for
    administration of the PDC program is $7.35 million. We project that PDC
    will breakeven in April of 2008, including all start up costs. Of the
    $7.35 million, $5.84 million is for managing the initiative and
    consists of costs for the Referral Unit, Oversight Unit, Project
    Office, and Project Office contractors. The remaining $1.51 million is
    for IT costs.
        Based on conservative projections for revenue, the program is
    expected to recoup all costs in fiscal year 2008 and is projected to
    generate between $1.5 billion and $2.2 billion in revenue over 10
    years. In fiscal year 2008, we expect the PDC ROI will be between 4.0
    to 1 and 4.3 to 1, once the program is in steady state.
        Question. If the IRS is prevented from using any appropriated funds
    to administer the program, how will the IRS allocate the appropriations
    which otherwise would have gone to the PDC program?
        Answer. If the IRS is prevented from using funds to administer the
    program, we would need to determine alternative applications for the
    funding. The staff in the Referral Unit, Oversight Unit, and Project
    Office would be absorbed into other collection activities. The
    remaining non-labor funds would be reprioritized against all agency
    requirements. The IRS will work with the Office of Management and
    Budget (OMB) to determine the most appropriate allocation of resources.
        It is also important to note that if the program is eliminated, the
    IRS would continue to apply available resources to the highest priority
    collection work. Since the cases assigned to the PDC program have
    already been through lower cost methods of collections at the IRS, they
    would remain unworked. The President's fiscal year 2008 budget request
    does not include funds to hire IRS workers to replace Private
    Collection Agency (PCA) employees should the Congress eliminate the
    program. The IRS would need a significant influx of resources over a
    number of years to be able to work enough inventory to get to these
    lower priority cases currently eligible for PCA placement.
        In addition, sec. 6306 of Title 26 (The Internal Revenue Code)
    allows the Secretary to retain and use up to 25 percent of the
    collections for collection enforcement activities of the Internal
    Revenue Service. Termination of the contracts would also cut off
    continued accumulation of the retained funds which can be used to fund
    other Tax Law Enforcement activities. The projected revenue, between
    $1.5 billion and $2.2 billion over ten years, would also be lost.
        Question. If the PDC were repealed or de-funded, is there a
    detailed proposal, including cost and timeline estimates, to replicate
    the PDC within the IRS, or an alterative plan to collect the
    ``inventory'' of cases or the debt currently slated to be collected via
    the PDC?
        Answer. No. The types of cases currently assigned to the PCAs would
    not be actively worked by the IRS if the PDC program were repealed or
    de-funded and funding for any alternatives are not assumed in the
    budget request. Due to the volume of higher priority work, there is no
    plan to replicate PDC within the IRS. These lower priority cases would
    remain unassigned.
                                     ______

                      Questions Submitted to Nina E. Olson
                Questions Submitted by Senator Richard J. Durbin
        Question. Improving taxpayer service is an important part of a
    comprehensive strategy to reduce the ``tax gap'' by helping taxpayers
    understand and meet their tax obligations.
        On April 11, the Taxpayer Assistance Blueprint, Phase 2 was
    published. This Blueprint is the joint response of the IRS, the IRS
    Oversight Board and the National Taxpayer Advocate to comply with a
    congressional mandate for the development of a five-year strategic plan
    for the delivery of taxpayer service.
        The plan includes a variety of specific recommendations to expand,
    simplify, standardize and automate services, and to improve and expand
    technology infrastructure. It also includes recommendations for
    increasing education and outreach to taxpayers, partners and IRS
    employees, and incorporating feedback into future service decisions.
        When the recent Blueprint was issued, you labeled it a ``much-
    needed first step to delivering this service in ways that meet taxpayer
    needs.''
        Where does it fall short? What additional steps do you consider
    critical to meeting taxpayer needs?
        Answer. The Taxpayer Assistance Blueprint (TAB) lays out a
    comprehensive, laudable plan to improve taxpayer service over the next
    five years. Now, the critical issue is how the IRS implements the plan.
    I believe the TAB is only a ``first step'' because the TAB report alone
    will not ensure that the IRS delivers service in ways that meet
    taxpayer needs. To improve taxpayer service, the IRS must maintain a
    commitment to improving assistance to taxpayers both now and in the
    future, and must be given the resources necessary to make the needed
    improvements.
        The TAB also is just a ``first step'' because it focuses solely on
    individual taxpayers. The IRS should expand its focus to more
    comprehensively consider the needs of all taxpayers. For example, the
    IRS should use the TAB as a starting point and engage in similar
    efforts to improve services for Schedule C filers, large and small
    businesses, and tax-exempt organizations. Additionally, the IRS should
    begin to look at other areas that affect taxpayer service, including
    return preparers, submission processing, and the content of notices and
    publications.
        The IRS also should continue the research efforts it began in
    preparing the TAB. The taxpaying population will continue to change and
    so will taxpayer needs. The IRS should commit to ongoing research
    related to issues such as taxpayer needs, the link between service and
    compliance, and barriers taxpayers face to using certain IRS services.
        Question. I understand that the Blueprint was a product of a
    collaborative effort. Were there any aspects upon which you could not
    reach consensus that, as a result, were not incorporated in the
    publication?
        Answer. The TAB was designed to reflect the collaborative efforts
    of the IRS, the IRS Oversight Board, and the National Taxpayer
    Advocate. Throughout the development of the TAB, I personally
    participated in the TAB Executive Steering Committee meetings and
    decisions. I met personally with the members of the TAB team to discuss
    with them my views on the TAB and taxpayer service in general. I
    reviewed drafts of the TAB report and provided comments and feedback to
    the TAB team. Members of my staff worked closely with the TAB team both
    in monitoring the research and in drafting the report.
        Throughout the TAB process, disagreements occasionally arose over
    the direction of the TAB report. These issues were discussed among the
    Executive Steering Committee members in order to reach an agreement. I
    worked tirelessly to ensure that the TAB report would reflect a
    taxpayer-centric perspective and that taxpayer needs would not be
    unduly sacrificed for the sake of administrative convenience. I also
    wanted to ensure that given the time allotted, the TAB report would not
    come to any conclusion on reducing or eliminating taxpayer services.
    Instead, I urged that the TAB propose a methodology to evaluate current
    services and make improvements to meet taxpayer needs based on the data
    collected through the TAB research efforts, while not reducing the
    services currently available. For the most part, I believe the TAB
    report reflects this approach.
        As the IRS begins to realize cost savings as a result of providing
    more efficient and effective taxpayer service, I believe strongly that
    any savings resulting from those efficiencies should be reinvested in
    taxpayer service and not shifted to compliance. I also believe that the
    IRS should maintain its commitment to providing face-to-face services
    in the future, as stated in the TAB Guiding Principles.
        Question. As an element of the Taxpayer Assistance Blueprint, the
    IRS recommended a migration strategy to move taxpayers away from
    Taxpayer Assistance Centers (TACs) and toward electronic, self-assisted
    services. I understand the IRS plans to implement Facilitated Self-
    Assistance Models in 15 selected sites, including two locations in my
    home State of Illinois. Under the model, taxpayers who come to the TACs
    for in-person help will be directed to in-house telephones and
    computers where they can access both the IRS website and phone
    assistors.
        The National Taxpayer Advocate's Report to Congress for 2006
    provides some data drawn from the IRS Oversight Board's 2006 Service
    Channel Survey. I think it elucidates the concern that migrating away
    from Taxpayer Assistance Centers (TACs) may be problematic. It states:

        ``Nearly 25 percent of taxpayers do not have Internet access, with
    more than twice as many taxpayers over 60 not having Internet access as
    those 60 or younger. Approximately 75 percent stated they were not
    secure sharing personal information via the Internet. Among taxpayers
    who have used IRS services in the last two years, about 45 percent of
    those who called IRS and more than 75 percent of those who visited the
    IRS stated that they would not use the IRS website.''

        How do you respond to concerns that migrating to self-assisted
    centers may be laying the groundwork for an expanded effort to move
    persons away from face-to-face interactive contacts and toward
    telephone and Internet access?
        Answer. Throughout the development of the TAB, I advocated strongly
    to ensure that, as the IRS moves increasingly toward the electronic
    delivery of services, the Service remains aware of the needs of those
    taxpayers who may be unable or unwilling to use self-assisted services.
    Many taxpayers face barriers in receiving assistance, particularly in
    using the Internet, and the IRS has an obligation to provide service to
    these taxpayers, including face-to-face service, as well as to help
    these taxpayers overcome the barriers.
        The IRS is making an effort to move taxpayers away from face-to-
    face interaction and toward telephone and Internet services. This
    approach is appropriate for many taxpayers who are comfortable handling
    financial transactions by phone or over the Internet. However, the
    TAB's research studies showed that a certain percentage of taxpayers
    will continue to need face-to-face services. Therefore, I will continue
    to advocate that, even as many taxpayers move to electronic service
    options, the IRS must maintain face-to-face services as long as there
    is a segment of the population that still needs them.
        Question. Wouldn't a plan to scale back the number of TACs or
    replace them with self-help centers be an unwise cutback in customer
    service and a step backwards in achieving the goal of increasing
    compliance and shrinking the tax gap?
        Answer. At this point, I believe the IRS lacks the data necessary
    to determine whether it should reduce the number of TACs or replace
    existing TACs with self-help centers. Although the TAB report contains
    a significant amount of information regarding taxpayer needs and
    preferences, the IRS still has not completed enough research to
    evaluate the existing TACs.
        An ongoing survey of taxpayers who visit TACs conducted by the
    Taxpayer Advocacy Panel, an advisory panel that operates pursuant to
    the Federal Advisory Committee Act, should provide valuable information
    regarding whether TACs are meeting taxpayer needs. This is the first
    survey that asks taxpayers who were turned away from the TACs what
    assistance they were seeking, and asks taxpayers who were served by the
    TACs whether they received the service they sought. With this data, the
    IRS can begin to determine whether it is offering sufficient assistance
    or whether it needs to expand both the nature and amount of its service
    offerings to meet taxpayer needs.
        My goal is to work with the IRS as it evaluates the current
    placement of the TACs. The IRS needs to ensure that TACs are located in
    areas where taxpayers need and can use the services offered. By
    evaluating the location of the current 401 TACs, the IRS can identify
    areas in which moving a TAC may make it more convenient for taxpayers.
    Additionally, we may identify areas where the IRS should consider
    adding a TAC.
        The Facilitated Self-Assistance Model (FSM) represents an important
    step forward as the IRS expands its efforts to deliver services
    electronically. FSM is designed to assist taxpayers who have indicated
    a willingness to use alternate service channels, such as the Internet
    and the telephone. If a taxpayer comes into a TAC to obtain a form and
    the TAC does not have the form in stock, FSM will allow the taxpayer to
    use one of the computer terminals provided and, with the assistance of
    a TAC employee, to print out the form he needs. In the future, the same
    taxpayer may wish to return to the TAC to obtain a form, or he may now
    feel comfortable navigating irs.gov to print out a copy of the form on
    his own. FSM will also provide additional information about taxpayer
    needs. In addition to conducting surveys of taxpayers who use the FSM
    work stations, the IRS will be able to monitor taxpayers as they
    navigate irs.gov. This information will identify areas where the
    website can be improved to make it easier for taxpayers to use. This
    type of real world testing is critical to improving irs.gov and making
    it more taxpayer-friendly.
        I do not view FSM as a replacement for traditional face-to-face
    services provided in a TAC. Rather, I view FSM as a complement to
    existing TAC services. If the FSM pilot proves successful and the IRS
    is given the additional taxpayer service funding it needs, I am hopeful
    that workstations will be installed in all TAC offices. By rolling out
    FSM, our goal is to help some taxpayers become more comfortable using
    online and telephone alternatives. FSM has the potential to save both
    taxpayers and the IRS time and costs.
        Question. As your report observes, ``Until [these] barriers to
    Internet access can be addressed, eliminating the option of being able
    to call or visit the IRS means that these taxpayers would not be able
    to use the IRS website for the service they received, increasing the
    burden for these taxpayers to comply with their tax obligations.'' How
    serious is your concern? What are the implications?
        Answer. My concerns are very serious. As I have stated previously,
    the overriding mission of the IRS should be to increase voluntary
    compliance. The IRS should make it as easy as possible for taxpayers to
    comply with the tax laws. As the IRS looks to move more taxpayers
    toward using electronic service delivery options such as the Internet,
    the IRS must consider why some taxpayers cannot use the Internet. One
    way this can be accomplished is through the current Facilitated Self
    Assistance pilot in the TACs. By observing how taxpayers use irs.gov to
    obtain needed services, the IRS can potentially identify barriers to
    using the Internet and modify irs.gov in order to help taxpayers
    overcome these barriers.
        While continued research into the barriers to using electronic
    services is necessary, it is also critical that the IRS continue to
    maintain telephone and face-to-face services for taxpayers who are
    unable or unwilling to use electronic services. The IRS cannot reduce
    or eliminate existing service delivery methods until research
    demonstrates that the available services are meeting the needs of all
    taxpayers. Moreover, it is my belief that there are many tax issues
    that cannot be resolved through electronic communication. That is, the
    conversation between the IRS employee and the taxpayer, whether on the
    phone or in person, is part of the resolution process. Thus, I cannot
    now envision a time when it would be appropriate for the IRS to
    eliminate or sharply curtail the availability of face-to-face services
    for taxpayers who seek them.
                                     ______

                   Questions Submitted by Senator Ben Nelson
        Question. What amount of the fiscal year 2008 appropriation does
    the IRS plan to devote to the PDC program? (Or, as fiscal year 2008
    appropriations are as-of-yet unknown, how much has the IRS budgeted for
    administration of the PDC program in fiscal year 2008?)
        Answer. The IRS estimates that the PDC initiative will cost $7.35
    million in fiscal year 2008.\1\ However, this number does not include
    indirect costs such as the staffing the Taxpayer Advocate Service is
    devoting to oversight and casework arising from the PDC initiative.
    Moreover, the IRS reports that it will have spent about $71 million in
    startup and maintenance costs by the end of fiscal year 2007, again
    excluding indirect costs. As a result, the IRS projects that the
    initiative at this point has lost money and will not break even until
    April 2008.\2\ It is not clear why the IRS is investing so much in an
    initiative that promises to return relatively little and that raises so
    many concerns regarding taxpayer rights, especially when the IRS could
    invest the same amount of money in its Automated Collection System
    (ACS) and generate a greater return on its investment.
    ---------------------------------------------------------------------------
        \1\ Internal Revenue Service, Filing and Payment Compliance
    Advisory Council (May 1, 2007) at 15.
        \2\ Data furnished by the IRS Filing and Payment Compliance
    Modernization Project Office (June 2007).
    ---------------------------------------------------------------------------
        Question. If the IRS is prevented from using any appropriated funds
    to administer the program, how will the IRS allocate the appropriations
    which otherwise would have gone to the PDC program?
        Answer. If Congress prohibits the IRS from administering the PDC
    initiative, the IRS could apply its resources to ACS, whose employees
    perform work most analogous to the PDCs. In fact, ACS would likely
    generate a much greater return than the PDC initiative if provided the
    additional funding. For instance, it is estimated that the PDC
    initiative will cost $71 million on startup and ongoing maintenance
    expenses through fiscal year 2007.\3\ If this $71 million were
    allocated to ACS, the Office of the Taxpayer Advocate has estimated
    that the IRS could bring in $1.4 billion, as compared to the $19.5
    million brought in by the PDC initiative to date.\4\ Even if the cost
    of the PDC initiative significantly decreases, as the IRS projects, the
    IRS would still likely be better off spending the PDC program costs on
    hiring more collection personnel. For example, if the IRS applied the
    $7.35 million (which is the PDC initiative's estimated cost for the
    referral unit, oversight unit, program office, contractors, and MITS
    for fiscal year 2008) to ACS, the IRS could collect about $146
    million.\5\ By contrast, the IRS PDC initiative is projected to bring
    in $88 million in gross revenue for fiscal year 2008.
    ---------------------------------------------------------------------------
        \3\ Internal Revenue Service, Filing and Payment Compliance
    Advisory Council (May 1, 2007) at 15. These estimated costs include
    startup and ongoing maintenance from the PDC Project Office, oversight,
    administration, and IT costs from fiscal year 2004 projected through
    fiscal year 2007. These estimated costs do not include infrastructure
    assessments for any MITS costs or costs associated with TAS oversight
    or casework arising from the PDC initiative.
        \4\ The dollars spent on the PDC initiative could instead have been
    used to fund new ACS employees. We computed the fully loaded cost of an
    average ACS employee at about $75,000 (assuming GS-8, step 5). Based on
    IRS expenditures of $71 million, the number of new ACS employees that
    could have been funded by the PDC initiative (about 942) was multiplied
    by the current average dollars collected by an ACS employee per year
    (about $1.49 million) to estimate the revenue that could be collected
    by ACS in one year.
        \5\ Internal Revenue Service, Filing and Payment Compliance
    Advisory Council (May 1, 2007) at 15.
    ---------------------------------------------------------------------------
        Question. What is the estimate of the return on investment in terms
    of revenue collected from the alternative use of appropriated funds as
    mentioned in question 1 above? How does this compare to projections for
    fiscal year 2008 collections under the PDC program?
        Answer. It is clear that the IRS can collect these liabilities more
    efficiently and effectively. In fact, the IRS openly acknowledges it
    can do better.\6\ The Private Collection Agencies (PCAs) get a four
    dollar return for every one dollar IRS invests.\7\ By contrast, IRS ACS
    personnel obtain an average return of $20 for every one dollar IRS
    invests in collecting tax liabilities. From the September 2006
    inception of the PDC program through April 19, 2007, the PCAs collected
    $19.5 million in gross revenue. As noted, however, if the $71 million
    invested in the PDC initiative were instead invested in ACS, the IRS
    could bring in about $1.4 billion. Not only can the IRS get a better
    return, but IRS employees, although not perfect, receive significantly
    more training concerning taxpayer rights and are better equipped to
    work with taxpayers on resolving their tax debts.\8\
    ---------------------------------------------------------------------------
        \6\ Testimony of Commissioner of Internal Revenue, Mark W. Everson,
    House Committee on Appropriations: Subcommittee on Transportation,
    Treasury, Housing and Urban Development, and the District of Columbia,
    Fiscal Year 2007 Appropriations for the Internal Revenue Service (March
    29, 2006).
        \7\ Testimony of United States Treasury Secretary, John Snow, in an
    exchange with Senator Robert C. Byrd, Senate Committee on
    Appropriations: Subcommittee on Transportation, Treasury and General
    Government, Hearing on Fiscal Year 2004 Appropriations for the Treasury
    Department, May 20, 2003.
        \8\ TAS also produced video training, including a 20-minute
    presentation by the National Taxpayer Advocate and a two-hour
    discussion by TAS personnel, that is required to be taken by all PCA
    employees about TAS, taxpayer rights, low income taxpayer clinics
    (LITCs), and procedures for referring TAS cases.
    ---------------------------------------------------------------------------
        Question. If the PDC were repealed or de-funded, is there a
    detailed proposal, including cost and timeline estimates, to replicate
    the PDC within the IRS, or an alterative plan to collect the
    ``inventory'' of cases or the debt currently slated to be collected via
    the PDC?
        Answer. If the PDC initiative is repealed, there are a variety of
    areas in which the IRS could invest that would generate a better return
    and benefit taxpayers. For example, the IRS could invest in ACS,
    including retraining some submission-processing employees whose
    positions are being eliminated due to the expansion of electronic
    filing and the consequent reduction in the need for manual entry of
    data from paper-filed returns. Those employees could work PCA-type
    cases as a stepping stone to more complex collection work. The IRS
    could design a system that would effectively identify the ``next best
    case'' to work and should invest in modernizing its technology. The IRS
    could use the funding to revise or develop collection measures, which
    will accurately identify the true age of its accounts receivable;
    develop realistic measures of collection ``yields'' that accurately
    identify recovery of potentially lost revenue; and improve
    communication to delinquent taxpayers concerning the accrual of
    penalties and interest on collection cases.\9\
    ---------------------------------------------------------------------------
        \9\ For an in-depth analysis of current IRS collection strategy and
    recommendations for improvement, see National Taxpayer Advocate 2006
    Annual Report to Congress at 80-82.
    ---------------------------------------------------------------------------
        In addition to funding ACS, there are several alternative areas in
    which the IRS could invest the funds currently being used to oversee
    the PDC initiative. For instance, the IRS has failed to fund the other
    two components of its Filing and Payment Compliance Project (F&PC).
    These components include plans to conduct analysis on a given
    collection case and allow it to be officially routed to the appropriate
    collection unit, whether the IRS automated call sites, IRS campuses, or
    the IRS collection field function. The full impact of this initiative
    is unclear since only the PDC component is funded. But I believe there
    are multiple superior uses for these funds that would produce better
    returns on investment at less risk to taxpayer rights.
        Question. What is the estimate of the return on investment in terms
    of revenue collected from the alternative use of appropriated funds as
    mentioned in question 1a above? How does this compare to projections
    for fiscal year 2008 collections under the PDC program?
        Answer. Overall, the IRS Return on Investment (ROI) is about 4 to
    1. ROI resulting from IRS enforcement programs ranges from $3 to $14
    for every additional $1 invested, depending on the type of enforcement
    activity. For example, labor-intensive activities such as the
    Collection Field Function have lower ROIs, and automated activities
    such as Automated Underreporter have high ROIs. It would be expected
    that the ROI for an ``alternative use of funds'' initiative would be
    consistent with that for enforcement programs and range from 3:1 to
    14:1.
        In fiscal year 2008, we expect the PDC ROI will be between 4.0 to 1
    and 4.3 to 1, once the program is in steady state. We base this
    estimate on fiscal year 2008 gross revenue projections of $86 million
    to $127 million compared to operating costs of approximately $5.84
    million \10\ in IRS costs and the average 18.5 percent payments to the
    PCAs.
    ---------------------------------------------------------------------------
        \10\ Due to fluctuating costs, there may be additional costs
    incurred that would result in the actual ROI being closer to the low
    end of the range. The $5.84 million does not include MITS Maintenance
    costs which were included in fiscal year 2008 costs ($7.35 million) on
    a prior page.
    ---------------------------------------------------------------------------

                      ADDITIONAL STATEMENT FOR THE RECORD

        Senator Durbin. The statement from Colleen Kelley, referred
    to earlier, will be inserted into the record at this point.
        [The statement follows:]
     Prepared Statement of Colleen M. Kelley, President, National Treasury
                                Employees Union
        Chairman Durbin, Ranking Member Brownback, and distinguished
    members of the Subcommittee, I would like to thank you for allowing me
    to provide comments on the Administration's fiscal year 2008 budget
    request for the Internal Revenue Service (IRS). As President of the
    National Treasury Employees Union (NTEU), I have the honor of
    representing over 150,000 federal workers in 30 agencies including the
    men and women at the IRS.
                      irs fiscal year 2008 budget request
        Mr. Chairman, as you know, the IRS budget forms the foundation for
    what the IRS can provide to taxpayers in terms of customer service and
    how the agency can best fulfill its tax enforcement mission. Without an
    adequate budget, the IRS cannot expect continued improvement in
    customer service performance ratings and will be hampered in its effort
    to enhance taxpayer compliance. I would like to applaud the
    Administration for acknowledging in its Fiscal Year 2008 Budget in
    Brief (page 65) that ``assisting the public to understand their tax
    reporting and payment obligations is the cornerstone of taxpayer
    compliance and is vital for maintaining public confidence in the tax
    system.'' However, I was disappointed in the Administration for failing
    to request a budget for fiscal year 2008 that meets the needs of the
    Agency to meet its customer service and enforcement challenges. In
    fact, the President's budget anticipates a ``savings'' equal to nearly
    1,200 full-time equivalent positions, including 1,147 in enforcement
    and taxpayer service programs.
        Although it's widely recognized that additional funding for
    enforcement provides a great return on the investment, the
    Administration seems reluctant to request an adequate budget for the
    IRS. In addition, despite citing a lack of resources as the primary
    rationale for contracting out a number of inherently governmental
    activities, such as the collection of taxes, the Commissioner of the
    IRS has told Congress that the IRS does not need any additional funding
    above the President' budget request.
        NTEU believes that Congress must provide the IRS with a budget that
    will allow the Service to replenish the depleted workforce,
    particularly with respect to enforcement personnel.
        History has shown that the IRS has the expertise to improve
    taxpayer compliance but lacks the necessary personnel and resources.
    The President's own fiscal 2008 budget proposal trumpets the increased
    tax collections produced by IRS's own employees and cites the increased
    collections of delinquent tax debt from $34 billion in 2002 to $49
    billion in 2006, an increase of 44 percent. Unfortunately, instead of
    providing additional resources to hire more enforcement staff, IRS
    personnel resources have been slashed in recent years resulting in a 36
    percent decline in combined collection and examination function
    enforcement staff between 1996 and 2003. In addition, these staffing
    cuts have come at a time when the IRS workload has dramatically
    increased.
        According to IRS's own annual reports and data, taxpayers filed
    114.6 million returns in 1995. After a steady annual climb, eleven
    years later, the Service saw more than 132 million returns filed. Yet,
    between 1995 and 2005, total numbers of IRS employees shrunk from
    114,000 to 94,000. Even more alarming is that during that period,
    revenue officers and revenue agents--two groups critical to IRS
    enforcement and compliance efforts--shrunk by 32 and 23 percent
    respectively. Revenue officers who collect large delinquent accounts
    went from 8,139 to 5,462 and revenue agents who do audits fell from
    16,078 to 12,355. Unfortunately, instead of reversing this trend, the
    IRS has continued efforts to reduce its workforce and has moved forward
    with downsizing in several different areas which have targeted some of
    the service's most productive employees.
        These include last year's reorganization of the Estate and Gift Tax
    Program which sought the elimination of 157 of the agency's 345 estate
    and gift tax attorneys--almost half of the agency's estate tax
    lawyers--who audit some of the wealthiest Americans. The Service
    pursued this drastic course of action despite internal data showing
    that estate and gift attorneys are among the most productive
    enforcement personnel at the IRS, collecting $2,200 in taxes for each
    hour of work.
        The IRS decision to drastically reduce the number of attorneys in
    the estate and gift tax area flies in the face of several reports made
    to Congress by Treasury and IRS officials over the past few years,
    indicating that tax evasion and cheating among the highest-income
    Americans is a serious and growing problem. In fact, an IRS study found
    that in 1999, more than 80 percent of the 1,651 tax returns reporting
    gifts of $1 million or more that were audited that year understated the
    value of the gift. The study found that the average understatement was
    about $303,000, on which about $167,000 in additional gift taxes was
    due. This alone cost the government about $275 million. Consequently,
    it is difficult to understand why the IRS sought the elimination of key
    workforce positions in an area that could produce significant revenue
    to the general treasury.
        In addition, the Service continues to move forward with its plan to
    close five of its ten paper tax return submission facilities by 2011.
    The IRS originally sought the closings of the five paper return
    submission centers due to the rise in the use of electronic filing (e-
    filing) and in order to comply with the IRS Restructuring and Reform
    Act of 1998 (RRA 98) which established a goal for the IRS to have 80
    percent of Federal tax and information returns filed electronically by
    2007. But in their recent report to Congress on e-filing, the IRS
    Oversight Board noted that the IRS will fall well short of the 80
    percent goal and urged Congress to extend the deadline to 2012. The
    report noted that in 2006 just 54 percent of individuals e-filed their
    returns, well short of the 80 percent goal. Furthermore, the report
    cited a decline in 2006 in the number of e-file returns received from
    individual taxpayers who self-prepared their taxes. And finally a
    recent GAO report on the 2006 filing season noted the year over year
    percentage growth in individual e-filing slowed to a level lower than
    any of the previous three years.
        While overall use of e-filing may be on the rise, the number of
    taxpayers opting to use this type of return is not increasing as
    rapidly as the IRS had originally projected. Combined with the fact
    that almost a third of American taxpayers do not even have internet
    access and changes to the IRS Free File Program that are expected to
    increase the number of paper filing returns, it is clear that paper
    submission processing facilities are still necessary and that serious
    thought and consideration must be given before any additional closings
    are undertaken.
        Mr. Chairman, it is clear that drastic reductions in some of the
    agency's most productive tax law enforcement employees directly
    contradict the Service's stated enforcement priority to discourage and
    deter non-compliance, particularly among high-income individuals. In
    addition, we believe these staffing cuts have greatly undermined agency
    efforts to close the tax gap which the IRS recently estimated at $345
    billion. As Nina Olson, the National Taxpayer Advocate noted, this
    amounts to a per-taxpayer ``surtax'' of some $2,600 per year to
    subsidize noncompliance. And while the agency has made small inroads
    and the overall compliance rate through the voluntary compliance system
    remains high, much more can and should be done. NTEU believes that in
    order to close the tax gap, the IRS needs additional employees on the
    frontlines of tax compliance and customer service. In addition, we
    believe Congress should establish a dedicated funding stream to provide
    adequate resources for those employees.
                             nteu staffing proposal
        In order to address the staffing shortage at the IRS, NTEU supports
    a two percent annual net increase in staffing (roughly 1,885 positions
    per year) over a five-year period to gradually rebuild the depleted IRS
    workforce to pre-1998 levels. A similar idea was proposed by former IRS
    Commissioner Charles Rossotti in a 2002 report to the IRS Oversight
    Board. In the report, Rossotti quantified the workload gap in non-
    compliance, that is, the number of cases that should have been, but
    could not be acted upon because of resource limitations. Rossotti
    pointed out that in the area of known tax debts, assigning additional
    employees to collection work could bring in roughly $30 for every $1
    spent. The Rossotti report recognized the importance of increased IRS
    staffing noting that due to the continued growth in IRS' workload
    (averaging about 1.5 to 2.0 percent per year) and the large accumulated
    increase in work that should be done but could not be, even aggressive
    productivity growth could not possibly close the compliance gap.
    Rossotti also recognized that for this approach to work, the budget
    must provide for a net increase in staffing on a sustained yearly basis
    and not take a ``one time approach.''
        Although this would require a substantial financial commitment, the
    potential for increasing revenues, enhancing compliance and shrinking
    the tax gap makes it very sound budget policy. One option for funding a
    new staffing initiative would be to allow the IRS to hire personnel
    off-budget, or outside of the ordinary budget process. This is not
    unprecedented. In fact, Congress took exactly the same approach to
    funding in 1994 when Congress provided funding for the Administration's
    IRS Tax Compliance Initiative which sought the addition of 5,000
    compliance positions for the IRS. The initiative was expected to
    generate in excess of $9 billion in new revenue over five years while
    spending only about $2 billion during the same period. Because of the
    initiative's potential to dramatically increase federal revenue,
    spending for the positions was not considered in calculating
    appropriations that must come within annual caps.
        A second option for providing funding to hire additional IRS
    personnel outside the ordinary budget process could be to allow IRS to
    retain a small portion of the revenue it collects. The statute that
    gives the IRS the authority to use private collection companies to
    collect taxes allows 25 percent of collected revenue to be returned to
    the companies as payment, thereby circumventing the appropriations
    process altogether. Clearly, there is nothing magical about revenues
    collected by private collection companies. If those revenues can be
    dedicated directly to contract payments, there is no reason some small
    portion of other revenues collected by the IRS could not be dedicated
    to funding additional staff positions to strengthen enforcement.
        While NTEU agrees with IRS' stated goal of enhancing tax compliance
    and enforcement, we don't agree with the approach of sacrificing
    taxpayer service in order to pay for additional compliance efforts.
    That is why we were disappointed to see that the President's proposed
    budget calls for the elimination of 527 taxpayer services positions.
    NTEU believes providing quality services to taxpayers is an important
    part of any overall strategy to improve compliance and that reducing
    the number of employees dedicated to assisting taxpayers meet their
    obligations will only those efforts. The Administration's own budget
    proposal for 2008 notes that in fiscal year 2006, IRS' customer
    assistance centers answered almost 33 million assistor telephone calls
    and met the 82 percent level of service goal, with an accuracy rate of
    91 percent for tax law questions. In addition, a recent study
    commissioned by the Oversight Board found that more than 80 percent of
    taxpayers contacted said that IRS service was better than or equal to
    service from other government agencies. And while these numbers show
    that IRS taxpayer services are being effective, more can and should be
    done.
        Mr. Chairman, in order to continue to make improvements in taxpayer
    services while simultaneously processing a growing number of tax
    returns and stabilizing collections and examinations of cases, it is
    imperative to reverse the severe cuts in IRS staffing levels and begin
    providing adequate resources to meet these challenges. With the future
    workload expected to continue to rise, the IRS will be under a great
    deal of pressure to improve customer service standards while
    simultaneously enforcing the nation's tax laws. NTEU strongly believes
    that providing additional staffing resources would permit IRS to meet
    the rising workload level, stabilize and strengthen tax compliance and
    customer service programs and allow the Service to address the tax gap
    in a serious and meaningful way.
                                span of control
        And while it is imperative that Congress provide the IRS with
    sufficient staffing resources, we also believe that the IRS should look
    at the management to bargaining unit employee ratio to find additional
    resources for increased frontline tax compliance efforts. As noted
    previously, while the number of employees at the IRS has decreased by
    almost 20,000 since 1995, the number of managers who supervise these
    employees has increased over this same period. If we just look at the
    period between 2000 and 2005, we see that the number of bargaining unit
    employees, the frontline employees who do the work, decreased by 4,756,
    a decrease of 5.1 percent. During that same time, the number of
    managers and management officials increased by 170, an increase of 1
    percent. If the IRS decreased the number of managers and management
    officials at the same rate as it decreased its rank and file employees
    during that period, there would be 5.1 percent fewer managers and
    management officials or a savings of 808 Full time Equivalents (FTE's)
    that could be saved and redirected to the frontlines. While the IRS has
    previously cited concerns about the number of employees that would have
    to be taken offline to train additional frontline employees, we believe
    this training could be done with minimal disruption to current
    operations. One possibility would be to use the increasing number of
    managers and management officials to do the training. This would ensure
    that these employees are afforded the best possible training while
    allowing current operations to continue to run efficiently.
                             private tax collection
        Mr. Chairman, as stated previously, if provided the necessary
    resources, IRS employees have the expertise and knowledge to ensure
    taxpayers are complying with their tax obligations. That is why NTEU
    continues to strongly oppose the Administration's private tax
    collection program, which began in September of last year. Under the
    program, the IRS is permitted to hire private sector tax collectors to
    collect delinquent tax debt from taxpayers and pay them a bounty of up
    to 25 percent of the money they collect. NTEU believes this misguided
    proposal is a waste of taxpayer's dollars, invites overly aggressive
    collection techniques, jeopardizes the financial privacy of American
    taxpayers and may ultimately serve to undermine efforts to close the
    tax gap.
        NTEU strongly believes the collection of taxes is an inherently
    governmental function that should be restricted to properly trained and
    proficient IRS personnel. When supported with the tools and resources
    they need to do their jobs, there is no one who is more reliable and
    who can do the work of the IRS better than IRS employees.
        As you may know, under current contracts, private collection firms
    are eligible to retain 21 percent to 24 percent of what they collect,
    depending on the size of the case. In testimony before Congress, former
    IRS Commissioner Mark Everson repeatedly acknowledged that using
    private collection companies to collect federal taxes will be more
    expensive than having the IRS do the work itself. The Commissioner's
    admission directly contradicts one the Administration's central
    justifications for using private collection agencies--that the use of
    private collectors is cost efficient and effective.
        In addition to being fiscally unsound, the idea of allowing private
    collection agencies to collect tax debt on a commission basis also
    flies in the face of the tenets of the IRS Restructuring and Reform Act
    of 1998. Section 1204 of the law specifically prevents employees or
    supervisors at the IRS from being evaluated on the amount of
    collections they bring in. But now, the IRS has agreed to pay private
    collection agencies out of their tax collection proceeds, which will
    clearly encourage overly aggressive tax collection techniques, the
    exact dynamic the 1998 law sought to avoid. Furthermore, the IRS is
    turning over tax collection responsibilities to an industry that has a
    long record of abuse. For example, in 2006, consumer complaints about
    third-party debt collectors increased both in absolute terms and as a
    percentage of all complaints that consumers filed with the Federal
    Trade Commission (FTC). Last year the FTC received 69,204 consumer
    complaints about debt collection agencies--giving debt collectors the
    impressive title of the FTC's most complained about industry.
        NTEU believes that a better option would be to provide the IRS with
    the resources and staffing it needs. There is no doubt that IRS
    employees are--by far--the most reliable, cost-effective means for
    collecting federal income taxes. As noted previously, the former IRS
    Commissioner himself has admitted that using IRS employees to collect
    unpaid tax debts is more efficient than using private collectors. In
    addition, the 2002 budget report submitted to the IRS Oversight Board,
    former Commissioner Charles Rossotti made clear that with more
    resources to increase IRS staffing, the IRS would be able to close the
    compliance gap.
        This is not the first time the IRS has tried this flawed program.
    Two pilot projects were authorized by Congress to test private
    collection of tax debt for 1996 and 1997. The 1996 pilot was so
    unsuccessful it was cancelled after 12 months, despite the fact it was
    authorized and scheduled to operate for two years. A subsequent review
    by the IRS Office of Inspector General found that contractors
    participating in the pilot programs regularly violated the Fair Debt
    Collection Practices Act, did not adequately protect the security of
    personal taxpayer information, and even failed to bring in a net
    increase in revenue. In fact, a 1997 GAO report found that private
    companies did not bring in anywhere near the dollars projected, and the
    pilot caused a $17 million net loss.
        Despite IRS assurances that it has learned from its past mistakes,
    two recent reports indicate otherwise. A March 2004 report by the
    Treasury Inspector General for Tax Administration raised a number of
    questions about IRS' contract administration and oversight of
    contractors. The report found that ``a contractor's employees committed
    numerous security violations that placed IRS equipment and taxpayer
    data at risk'' and in some cases, ``contractors blatantly circumvented
    IRS policies and procedures even when security personnel identified
    inappropriate practices.'' (TIGTA Audit #200320010). The proliferation
    of security breaches at a number of government agencies that put
    personal information at risk further argue against this proposal. These
    security breaches illustrate not only the risks associated with
    collecting and disseminating large amounts of electronic personal
    information, but the risk of harm or injury to consumers from identity
    theft crimes.
        In addition, a September 2006 examination of the IRS private
    collection program by the Government Accountability Office (GAO)
    reveals that like the 1996 pilot, the program may actually lose money
    by the scheduled conclusion of the program's initial phase in December
    2007. The report cited preliminary IRS data showing that the agency
    expects to collect as little as $56 million through the end of 2007,
    while initial program costs are expected to surpass $61 million. What's
    more, the projected costs do not even include the 21-24 percent
    commission fees paid to the collection agencies directly from the taxes
    they collect.
        In addition to the direct costs of the program, I am greatly
    concerned about the potential negative effect that the private tax
    collection program will have on our tax administration system. In her
    recent report to Congress, the National Taxpayer Advocate voiced
    similar concern about the unintended consequences of privatizing tax
    collection. Olson cited a number of ``hidden costs'' that private tax
    collection has on the tax system including reduced transparency of IRS
    tax collection operations, inconsistent treatment for similarly
    situated taxpayers, and reduced tax compliance. Clearly the negative
    effects of contracting out tax collection to private collectors hampers
    the agency's ability to improve taxpayer compliance and will only serve
    to undermine future efforts to close the tax gap.
        NTEU is not alone in its opposition to the IRS' plan. Similar
    proposals allowing private collection agencies to collect taxes on a
    commission basis have been around for a long time and have consistently
    been opposed by both parties. In fact, the Reagan Administration
    strongly opposed the concept of privatizing tax collections warning of
    a considerable adverse public reaction to such a plan, and emphasizing
    the importance of not compromising the integrity of the tax system.
    (Treasury Dept. Statement to House Judiciary Comm. 8/8/86). More
    recently, opposition to the private tax collection program has been
    voiced by a growing number of members of Congress, major public
    interest groups, tax experts, as well as the Taxpayer Advocacy Panel, a
    volunteer federal advisory group--whose members are appointed by the
    IRS and the Treasury Department. In addition, the National Taxpayer
    Advocate, an independent official within the IRS recently identified
    the IRS private tax collection initiative as one of the most serious
    problems facing taxpayers and called on Congress to immediately repeal
    the IRS' authority to outsource tax collection work to private debt
    collectors (National Taxpayer Advocate 2006 Report to Congress).
        Instead of rushing to privatize tax collection functions which
    jeopardizes taxpayer information, reduces potential revenue for the
    federal government and undermine efforts to close the tax gap, the IRS
    should increase compliance staffing levels at the IRS to ensure that
    the collection of taxes is restricted to properly trained and
    proficient IRS personnel.
        irs audits of high-income individuals and large businesses and
                                  corporations
        Mr. Chairman, the final issue that I would like to discuss is IRS
    enforcement efforts with regard to high-income individuals and large
    businesses and corporations. I previously noted the drastic staff
    reductions in the estate and gift tax division that occurred last year
    and will obviously hamper the Service's ability to achieve greater
    compliance from the wealthiest Americans. In addition, recent IRS data
    shows that IRS audits of high-income individuals have dropped
    dramatically over the past decade. The audit rate for face-to-face
    audits fell from 2.9 percent of high-income tax filers in fiscal year
    1992 to 0.38 percent in fiscal year 2001 and then drifted down to 0.35
    percent in fiscal year 2004. While the audit rate has rebounded
    somewhat in the last two years, it is still far below the level of the
    mid-1990's. These facts seem to directly contradict claims by the IRS
    that the Service's first enforcement priority is to discourage and
    deter non-compliance, with an emphasis on high-income individuals.
        We are seeing similar troubling trends with respect to large
    corporations. While this issue has just started receiving public
    attention in recent weeks, it has long been of concern to IRS employees
    that believe recent IRS currency and cycle time initiatives are
    resulting in the premature closing of audits of large companies,
    possibly leaving hundreds of millions of dollars of taxes owed on the
    table. IRS data shows the thoroughness of IRS enforcement efforts for
    the nation's largest corporations--measured by the number of hours
    devoted to each audit--has substantially declined since fiscal year
    2002. IRS data also show that the annual audit rates for these
    corporations, all with assets of $250 million or more, while increasing
    in fiscal year 2004 and 2005, receded in 2006 to about the level it was
    in 2002 and is much lower than levels that prevailed a decade or more
    ago.
        Although the number of the largest corporations is small, they are
    a very significant presence in the American economy. In fiscal year
    2002, the largest corporations were responsible for almost 75 percent
    of all additional taxes the IRS auditors said were owed the government.
    By comparison, low and middle income taxpayers in the same year were
    responsible for less than 10 percent of the total.
        Agency data shows that audit attention given those corporations
    with $250 million or more in assets has substantially declined in the
    last five years. In 2002, an average of 1,210 hours were devoted to
    each of the audits of the corporations in this category. The time
    devoted to each audit dropped sharply in 2004 and by 2006 the number of
    hours per audit remained 20 percent below what it was in 2002.
        But what may be most disturbing is that according to IRS' own data,
    while the coverage rate of large corporation returns (identified as
    those with assets of $10 million and higher) increased in fiscal year
    2004 and 2005, the number of audits for these corporations actually
    decreased in 2006. Clearly, the rationale the IRS is using to justify a
    reduction in time and scope of large corporation audits, that is, to
    allow for expanding the total number of companies audited is not
    working.
        IRS officials have continued to point to a rise in additional tax
    recommended for each hour of audit as a sign that the policy is
    working, but most auditors know that this rise can be primarily
    attributed to the proliferation of illegal tax shelters which makes it
    easier to find additional taxes due.
        Warnings about the potential negative consequences of such policy
    decisions were made by a number of IRS employees in a recent New York
    Times article and are not new. In fact, when the IRS first began
    limiting the time and scope of business audits through implementation
    of the Limited Issue Focused Examination (LIFE) process in 2002, the
    former chief counsel of the IRS said that the IRS' proposed reductions
    in cycle time of corporate audits would ``virtually guarantee that IRS
    auditors would miss tax dodges, fail to explore suspicious
    transactions, or even walk away from audits that are on the verge of
    finding wrongdoing.''
        In addition, IRS employees have raised concerns about this shift in
    approach to the auditing of business tax returns since its
    implementation several years ago. Their concerns are multi-fold.
    Primarily, employees' feel that their experience and professional
    judgment is being ignored when the scope of audits is limited and cycle
    times are reduced. Revenue agents need flexibility to determine the
    scope of an audit and need the ability to expand the examination time
    when necessary. The men and women of the IRS that perform these audits
    are highly experienced employees who know which issues to examine and
    when more time is necessary on a case. But under current IRS policies,
    this is just not the case.
        Mr. Chairman, we have heard directly from a number of our members
    about the detrimental effect this policy has had not just on efforts to
    ensure corporations are in full compliance, but also how this misguided
    policy is damaging employee morale. In one instance, an IRS agent with
    29 years of experience, including 19 as an international specialist
    examining tax returns of large, multinational corporations was given an
    unreasonably short period of time to examine three tax years of a very
    large company. The agent reported being constantly harassed for
    refusing to further limit the scope of the examination beyond that
    which was set at the beginning of the audit, even though he had
    successfully completed two prior examinations of the same taxpayer in a
    timely manner. The employee knew the issues and how to examine them but
    also knew they would need more than the allotted time to complete his
    part of the examination. But, despite past successes, management
    refused to provide the employee with additional time to complete his
    portion of the audit and labeled the employee as uncooperative and not
    a ``team player.'' Although the employee refused to compromise, he
    believed that other members of the examination team had been pressured
    into dropping issues which likely would have resulted in additional
    tax.
        Mr. Chairman, in the face of a rising tax gap and exploding federal
    deficits, it is imperative that the agency is provided with the
    necessary resources to allow IRS professionals to pursue each and every
    dollar of the taxes owed by large businesses and corporations. Allowing
    these corporations to pay just a fraction of what they owe in taxes
    greatly hinders efforts to close the tax gap and is fundamentally
    unfair to the millions of ordinary taxpayers that dutifully pay their
    taxes. Only by increasing the overall number of IRS employees that do
    this work can the Service ensure that businesses and large corporations
    are complying with their tax obligations and that the tax gap is being
    closed.
                                   conclusion
        It is an indisputable fact that the IRS workforce is getting mixed
    signals regarding its value to the mission of the Service and the level
    of workforce investment the Service is willing to make. NTEU believes
    that the drastic reductions of some of the IRS's most productive
    employees, reliance on outside contractors to handle inherently
    governmental activities such as the collection of taxes, and a shift in
    philosophy which focuses enforcement efforts too much on wage earners
    and not enough on high-income individuals and large businesses and
    corporations, only serve to undermine the agency's ability to fulfill
    its tax enforcement mission and hamper efforts to close the tax gap.

                              SUBCOMMITTEE RECESS

        Senator Durbin. The subcommittee stands recessed.
        [Whereupon, at 4:17 p.m., Wednesday, May 9, the
    subcommittee was recessed, to reconvene subject to the call of
    the Chair.]

      FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL
                                   YEAR 2008

                                  ----------

                            WEDNESDAY, MAY 16, 2007

                                           U.S. Senate,
               Subcommittee of the Committee on Appropriations,
                                                        Washington, DC.
        The subcommittee met at 3:07 p.m., in room SD-192, Dirksen
    Senate Office Building, Hon. Richard J. Durbin (chairman)
    presiding.
        Present: Senators Durbin, Brownback, and Allard.

                       SECURITIES AND EXCHANGE COMMISSION

    STATEMENT OF HON. CHRISTOPHER COX, CHAIRMAN

                     STATEMENT OF SENATOR RICHARD J. DURBIN

        Senator Durbin. Good afternoon. This hearing will come to
    order.
        I am pleased to convene this session before the Financial
    Services and General Government Appropriations Subcommittee.
    Our focus today is on the President's fiscal year 2008 budget
    request for the Securities and Exchange Commission (SEC). In
    previous years funding for this agency was provided through the
    Commerce, Justice, and State, the Judiciary Subcommittee. It
    now has a new home in the Senate Financial Services
    Subcommittee.
        I welcome my colleague Senator Allard who has joined me and
    others who may arrive. Appearing before the subcommittee this
    afternoon is the Chairman of the SEC, the Honorable Chris Cox.
    Welcome, Chairman Cox. Glad to have you here, my former
    colleague from the House.
        The mission of the SEC is to administer and enforce Federal
    securities laws, to protect investors, and maintain fair,
    honest, and efficient markets. This includes ensuring full
    disclosure of financial information, regulating the Nation's
    security markets, and preventing and policing fraud and
    malpractice in the securities and financial markets.
        The administration's budget proposal for fiscal year 2008
    seeks $905.3 million for the SEC. This is a 2.7-percent
    increase, $23.7 million over the fiscal year 2007 spending
    level. The $905.3 million includes $30.3 million in carryover
    balances.
        It is interesting and important to note that the entire
    amount of the SEC budget authority is derived from the
    collection of fees, fees that are collected and deposited in
    special offset accounts, available to appropriators, not to the
    Treasury's general fund. As a result of these fee collections,
    no direct appropriations are used to fund the SEC.
        The proposed funding level of $905.3 million is similarly
    structured: $648.5 million designated for enforcement, $59.4
    million for regulatory function, $126 million directed to
    disclosure reviews and investor education, and $71.4 million
    for operations.
        I would like to invite my colleague Senator Allard, if he
    would like, to make an opening remark at this point.

                       STATEMENT OF SENATOR WAYNE ALLARD

        Senator Allard. Mr. Chairman, thank you. I would like to
    make a brief remark if I might. I want to thank you for holding
    this hearing.
        Currently the securities and financial markets of the
    United States are thriving and investors are enjoying the
    longest bull run in over 80 years. The Dow Jones Industrial
    Average has recorded 22 record closes since the start of the
    year and the S&P 500 is 24 points below its record close it set
    in March 2000. The Dow is no longer showing lingering effects
    of the 416-point drop it suffered on February 27 and the U.S.
    economy is continuing to expand and is adding jobs.
        With more than one-half of American families investing in
    the securities market, it is vital to our Nation's economic
    health that we enjoy fairness, integrity, and efficiency in the
    marketplace.
        I would like to take this time to welcome my good friend
    and former colleague, Chairman Cox, whose responsibility it is
    to uphold the SEC's mission to protect investors, maintain
    fair, orderly, and efficient markets, and facilitate capital
    formation. I am used to seeing Chairman Cox testify before the
    full Senate Banking Committee, but I welcome him here and this
    opportunity to discuss important issues involving the SEC.
        We will be holding a hearing tomorrow, Mr. Chairman, in the
    authorizing committee on the consolidation of the National
    Association of Securities Dealers (NASD) and the New York Stock
    Exchange (NYSE) regulatory functions. I would like to thank
    you, Chairman Cox, for allowing a member of the SEC to testify
    in front of that committee on this matter.
        Again, Mr. Chairman, thank you for holding today's hearing.
    I look forward to hearing Chairman Cox's testimony and working
    with him and the SEC as a member of this subcommittee and as
    the ranking member of the Securities and Insurance and
    Investment Subcommittee.
        Thank you, Mr. Chairman.
        Senator Durbin. Thank you, Senator Allard.
        I want to just join in noting that the stock market has
    been doing very well and I hope there is nothing we will do
    here today that will change that.
        I turn now to Chairman Cox for your presentation. Welcome,
    Mr. Chairman.

                      SUMMARY STATEMENT OF CHRISTOPHER COX

        Mr. Cox. Thank you very much, Chairman Durbin. I know that
    Ranking Member Brownback will perhaps be here soon. Senator
    Allard. It is a pleasure to testify before you today. Thank you
    for giving me this opportunity to engage in some sharing of
    information about our budget request for fiscal 2008.
        Before I begin, I would like to congratulate you, Mr.
    Chairman, on assuming this new role. I am very, very pleased
    and looking forward to working with you.
        As you know, we are requesting $905.3 million for the SEC
    in 2008, and that represents an increase, as you noted, Mr.
    Chairman, over fiscal year 2007 that will allow the SEC to
    continue the important initiatives underway to protect and
    inform investors. These initiatives all have in common that
    they are aimed at benefiting the average retail customer, whose
    savings are dependent on healthy and well-functioning markets.
        Since I became Chairman I have worked to reinvigorate the
    agency's focus on the ordinary investor. This is the SEC's
    traditional responsibility. Back in Joe Kennedy's day, our
    first SEC Chairman could marvel that 1 in 10 Americans owned
    stocks. Today one-half of Americans own securities, and the
    median income for shareholders is a very middle class $65,000.
        When you then consider all the teachers, the Government
    employees, and the workers in other industries who have
    pensions, it becomes clear that nearly all taxpayers have a
    personal interest in fair and honest securities markets. In
    fact, when one considers the staggering growth in Americans'
    participation in the market, the enormity of the SEC's task
    becomes apparent. About 3,600 staff at the SEC are responsible
    for overseeing over 10,000 public companies, investment
    advisers that manage over $32 trillion in assets, nearly 1,000
    fund complexes, 6,000 broker-dealers with 172,000 branches, and
    the $44 trillion worth of trading conducted each year on
    America's stock and options exchanges.
        These daunting numbers make it clear that, even if the SEC
    budget were to double or to triple, the agency would have to
    carefully set priorities. That is exactly what we are doing in
    our proposed budget for fiscal 2008.
        Our risk-based and flexible approach to our examination
    program is permitting us to focus the agency's energies on the
    particular marketplace practices that are most likely to be
    high risk and on the particular investment advisers and mutual
    funds that are most likely to be sources of trouble. It also
    provides the basis for the selection of targets for
    comprehensive exam sweeps on crosscutting issues that could
    present a significant threat to investors, and it drives the
    SEC's enforcement, rulemaking, and disclosure reviews as well.
    In each case, the objective is to apply the taxpayers'
    resources in ways that make the most significant positive
    contribution to investor protection.
        If I may, Mr. Chairman, I would like to point out some of
    the major areas in which the SEC is currently focusing its
    energies. Our most important initiatives begin with our focus
    on fighting fraud against seniors. There are an estimated 75
    million Americans who will turn 60 over the next 20 years, and
    they are going to live longer than any generation before them.
    As the baby boomers turn 60, that is 10,000 of them every day
    for the next 20 years, they will need to continue to actively
    manage their investments for higher yield over their longer
    lifetimes. It was not that way with their parents.
        Rather than switching into low-yield safe investments as
    their parents did, they are going to have to be active managers
    overseeing their returns to provide for a much longer lifetime.
    That is going to have enormous consequences for our capital
    markets.
        Households today led by people over 40 already own 91
    percent of America's net worth; and, as the baby boomers
    retire, very quickly the vast majority of our Nation's net
    worth will be in the hands of our Nation's seniors. So
    following the Willie Sutton principle, scam artists are going
    to swarm like locusts over this increasingly vulnerable group
    because that is where the money is.
        Nearly every day, the SEC receives letters and phone calls
    from seniors and their caregivers who have been targeted by
    fraudsters. That is why the SEC has focused its energies in
    this area and why we have organized our fellow regulators and
    law enforcement officials at the first-ever national senior
    summit, here in Washington last July. This year's summit, the
    second annual, will integrate even more of our national
    resources, and it will take place in just a few months with our
    partners.
        We have developed a strategy to attack the problem from all
    angles. It includes aggressive enforcement, targeted
    examinations, and, very importantly, investor education. Over
    the past year the SEC's Division of Enforcement has brought 26
    enforcement actions specifically aimed at protecting elderly
    investors. Many of those were coordinated with State
    authorities.
        For example, the Commission coordinated with law
    enforcement authorities in California to crack down on a $145
    million Ponzi scheme that lured elderly victims, elderly would-
    be investors, into workshops with the promise of free food and
    then bilked them out of their retirement money by purporting to
    sell them safe guaranteed notes. In another case we filed an
    emergency action to halt an ongoing securities fraud that
    targeted individuals' retirement funds.
        By focusing on free lunch seminars and dozens of other
    techniques that would-be fraudsters aim at seniors, the Federal
    Government is serving notice that there will be a special place
    in hell reserved for those who prey on the life savings of
    older Americans.
        Another important focus for the Commission is a program I
    know that is of significant interest to you, Mr. Chairman, and
    that is the agency's Office of Global Security Risk. As you
    know, this office, which is located in the Division of
    Corporation Finance, is responsible for monitoring companies'
    disclosures regarding their contacts with countries that have
    been identified by the State Department as State sponsors of
    terrorism and for coordinating with other Federal Government
    agencies to ensure the sharing of information that is relevant
    to that assessment.
        The office reviews Securities Act registration statements
    and Exchange Act filings whenever it appears that a company may
    have material contacts with countries that raise global
    security concerns, and it requires enhanced disclosure where
    appropriate.
        In the past year, the office issued comments to
    approximately 212 companies. The office conducts reviews both
    independently and in concert with the rest of the division's
    disclosure review staff. In reviewing companies' disclosures,
    the office draws upon a variety of data sources. It also
    coordinates with the Treasury's Office of Foreign Assets
    Control and Commerce's Bureau of Industry and Security.
        I appreciate the leadership of this subcommittee in
    ensuring that investors have the relevant information that they
    need to make informed investment decisions regarding the
    foreign activities of companies that they own, and I am
    confident that the Office of Global Security Risk is well
    positioned to continue fulfilling these vitally important
    responsibilities.
        Another priority for the Commission is ensuring that the
    money that is recovered in SEC settlements and court cases is
    distributed as quickly as possible to injured investors. The
    Sarbanes-Oxley Act in 2002 gave the SEC this new ``fair funds''
    authority. Since then we have begun to develop a very
    considerable expertise in this area. When I became Chairman in
    2005, the SEC had completed the process of disbursing funds to
    investors in only a few cases. Since then we have returned over
    $1.7 billion in penalties and disgorgements to injured
    investors in significant cases, including WorldCom, Global
    Analysts Research, New York Stock Exchange Specialists,
    Hartford, and Bristol-Myers-Squibb.
        In addition, several large disbursements are pending and
    will be announced very shortly.
        To completely fulfill the vision that Congress wrote into
    Sarbanes-Oxley, however, will require a sustained effort to
    train professionals in this area. That is why I have ordered
    the creation of a new office that will work full time to return
    these funds to investors. The efforts of this new office will
    be aided by a new information system called Phoenix, that will
    more accurately track, collect, and distribute the billions of
    dollars in penalties and disgorgements that flow from our
    enforcement work. The efficiency of a dedicated tracking system
    will remove what has been a major hindrance in our efforts to
    quickly distribute fair funds.
        Another major initiative I want to bring to your attention
    holds great potential for investors. It is called interactive
    data. By using interactive data, we can give investors far more
    information in a far more useful form than anything they have
    ever gotten from the SEC before. In the very near future,
    investors will be able to easily search through and make sense
    of the mountains of financial data contained in current company
    disclosures.
        We are going to convert the SEC's current online system,
    called EDGAR (electronic data gathering analysis and retrieval
    system), from what is really now just a vast electronic filing
    cabinet into something that is truly interactive, a tool that
    lets an investor, an analyst, anyone, manage all of that
    information in ways that are truly useful to them. With a few
    clicks of the mouse, investors will be able to find, for
    example, the mutual funds with the lowest expense ratios, the
    companies within a particular industry that have the highest
    net income, or the overall trend in their favorite company's
    earnings.
        To take advantage of the capabilities of interactive data,
    the SEC is modernizing the entire EDGAR system; and, as part of
    this effort, the very new and different EDGAR will be renamed
    later in 2007. It came as a bit of a shock to viewers of the
    hit TV show ``24'' when Edgar bit the dust and it may take a
    while for people to get used to the new, improved EDGAR with a
    new name, but the effort will be supremely worthwhile.
        In all, the Commission is investing $54 million over
    several years to build the infrastructure to support widespread
    adoption of interactive data.
        Finally, I want to discuss a significant new responsibility
    that the SEC is undertaking this year to oversee credit rating
    agencies. As you know, in 2006 the Congress gave the SEC this
    new responsibility and new authority to register and inspect
    the Nation's credit rating agencies, including industry giants
    Standard and Poor's, Moody's, Fitch Ratings, and A.M. Best, as
    well as several other large, medium, and smaller current and
    potential industry participants.
        Because of congressional concern that the industry faces
    potential conflicts of interest, imposes barriers to entry for
    new rating agencies, and has failed to warn the market of such
    significant impending financial failures as Enron and WorldCom,
    even immediately before their collapse, the SEC is tasked with
    devoting significant manpower and resources to this area. Under
    the new law and the SEC's proposed implementing rules, credit
    rating agencies will be required to register with the
    Commission. In addition, they will be required to submit to
    periodic inspections to ensure that they are implementing
    policies to mitigate conflicts of interest, prevent leaks of
    material nonpublic information, and to refrain from coercive or
    unfair practices.
        The SEC takes this new responsibility very seriously. We
    remain committed to finalizing the new rules before the
    statutory deadline, and we are assembling a team of staff to
    oversee the program and begin conducting inspections over the
    next several months.
        So with that background, Mr. Chairman, that brings us to
    our requested budget increase for fiscal 2008. That level will
    permit us to continue our ongoing hiring to reach a level of
    approximately 3,600 full-time staff. This level of personnel
    strength, which as you know is 21 percent higher than in 2001,
    will permit the agency to vigorously pursue its mission and
    maintain strong regulatory, enforcement, examination, and
    disclosure review functions. It will also allow the SEC to
    continue our commitment to information technology.
        In addition to the SEC's interactive data initiative, the
    SEC is deploying new systems to better manage enforcement and
    examination programs. We are using new techniques and new
    technology to help make our existing staff more productive.
    There is absolutely no question that these technology
    improvements will make the SEC more productive and give
    investors and taxpayers more value for the money.
        Over the last 2 years, the SEC has made tremendous progress
    in improving its operations. This fiscal 2008 request will
    permit us to continue improving the agency's internal financial
    controls. The SEC has poured tremendous energy into this area
    since I have been Chairman. As you know, a few years before I
    joined the SEC, the agency began to publish audited financial
    statements. I am pleased to report that for the first time in
    its history the SEC last year received a clean opinion of its
    audited financial statements for 2006, with no material
    weaknesses in internal controls. That is vitally important, Mr.
    Chairman, because the SEC must set an example not only for
    other Federal agencies, but also for the many public companies
    whose financial statements and disclosures we review.
        For this reason, we plan to continue upgrading the agency's
    financial system and to beef up security over our information
    security.
        The largest single application of our requested budget
    increase will be to fund pay raises for SEC staff that will
    average between 5 percent and 6 percent next year. These
    healthy increases are in accordance with the SEC's pay parity
    authority and our collective bargaining agreement. I should
    point out, Mr. Chairman, the fact that cost-of-living
    adjustments, career ladder promotions, and merit pay increases
    that are essentially built into our system amount to between 5
    and 6 percent each year. That is a challenge for the SEC and
    for this subcommittee because two-thirds of our budget is
    personnel; and, if two-thirds of our budget is growing each
    year automatically by as much as 6 percent, then the agency's
    total budget has to increase by 4 percent just to maintain
    personnel at a steady state from year to year.
        The final and most important reason that the SEC needs the
    budget increase that we are requesting is to provide the tools
    that we need to address emerging risks in the Nation's capital
    markets, including not just known areas of concern, such as
    hedge fund insider trading, the safety and security of 401(k)
    plans, and fraud in the municipal securities market, but also
    threats to market integrity and investor confidence that have
    yet to emerge.

                               PREPARED STATEMENT

        So I appreciate, Mr. Chairman, the opportunity to discuss
    with you the SEC appropriation for fiscal 2008. I look forward
    to working with the subcommittee on the best ways to meet the
    needs of our Nation's investors. I would be happy to take your
    questions.
        Senator Durbin. Thank you very much, Chairman Cox.
        [The statement follows:]
                     Prepared Statement of Christopher Cox
        Chairman Durbin, Ranking Member Brownback, and Members of the
    Subcommittee: Thank you for the opportunity to testify today about the
    Securities and Exchange Commission's budget request for fiscal year
    2008.
        Before I begin, I would like to congratulate you, Mr. Chairman, on
    your new role as head of this subcommittee. I look forward to working
    with you and all the members of this subcommittee for the benefit of
    the nation's investors.
        As you know, the President's budget requests $905.3 million for the
    SEC in 2008. I fully support this request for increased funding over
    fiscal year 2007, which will allow the SEC to continue the important
    initiatives underway to protect and assist the average investor.
        These initiatives all have in common that they are aimed at
    benefiting the average retail customer whose savings are dependent on
    healthy, well-functioning markets. Since I became Chairman, I have
    worked to reinvigorate the agency's focus on the ordinary investor.
    This is the SEC's traditional responsibility. Back in Joseph Kennedy's
    day, our first SEC Chairman was amazed that ``one person in every ten''
    owned stocks. But today, more than half of all households own
    securities, and the median income for shareholders is a very middle-
    class $65,000. When you then consider all of the teachers, government
    employees, and workers in other industries who have pensions, it
    becomes clear that nearly all taxpayers have a personal interest in
    fair and honest securities markets.
        In fact, when one considers the staggering growth in Americans'
    participation in the markets, the enormity of the SEC's task becomes
    apparent. About 3,600 staff at the SEC are responsible for overseeing
    more than 10,000 publicly traded companies, investment advisers that
    manage more than $32 trillion in assets, nearly 1,000 fund complexes,
    6,000 broker-dealers with 172,000 branches, and the $44 trillion worth
    of trading conducted each year on America's stock and options
    exchanges.
        These daunting numbers make it clear that, even if the SEC budget
    were to double or triple, the agency would have to carefully set
    priorities. That is exactly what we are doing in this proposed budget
    for fiscal year 2008. We must continue to think strategically about
    which areas of the market pose the greatest risk, and which areas of
    potential improvement hold the greatest benefit for investors. And
    given the fast changing conditions in America's and the world's capital
    markets, we must remain agile and flexible enough to redirect our
    resources with little notice.
        This risk-based and flexible approach guides the SEC's examination
    program as we focus the agency's energies on those practices in the
    marketplace, and those investment advisers and mutual funds, that are
    most likely to be high-risk. It also provides the basis for the
    selection of targets for comprehensive examination sweeps on cross-
    cutting issues that could present a significant threat to investors.
    And it drives the SEC's enforcement, rulemaking, and disclosure review
    functions as well. In each case, the objective is to apply the
    taxpayer's resources in ways that provide the biggest investor
    protection bang for the buck.
        In recent years, the SEC has professionalized the culture of risk
    assessment that informs so many of our programs throughout the SEC.
    From relatively modest beginnings as a discrete office within the SEC
    established by my predecessor, William Donaldson, the risk assessment
    function is now wholeheartedly embraced in every major functional
    division and office of the agency.
        If I may, Mr. Chairman, I would now like to discuss some of the
    major areas in which the SEC is currently focusing its energies, in
    order to provide the maximum benefit to America's retail investors.
                         fighting fraud against seniors
        As you know, an estimated 75 million Americans will turn 60 over
    the next 20 years. And they will live longer than any generation before
    them. As the Baby Boomers turn 60--more than 10,000 of them every day
    for the next 20 years--they will need to continue to actively manage
    their investments for higher yield over their longer lifetimes, rather
    than switching into low-yield, safe investments as their parents did.
    This will have enormous consequences for our capital markets.
    Households led by people aged 40 or over already own 91 percent of
    America's net worth. The impending retirement of the baby boomers will
    mean that, very soon, the vast majority of our nation's net worth will
    be in the hands of our nation's seniors.
        Following the Willie Sutton principle, scam artists will swarm like
    locusts over this increasingly vulnerable group--because that is where
    the money is. And it is already occurring. Nearly every day, our agency
    receives letters and phone calls from seniors and their caregivers who
    have been targeted by fraudsters.
        That is why the SEC has focused its energies in this area, and why
    we organized our fellow regulators and law enforcement officials at the
    first-ever Seniors Summit in July 2006. This year's Seniors Summit,
    which will integrate even more of our national resources, will take
    place in just a few months. With our partners, the SEC has developed a
    strategy to attack the problem from all angles--from aggressive
    enforcement efforts, to targeted examinations, to investor education.
        Fighting fraud against seniors means taking aggressive action. Over
    the past year, the SEC's Division of Enforcement has brought 26
    enforcement actions aimed specifically at protecting elderly investors.
    Many of these were coordinated with state authorities.
        For example, the Commission coordinated with law enforcement
    authorities in California to crack down on a $145 million Ponzi scheme
    that lured elderly victims to investor workshops with the promise of
    free food--and then bilked them out of their retirement money by
    purporting to sell them safe, guaranteed notes.
        In another case, we filed an emergency action to halt an ongoing
    securities fraud that targeted individuals' retirement funds. At
    ``free'' dinner and retirement planning seminars, seniors were urged to
    invest their savings in non-existent businesses with promises of
    alluringly high rates of return.
        By bringing cases like these, and dozens more like them, the
    federal government is putting would-be fraudsters on notice that they
    will be caught and punished if they prey upon seniors.
        SEC examiners are also working closely with state regulators across
    the country to stop abusive practices before seniors are actually
    injured. With our state partners, we're sharing regulatory intelligence
    about abusive sales tactics targeting seniors, and conducting focused
    examinations of any firms whose practices raise red flags.
        For example, in Florida we initiated an examination sweep of firms
    selling investments to seniors, in cooperation with the State of
    Florida and the National Association of Securities Dealers. We
    subsequently expanded the sweep to include other states with large
    retiree populations--including California, Texas, North Carolina,
    Alabama, South Carolina, and Arizona. Working together with state
    securities regulators in those states, the NASD, and the NYSE, our goal
    is to see to it that the sales people at ``free lunch'' seminars are
    properly supervised by their firms, and that the seminars are not used
    as a vehicle to sell unsuitable investment products to seniors.
        Another tool in fighting securities fraud against seniors is
    education. These efforts are aimed not only at seniors, but also their
    caregivers--as well as pre-retirement workers, who are encouraged to
    plan for contingencies in later life. The SEC is expanding our efforts
    to reach out to community organizations, and to enlist their help in
    educating Americans about investment fraud and abuse that is aimed at
    seniors. We have also devoted a portion of the SEC website specifically
    to senior citizens (http://www.sec.gov/investor/seniors.shtml). The
    site provides links to critical information on investments that are
    commonly marketed to seniors, and detailed warnings about common scam
    tactics.
                              global security risk
        Another important area of focus for the Commission is a program of
    significant interest to you and other members of this subcommittee--the
    agency's Office of Global Security Risk. As you know, this office,
    which is located within the Division of Corporation Finance, is
    responsible for monitoring companies' disclosures regarding their
    contacts with countries that have been identified by the State
    Department as state sponsors of terrorism and coordinating with other
    federal government agencies to ensure the sharing of relevant
    information.
        The Office reviews Securities Act registration statements and
    Exchange Act filings whenever it appears that a company may have
    material contacts with countries that raise global security concerns,
    and pursues enhanced disclosure where appropriate. In the past year,
    the Office issued comments to approximately 212 companies. The Office
    conducts reviews both independently and in concert with the rest of the
    Division's disclosure review staff.
        In reviewing companies' disclosures, the Office draws upon a
    variety of data sources. The staff considers the information in a
    company's filings and information available from other sources. In
    addition, the Office continues to coordinate with other relevant
    federal agencies, such as Treasury's Office of Foreign Assets Control
    and Commerce's Bureau of Industry and Security.
        I fully support the goals of this office and believe its efforts
    are increasing the quality of information that investors receive
    regarding companies' contacts with countries identified by our
    government as state sponsors of terrorism. I appreciate the leadership
    of this subcommittee in endeavoring to ensure that investors have the
    relevant information they need to make informed investment decisions
    regarding the foreign activities of the companies that they own. And I
    am confident that the Office of Global Security Risk is well positioned
    to continue fulfilling these vitally important responsibilities.
                      returning funds to wronged investors
        We at the SEC work diligently to uncover fraud against investors,
    gather the evidence needed to build a case, and then prosecute cases to
    bring fraudsters to justice. But our efforts do not end at the
    courthouse door. Once we succeed in convincing a court to order a
    penalty, we must ensure that as many of those dollars as possible go
    back into the hands of wronged investors as quickly as possible.
        Since the Sarbanes-Oxley Act created ``Fair Funds,'' through which
    penalties in SEC cases can be returned directly to injured investors,
    the SEC has begun to develop a considerable expertise in using this
    important new authority. At the time I became Chairman in 2005, this
    authority was only three years old, and the SEC had completed the
    process of disbursing funds to investors in only a few cases. Since
    then, we have returned over $1.7 billion to injured investors,
    including significant distributions from cases involving WorldCom,
    Global Analysts Research, New York Stock Exchange Specialists,
    Hartford, and Bristol-Myers Squibb. In addition, several large
    disbursements are pending and will be announced shortly.
        To completely fulfill the vision that Congress wrote into Sarbanes-
    Oxley, however, will require a sustained effort within the Commission
    to train professionals in this area, to develop consistent practices,
    and to routinize the execution of the Fair Funds function. Too much
    money is still undisbursed because of the complexities of the process,
    leaving investors uncompensated.
        That is why I have ordered the creation of a new office that will
    focus the efforts of all of the SEC's offices around the country, and
    work full-time to return these funds to wronged investors. The creation
    of this specialized function within the SEC will ensure that investors'
    money is returned as quickly as possible, while minimizing the costs of
    the distributions.
        The efforts of this new office will be aided by a new information
    system, called Phoenix. The system will more accurately track, collect,
    and distribute the billions of dollars in penalties and disgorgements
    that flow from our enforcement work. The efficiency of a dedicated
    tracking system will remove what had been a major hindrance in our
    efforts to quickly distribute Fair Funds.
        The agency is taking other steps in this area as well. We are
    collaborating with the Bureau of the Public Debt to invest disgorgement
    and penalty funds in interest-bearing accounts. And we are working to
    consolidate funds from related cases into a single distribution, where
    appropriate, to potentially save investors hundreds of thousands of
    dollars.
        The SEC is dedicated to doing the very best job possible for
    investors in handling this responsibility. We know that you in the
    Congress, who entrusted us with this task, expect and deserve no less.
                                interactive data
        Another major initiative I want to bring to your attention holds
    great potential for investors. By using what I call ``interactive
    data,'' we can give investors far more information, in far more useful
    form, than anything they've ever gotten from the SEC before. In the
    very near future, investors will be able to easily search through and
    make sense of the mountains of financial data contained in current
    company disclosures.
        For years, ordinary investors have been stymied by the time and
    effort it takes to separately look up each SEC filing for a single
    company they might own, and then to do that again and again for every
    additional company in which they're interested. Even once the right
    forms are located, wading through all of the legal gobbledygook to find
    the right numbers has been nearly impossible for the average retail
    investor.
        That is because the SEC's online system, know as EDGAR, is really
    just a vast electronic filing cabinet. It can bring up electronic
    copies of millions of pieces of paper on your computer screen, but it
    doesn't allow you to manage all of that information in ways that
    investors commonly need.
        Not surprisingly, financial firms--who can afford it--usually end
    up getting the bulk of their information about companies not from the
    SEC filings, but from middlemen all over the world who re-key the
    information in SEC reports and put it in more useful form. This process
    is expensive and inefficient, and it also creates errors in the data.
    Worse, it feeds the notion that the rich and the highly sophisticated
    have a leg up in today's markets.
        Interactive data will let any investor quickly focus on the
    disclosure they need. With a few clicks of the mouse, investors will be
    able to find, for example, the mutual funds with the lowest expense
    ratios, the companies within an industry that have the highest net
    income, or the overall trend in their favorite companies' earnings. It
    works by giving each piece of information a unique label, written in
    the eXtensible Business Reporting Language (XBRL) computer language.
        The agency has taken a variety of steps to expand the use of
    interactive data. First, the Commission created a voluntary program for
    companies and mutual funds to submit disclosures using XBRL, and
    offered expedited reviews of disclosures if firms agree to share their
    experiences with the agency. More than 35 companies, including some of
    corporate America's biggest names, are already participating in this
    program.
        Second, the SEC is working with outside groups to develop the
    standardized computer labels for different kinds of numbers that appear
    in financial statements. The collections of these labels for each
    industry--the so-called ``taxonomies''--will be completed in 2007. With
    the taxonomies available to every SEC registrant, we will have in place
    the basic building blocks of the universal language that explains the
    components of every firm's financial statements.
        Third, the agency is modernizing the entire EDGAR system to convert
    it to one based on interactive data. As part of this effort, the SEC
    expects to rename the EDGAR system in 2007.
        In all, the Commission is investing $54 million over several years
    to build the infrastructure to support widespread adoption of
    interactive data. Companies have told us that the costs of implementing
    XBRL are minimal, while the benefits are substantial. In addition to
    providing far more useful information to investors, we believe the use
    of interactive data will be more efficient for companies' internal
    processes, for their registration and compliance reporting to the SEC,
    and for the SEC's own disclosure reviews for regulatory and enforcement
    purposes.
                             credit rating agencies
        Finally, I want to discuss a significant new responsibility that
    the SEC is undertaking this year to oversee credit rating agencies.
    This new role was given to the SEC by Congress last year.
        As you know, in 2006 the Congress gave the SEC both the
    responsibility and the authority to register and inspect the nation's
    credit rating agencies, including industry giants Standard & Poor's,
    Moody's, Fitch Ratings, A.M. Best, as well as several other large,
    medium, and smaller current and potential industry participants.
    Because of congressional concern that the industry faces potential
    conflicts of interest, imposes barriers to entry for new rating
    agencies, and has failed to warn the market of such significant
    impending financial failures as Enron and WorldCom even immediately
    before their collapses, the SEC is tasked with devoting significant
    manpower and resources to this area.
        Under the new law and the SEC's proposed implementing rules, credit
    rating agencies will be required to register with the Commission. In
    addition, they will be required to submit to periodic inspections to
    insure that they are implementing policies to mitigate conflicts of
    interest, prevent leaks of material non-public information, and refrain
    from unfair or coercive practices. The SEC takes this new
    responsibility very seriously. We remain committed to finalizing the
    new rules by the statutory deadline, and we will assemble a team of
    staff to oversee the program and begin conducting inspections over the
    next several months.
                              fiscal 2008 request
        With all of this as background, I'll take just a moment to provide
    some useful detail about the President's budget request for fiscal year
    2008.
        As you know, the request is for $905.3 million. That will permit
    the agency to maintain its staffing levels from 2007. This level
    personnel strength, which as you know is significantly higher than five
    years ago, will permit the agency to vigorously pursue its mission and
    maintain strong regulatory, enforcement, examination, and disclosure
    review programs.
        This funding level will allow the SEC to continue its commitment to
    information technology, which has the potential both to reduce
    regulatory costs and to give investors vastly more useful information
    than what they receive today. In addition to the SEC's interactive data
    initiative, the SEC is deploying new systems to better manage
    enforcement and examination resources, to help us manage a higher level
    of enforcement activity at existing personnel and funding levels. There
    is absolutely no question that these technology improvements will make
    the SEC more productive, and give both investors and taxpayers better
    value for their money.
        Over the last two years, the SEC has made tremendous progress in
    improving its operations. The fiscal 2008 request will permit us to
    continue improving the agency's internal financial controls. The agency
    has poured tremendous energy into this area during my tenure as
    Chairman. I am pleased to say that these efforts have generated
    success: under the leadership of a new Executive Director, the SEC
    received a clean opinion on its audited financial statements for 2006
    and, for the first time, there were no material weaknesses in internal
    controls. This is vitally important, Mr. Chairman, because the SEC must
    set the example not only for other federal agencies, but for all public
    companies whose financial statements and disclosures we review. For
    this reason, the SEC will continue to upgrade its financial system, and
    to beef up security over its information systems.
        The President's budget request also will fund pay raises for SEC
    staff, in accordance with the SEC's pay parity authority and our
    collective bargaining agreement. This is a significant fact. Including
    cost-of-living increases, career-ladder promotions, and merit pay
    increases, these raises amount to between five and six percent each
    year. Given that from a budgetary standpoint the increases are
    essentially automatic, and given further that payroll represents about
    two-thirds of our budget, the agency's total budget has to increase by
    over 3.5 percent just to maintain personnel at a steady state from year
    to year.
        Finally, and most importantly, the level of funding in this budget
    request will give the SEC the tools we need to address new, emerging
    risks in the nation's capital markets--including not only such known
    areas of concern as hedge fund insider trading, the safety and security
    of 401(k) plans, and the quality of disclosure to protect against fraud
    in the municipal securities market, but also those threats to market
    integrity and investor confidence that have yet to emerge.
                                   conclusion
        Thank you for this opportunity to discuss the SEC appropriation for
    fiscal 2008. I look forward to working with you on the best ways to
    meet the needs of our nation's investors, and I would be happy to
    answer any questions you may have.

                       SIMPLIFYING INVESTMENT INFORMATION

        Senator Durbin. Let me ask you a few questions. Most
    Americans may come in contact with your agency when they
    receive quarterly reports on their mutual funds or stocks that
    they own, and I assume that the contents of those reports are
    monitored, regulated by the Securities and Exchange Commission.
    Is that correct?
        Mr. Cox. That is correct.
        Senator Durbin. I would dare say as an attorney with little
    business background beyond law school that I find these
    overwhelmingly boring and unintelligible. Has anyone at the
    Securities and Exchange Commission taken a look at the required
    disclosures to try to follow the model that you suggested for
    EDGAR, to bring this down to a level where it might have some
    value to the average person, to require in simple,
    understandable terms some fundamentals about mutual funds that
    we own or stocks that we own, things that we should be aware of
    in the most direct way?
        Mr. Cox. Absolutely, Mr. Chairman. You are singing our
    song; we are singing your song. You sound like the average
    American customer that the SEC is supposed to be serving. When
    I have a chance to address large audiences, I often ask them:
    When you get your proxy information or your annual report in
    the mail, the SEC-mandated disclosure for the mutual fund or
    the stock or the security that you own, do you rush to your
    comfortable chair and sit down, open it up and read it? Nobody
    raises their hand and says yes to that.
        I ask: How many of you--tell the truth--throw it away? And
    the whole room will raise their hand. I think the SEC has to be
    very concerned when the customers are throwing away the
    product.
        The whole point of this exercise is meant to serve ordinary
    investors. Now, we recognize that what is being described is
    complex, and sometimes there is some required complexity in
    fully disclosing what is going on. But there is also a lot of
    complexity that is getting in the way, that is making it hard
    for investors to understand this information. Increasingly, I
    think, as we move to web-based tools, we are going to find that
    we can layer this information so that there can be some clearly
    understandable information on top; and then, if you want to
    keep drilling down for hyper-technical detail, you can find it.
    That I think holds great promise.
        But, meanwhile, we are focused on plain English in all of
    the retail disclosures for which the SEC is responsible. We
    have a ways to go there, Mr. Chairman. I recognize that. But it
    is a top priority for the Commission in everything that we do.
        Senator Durbin. So let me ask you, do we have to change the
    law so that we can receive reports that are intelligible and of
    practical value to investors? Is it congressional
    responsibility or do you have the power at the SEC to say that
    these things that you are mailing to millions of investors all
    over America, should at least have in the first four or five
    pages in very plain English important information that they
    should know about the company that is involved in it?
        Mr. Cox. We definitely have the power to do this. We are
    doing it now very formally in rule. The executive compensation
    disclosure that investors are receiving for the first time this
    year, much more detailed information about what the boss makes
    than they have ever had before, must be by rule in plain
    English, and we are going to review these disclosures with that
    in mind.
        Senator Durbin. Good.

                             PRIVATIZING SALLIE MAE

        Now let me ask you about the proposed sale of Sallie Mae.
    This proposal suggests that it may be purchased largely by
    private entities, except for two banks. Chase and Bank of
    America, I believe, are involved in the proposed purchase of
    Sallie Mae. From the viewpoint of the public and especially
    students and their families, the current disclosures by Sallie
    Mae through SEC and other Federal agencies gives us an insight
    into how this agency is operating.
        Should we have concern that if this private sale goes
    forward there will be less information available about how the
    new entity is operating, how student loans are being handled,
    the compensation of officers, how it is being spent? What kind
    of disclosure level do you think there would be in this new
    entity that is proposing to buy Sallie Mae?
        Mr. Cox. Well, it is an excellent question. Obviously the
    Congress has a special interest and the public has a special
    interest in GSE disclosure. There has been voluntary disclosure
    that is meant to conform with the SEC requirements that apply
    to all public companies. There is nothing that would prevent
    that under any private ownership.
        Senator Durbin. But would it have to be voluntary? This is
    what I am getting to. When I have raised this question with one
    of the banks involved in the proposed sale they said: Well, we
    have so many things we are already disclosing; there will be
    more disclosure than you know what to do with. So I was trying
    to get to the bottom line. Current disclosure standards for a
    public corporation like Sallie Mae I would assume are at this
    level [indicating], and now that we have a private entity
    buying this public entity will the disclosures at least reach
    this level [indicating] of information and transparency?
        Is this something that maybe I could ask your staff to take
    a look at and give us some feedback?
        Mr. Cox. We are, as you can imagine, keenly interested
    ourselves, and I would be happy to continue to work with you on
    this.
        Senator Durbin. Good.

                                SUDAN DIVESTMENT

        Before I turn it over to my colleague here for a few
    questions, let me ask you about the situation in Sudan. I
    contacted you earlier this year about the divestment interest
    which I have in order to put pressure on the Sudanese
    government to finally respond to the genocide in Darfur, which
    has been acknowledged by this administration. After receiving
    some information from your Commission--there was a list of some
    16 companies--it turns out that that is only a fraction of the
    actual activity that goes on in Sudan.
        When we asked your staff why we did not have more
    information, we were told that the SEC can only compile such a
    list based on available information and such a list is obsolete
    almost as soon as it is created since companies shift
    operations continuously. So we are now working with Treasury
    and the State Department to create stronger reporting
    requirements to the SEC so that better information is
    available.
        Before I ask you the specific question, I would like to add
    a footnote to that. There has been a great deal said recently
    by myself and others about Fidelity, a major brokerage company
    which it has been alleged has large holdings in PetroChina, the
    largest oil company in Sudan. You may have seen some ads on
    television and in publications. We were informed today it has
    been announced that Fidelity has sold at least 30 percent of
    the $1.1 billion in Hong Kong-listed PetroChina shares held as
    of December last year. We are still looking into it to
    determine how much they have divested.
        But going back to my earlier point, if we are looking for
    companies like Fidelity and others doing business in Sudan,
    what do you recommend that we do to ensure the SEC can collect
    the kind of data that makes our effort more likely to succeed?
        Mr. Cox. As you know, Mr. Chairman, your efforts, which we
    have been assisting, I think are properly aimed at a universe
    that is larger than just U.S.-listed companies, and the
    PetroChina example that you gave--PetroChina did not appear on
    the list that we provided of our registrants for the simple
    reason that it was not a U.S.-listed company. That is, the
    subsidiary listed in the United States did not have material
    contacts in Sudan and the parent, PetroChina, is not a U.S.-
    listed company. Because of the U.S. sanctions regime, not very
    many listed U.S. companies are the entities that themselves
    have the material contacts.
        So I think, if we are after the information that you seek,
    we need to broaden our horizons a little bit. Although the SEC
    can be very helpful in this regard, and I know that you are
    also working with the Treasury Department and the State
    Department, I think a multiagency effort is the best way to go.
        Senator Durbin. Well, I hope we can find that information,
    because I think at a minimum if Americans who are concerned
    about the issue are alerted to those companies that are doing
    business in Sudan and have a choice as consumers and investors
    to act accordingly that is the best we can do at this moment in
    time. We need to have a more robust effort to bring this
    information together and I will work with you to achieve that.
        I see Senator Brownback has arrived. I do not know if you
    would like to ask or let Senator Allard.
        Senator Brownback. Let Senator Allard.
        Senator Durbin. Senator Allard is recognized for 5 minutes.

                            NASD-NYSE CONSOLIDATION

        Senator Allard. Thank you, Mr. Chairman. I mentioned in my
    opening comments about the consolidation of the National
    Association of Security Dealers and the New York Stock Exchange
    regulatory function. The question I have for you, Chairman Cox,
    it is my understanding that the Division of Market Regulation
    is going to be responsible for regulation and supervision of
    the proposed consolidation. Do you feel that the SEC's budget
    request provides enough for these challenges and other
    initiatives that will modernize the national market system?
        Mr. Cox. I do. In fact, I think in some ways the
    consolidation of the regulatory functions of the NASD and the
    NYSE will make it easier to track fraud across markets. We had
    a problem heretofore with the sheriff having to stop at the
    county line. Fraud does not neatly restrict itself these days
    to one particular platform, one particular market, and, to the
    extent we have a more crosscutting view of what is going on in
    our market surveillance, we will be much more efficient at
    tracking down fraud.

                           PROGRAM ASSESSMENT RATINGS

        Senator Allard. As you will recall when we were in the
    House, the Contract with America, we worked with the Government
    Performance and Results Act (GPRA) and the way that became law
    and the way the Government agencies now is implementing it is
    the President's PART program. I am developing a reputation that
    on these Appropriations subcommittees I always ask whoever is
    testifying about how well their agency is doing in the PART
    program.
        I look here and I pulled the information off of the
    Internet on Expectmore.gov, and I see where the Securities and
    Exchange Commission, you have four programs that they refer to.
    The regulation of the investment management industry is listed
    as effective, and I congratulate you on that. The examining and
    compliance with security laws, that is characterized as
    moderately effective. Then there is a couple of agencies, what
    we call the Securities and Exchange Commission enforcement and
    then the Securities and Exchange Commission full disclosure
    program, that it says results not demonstrated, which tells me
    that they are not bothering to set objectives and try and move
    toward those.
        Now, I noticed in your comments that you referred to these
    programs and that some of the money you are requesting is to
    upgrade those programs. So my question is how are you coming
    along on getting more accountability in those two particular
    programs, where results are not demonstrated?
        Mr. Cox. First, thank you for asking about this, because it
    is something that we are very focused on from a management
    standpoint at the SEC. You are right to point out that the 2007
    PART review that focused on the Division of Investment
    Management gave the SEC the highest rating. As you know, that
    rating of ``effective'' is very rarely awarded. It is hard to
    get, and so that was cause for I think well-deserved
    celebration at the agency. We are very proud of having achieved
    that in 2007.
        Likewise, the Office of Compliance, Inspections, and
    Examinations received the next to the highest rating last year.
    Prior to the time that I came to the Securities and Exchange
    Commission, these other reviews that you mentioned were
    performed. The Enforcement Division, results not demonstrated,
    and the Division of Corporation Finance likewise, are for that
    reason very much in our focus. We are working right now with
    the Government Accountability Office (GAO), which is performing
    another management review of the Division of Enforcement, and
    we hope that, as a result of that collaboration and also our
    own internal management assessment, we will be able to develop
    additional measurable performance ratings.
        The enforcement area, as you can imagine, it is difficult.
    We are first and foremost a law enforcement agency, and it is
    the greater part of what we do. So we are very interested in
    anything that we can do to measure results.
        One of the things that we observe in the economy right now
    is that there are fewer security class actions being filed now
    than there have been in prior periods. There are a number of
    potential explanations for that, and I think only social
    scientists can parse, perhaps only to their own satisfaction,
    what the causes are for this.
        But looking for a measure of less fraud, which would be the
    ultimate performance that you would like our enforcement to
    achieve, is very difficult. So we are trying to come up with
    any way that we can measure this. We probably will not use such
    external measures for the reason that there is so much social
    science involved. But certainly we are going to develop even
    more rigorous measurements than we have used in the past so
    that we can satisfy ourselves that the taxpayers' resources are
    being put to the best use for the protection of investors.
        Senator Allard. Well, thank you for your response. Next
    year when you show up I will probably repeat that question and
    see how well we are doing.
        Now, has the GAO reviewed from the PART program
    perspective, have they reviewed all your programs, and if not
    how many more remain to be reviewed?
        Mr. Cox. Well, the GAO has on a number of occasions
    reviewed aspects of the SEC's operations. Their current ongoing
    study involves the Division of Enforcement.
        Senator Allard. Okay. So are there more programs that need
    to be reviewed yet that are not listed on here, or is this
    pretty much it?
        Mr. Cox. Well, the PART program, as you know, picks a
    different portion of the agency each year.
        Senator Allard. Right.
        Mr. Cox. And I do not know, frankly, where the Office of
    Management and Budget (OMB) will go next.
        Senator Allard. Okay. Well, we will want to follow up on
    that one too.
        Thank you for your testimony.
        Mr. Cox. Thank you.
        Senator Durbin. Senator Brownback.
        Senator Brownback. Thank you, Mr. Chairman.
        Welcome, Chairman Cox. Good to see you again. I want to
    join the chairman in his comments on Sudanese divestiture. We
    have a strong, growing campaign across the country. I am not
    sure where we are on the number of States. I do know Kansas
    just divested. We have probably between 8 to 10 States now that
    are involved in public divestiture from Sudan. I would hope you
    could help us out with that. It seems to me that is one of the
    best ways that a citizenry can express its displeasure with the
    genocide. You can say, you can conduct a genocide, we do not
    like it, and we are going to fight you every bit of the way,
    but it is certainly not going to be on our dime that you are
    going to do it. So your willingness to help is greatly
    appreciated.

                       DECLINE IN IPOS ON U.S. EXCHANGES

        I want to target you in on two things that have been seen
    in some of the publications. One is the reduction in IPOs in
    our capital markets that have been the subject of a number of
    articles recently, the New York Times, Wall Street Journal,
    Financial Times, and Economist. There is a recent report from
    McKinsey and Company commissioned by Senator Schumer and New
    York City Mayor Bloomberg that found in the first 10 months of
    2006 U.S. exchanges attracted barely one-third of the share of
    the IPOs they captured back in 2001. They noted at the same
    time European exchanges increased their market share by 30
    percent, and Asian exchanges doubled their share.
        The study found the trend was due to non-U.S. issuers'
    concern about compliance with Sarbanes-Oxley (SOx) section 404
    and operating in what they see as a complex and unpredictable
    legal and regulatory environment.
        I would ask you, as I am sure you have seen the same
    things, do you agree with these findings and what could be done
    to stem this flow of companies going to foreign exchanges?
        Mr. Cox. Well, Senator, I think the United States always
    needs to be focused on sharpening our competitive edge in every
    way that we can. The SEC has, of course, as our statutory
    mission protecting investors, but another statutory mission of
    the Securities and Exchange Commission is promoting capital
    formation, and we are focused on that, as we are focused on our
    third statutory mission, which is maintaining orderly markets.
    All of these things I think are complementary.
        We have to be concerned, when we see that there is more
    competition in the world now than there ever has been before,
    to see that the United States of America has a regulatory
    system that is pro-competition, that is efficient, that
    achieves all the objectives of investor protection that we
    want, but that it also succeeds in our market regulatory
    objective and also our objective of----
        Senator Brownback. Do you think it is due to section 404 of
    Sarbanes-Oxley? Is that a key part of why we are losing
    competitiveness?
        Mr. Cox. We have heard from foreign private issuers who
    listed in the United States that they are very concerned about
    the operation of section 404. We have also heard that same
    complaint from U.S. issuers. Because of this, we have gone back
    to the drawing board. We are on the threshold--and it will
    occur on May 23 and May 24--of repealing in its entirety the
    audit standard that was issued shortly after the passage of
    Sarbanes-Oxley by the Public Company Accounting Oversight Board
    under SOx 404 and replacing it with one that has the benefit of
    the interim years of experience.
        It is going to be top-down, risk-based, principles-based,
    materiality-focused, and scalable for companies of all sizes.
    None of those things was really a forte of the original
    standard.
        Senator Brownback. Do you think that will get at this loss
    of the flight of companies to foreign markets?
        Mr. Cox. That is certainly a part of it. But I started with
    a reference to competition for this reason. There is more
    competition now than there used to be. In days gone by there
    simply were not the large pools of capital around the world to
    tap, nor the technological means and the commercial means that
    would offer a feasible choice for many issuers.
        Today that competition exists. I think the competition
    itself is good. It is healthy. It tends to reduce the cost of
    capital. But we want to make sure that that competition is not
    a regulatory competition that lowers standards for investor
    protection. So we are working with our counterpart regulators
    to make sure that, as we flense the blubber from the regulatory
    system and wash out any unnecessary costs, we, if anything,
    increase the level of investor protection by closer
    collaboration overseas.
        If you take a look at what is actually going on in the
    markets, while it is true that the lion's share of foreign IPOs
    went elsewhere and we did not attract them in the United States
    in recent years, this year we are on track, according to
    Thomson Financial, to add the most foreign listings on U.S.
    exchanges since 1997. That is a good development.
        It was also recently reported that foreign companies
    accounted for over 23 percent of IPO proceeds last year, and
    that is the highest since 1994. So there is every reason to
    think that the United States will maintain its lead and the
    largest market share on Earth. We are still the largest,
    deepest, most liquid pool of capital in the world. But we do
    not want to take that for granted, and regulators as well as
    marketplace participants all have to constantly sharpen our
    competitive edge.
        Senator Brownback. I appreciate you looking at that and
    considering that. I am putting in a bill today on the
    Communities First Act, that is to provide targeted regulatory
    relief for community banks--these are small banks across the
    United States--that will provide some relief on section 102 of
    Sarbanes-Oxley by exempting insured depository institutions
    with consolidated assets of $1 billion or less from provisions
    of the internal control requirements in section 404.
        I just advise you of that. In my State we have a number of
    small banks, small institutions. A number of the Sarbanes-Oxley
    provisions have been very difficult, very onerous on them, and
    this regulatory relief would be something that would be
    helpful. I want to make sure that this regulation is not
    putting the United States at a competitive disadvantage in
    global capital markets.
        I appreciate your answer and working with us on these
    topics.
        Thank you, Mr. Chairman.
        Senator Durbin. Thank you, Senator Brownback.

                   RIGHTS AND REMEDIES AVAILABLE TO INVESTORS

        A few more questions if I might. It is my understanding,
    Chairman Cox, based on the Wall Street Journal article of April
    16 that the SEC is exploring the idea of eliminating the rights
    of investors to pursue legal remedies in court, instead
    shifting to arbitration. Inasmuch as your responsibility as
    Chairman of the SEC includes protecting investors and
    maintaining fair, orderly, and efficient markets, I would like
    to ask you a few questions if I might.
        You stated earlier there are fewer class actions that are
    being filed, which is an indication that the litigation rate is
    not increasing. But when it comes to this suggestion of moving
    the rights of investors to arbitration as opposed to the court
    system and this limitation of the legal rights of investors,
    how would you rationalize that decision against the fact that
    most of the arbitration hearings are going to be private in
    nature and some of the most dramatic information we have
    received about corporate wrongdoing, such as the Enron case,
    came in public forums, before the courts, leading to
    congressional response and perhaps a little more wariness on
    the part of investors?
        Are you not going to sacrifice some of that openness and
    transparency in this process if you move to an arbitration
    standard?
        Mr. Cox. Well, Mr. Chairman, I appreciate the opportunity
    to state very clearly, as I did to the reporter who wrote the
    story that you mentioned, that there is no pending rule or
    proposal before the Securities and Exchange Commission to allow
    corporations to mandate arbitration of shareholder claims. The
    source for the story is unclear. It was not explained to me by
    the reporter. But, as you will note, there were no other such
    stories, and I hope that I can speak authoritatively to that
    subject.
        Senator Durbin. Thank you.

                       EXPEDITING FAIR FUND DISBURSEMENTS

        Let me ask you, you have addressed this earlier, but I want
    to make sure it is clear in the record here. The fair funds for
    investors provision in Sarbanes-Oxley requires the SEC to
    return money to investors victimized by securities fraud. I
    think that your earlier statement was that you were making a
    more concentrated effort in trying to return these funds. The
    Government Accountability Office determined that as of 2005 the
    SEC had disbursed money to wronged investors in only a few
    cases--that is in 2005--and criticized the SEC for its slow
    process for disbursing more than $4.8 billion in disgorgement
    and penalties it had collected during the previous 3 years.
    While the SEC had used the fair funds provision in 75 cases,
    collecting money in a majority of those cases, the investors in
    only 3 of those cases had received any money.
        You quoted an earlier figure which I believe was $1.8
    billion. I may be wrong.
        Mr. Cox. $1.7 billion.
        Senator Durbin. $1.7 billion.
        Could you tell me, what is the status of this fair funds
    activity and whether that represents--it does not represent
    one-half, I believe, of what the GAO reported. But does it
    represent or is it an indication that this next year there will
    be even more funds to be disbursed?
        Mr. Cox. It is in fact, Mr. Chairman. The figures that you
    mentioned and the report that you mentioned from 2005, of
    course, represented the state of affairs that I found at the
    agency when I became Chairman in August 2005. That is why I
    made it an immediate priority. The $1.7 billion that we have
    distributed as of now is a substantial increase over what was
    the case in 2005.
        There is also $3.4 billion that we are very soon going to
    be able to distribute that relates to the recent mutual funds
    scandals, and that will be then the lion's share of the $3.8
    billion remaining backlog.
        Senator Durbin. Let me ask you about the WorldCom matter.
    The SEC collected $750 million in penalties and fines there.
    Could you tell me, what is the status of that reimbursement? I
    understand some $150 million should be doled out to investors.
        Mr. Cox. We have recently distributed $500 million,
    beginning this past October. There is, however, more to be
    distributed. The $750 million in total fair fund that was
    established and approved by the court in July 2004 was
    subsequently appealed to the Second Circuit Court of Appeals,
    and they then approved the lower court's decision in October
    2006.
        WorldCom also recently emerged from bankruptcy and there
    was a 9-month claims period because WorldCom was one of the
    most heavily traded stocks in the market and was widely held by
    small investors. The former Chairman of the Securities and
    Exchange Commission, Richard Breeden, is serving as our
    distribution consultant in this matter, and he has submitted a
    distribution plan that we started executing immediately after
    they emerged from bankruptcy.

                          VOLUME OF DISCLOSURE REVIEWS

        Senator Durbin. Mr. Chairman, your budget submission
    projects that the Divisions of Corporate Finance and Investment
    Management expect to review the disclosures of about 33 percent
    of all reporting companies and investment company portfolios.
    In last year's request you indicated that 44 percent of the
    disclosures would be reviewed. First, how do you select the
    disclosures to be reviewed? What is the total volume of
    filings, and why would you propose in next year's budget a 25-
    percent decrease in the number of disclosure reviews?
        Mr. Cox. The basis for the selection of submissions to
    review is risk. That is true not only in the Division of
    Corporation Finance, but it is true in our Office of
    Compliance, Inspections, Examinations, and the Division of
    Enforcement.
        SOx requires now that we review all the registrants once
    every 3 years, and so we are embarking upon that approach
    separately. The volume of filings as against the risk of
    filings gives us a tradeoff, therefore, that we have to make,
    because SOx is just purely quantitative. We have got to get to
    all of them ultimately. On a risk-based approach, we can focus
    our resources where they are better used.
        The figures that we provided to you about the number that
    we expect to reach are projections; and we do not know
    precisely where we will end up, of course, until we have the
    experience.
        Senator Durbin. Why would the percentage of those reviewed
    decline by 25 percent from this fiscal year to next fiscal
    year?
        Mr. Cox. That is simply an estimate based on meeting our
    SOx obligations at the same time that we pursue a risk-based
    approach to reviewing the filings.

                          SCHEME LIABILITY LITIGATION

        Senator Durbin. Let me ask you about the issue of scheme
    liability litigation. The SEC has in the past taken the
    position in amicus curiae filings that someone who engages in
    deceptive conduct may be liable for engaging in a scheme to
    defraud even without making false statements directly to the
    public if the person undertook acts with the purpose and effect
    of creating a misleading impression. For example, in October
    21, 2004, the SEC filed a brief in the Home Store case in the
    Ninth Circuit saying that if a third party engages with an
    issuer of securities, ``in a transaction whose principal
    purpose and effect is to create a false appearance of revenues
    intending to deceive investors in the corporation's stocks, it
    may be a primary violator.''
        The Ninth Circuit relied on the SEC's interpretation in its
    ruling and said: ``We agree with the SEC that engaging in a
    transaction the principal purpose and effect of which is to
    create the false appearance of fact constitutes a deceptive
    act.''
        Has anything occurred, Mr. Chairman, in the past 3 years
    that would cause the SEC to change its position on the
    liability of third parties?
        Mr. Cox. No.
        Senator Durbin. The issue of scheme liability is going to
    be before the Supreme Court next term in the Stoneridge case.
    This is also an issue that is at the heart of the decision by
    the Fifth Circuit effectively denying the Enron victims their
    day in court against the investment banks allegedly involved in
    the fraud. The SEC has an opportunity to file an amicus brief
    on June 11 standing up for its own rule and for the integrity
    of the financial markets, as it did in the Home Store case. Can
    investors count on the commission's support?
        Mr. Cox. As you know, Mr. Chairman, the Solicitor General
    will file a brief on behalf of the United States. The SEC will,
    I believe, soon receive a recommendation from our General
    Counsel on precisely how to proceed in that particular case.
    The Commission will vote on it, and then we will make our
    recommendations to the Solicitor General.
        I expect that the net result of all of that will be that
    the United States Government will do its level best to make
    sure that injured Enron investors receive the full amount of
    recovery to which they are entitled in our legal system.
        Senator Durbin. So this matter has not been decided? It
    will be under consideration after the Solicitor General----
        Mr. Cox. Yes, this is all relatively recent in the last few
    weeks.

    STUDENT LOAN REPAYMENT FOR SECURITIES AND EXCHANGE COMMISSION EMPLOYEES

        Senator Durbin. I would like to ask you one last question.
    Do you use student loan forgiveness to recruit and retain
    professional personnel?
        Mr. Cox. It is an excellent question. I do not know the
    answer. Let me see. Yes. Our Executive Director, sitting right
    behind me, tells me that we do.
        Senator Durbin. The staff just handed me a long list of
    people who have benefited from this. So it appears that you do
    use it. In fact, I would like to congratulate you for being a
    Federal Government leader in using this program. It turns out
    365 employees receive some money in student loan repayment
    benefits. This is a program which I have encouraged. I think it
    is an excellent way of attracting the best and the brightest to
    public service when they are burdened with student debt and
    might consider other careers. So I hope that you will continue
    to use that.
        Mr. Cox. We certainly will take your enthusiasm as it is
    intended.
        Senator Durbin. Thank you very much, Mr. Chairman, for
    testifying today. I thank all those who have come from the
    Securities and Exchange Commission.

                         ADDITIONAL COMMITTEE QUESTIONS

        Our record will remain open for 10 days if there are any
    written questions to be sent to you from our staff or the
    staffs of the other Senators involved.
        [The following questions were not asked at the hearing, but
    were submitted to the Commission for response subsequent to the
    hearing:]
                Questions Submitted by Senator Richard J. Durbin
                                  arbitration
        Question. In response to an inquiry at the hearing, you mentioned
    that a report in The Wall Street Journal that the Commission is
    considering a proposal originally described in the Capital Markets
    Study that would empower corporations to amend their bylaws to mandate
    arbitration of securities fraud class action cases was ``inaccurate''
    although you did not specify how the article was inaccurate. What
    assurance can you provide the Subcommittee that the SEC is not
    considering any changes regarding arbitration?
        Answer. There is no pending rule or proposal before the Commission
    to allow corporations to mandate arbitration of shareholder claims.
    Corporations should not be able unilaterally to limit the rights of
    investors to sue, and I can assure you that the Commission does not
    plan to advance any proposal that diminishes investor rights.
                             market competitiveness
        Question. Three recently issued reports--the Committee on Capital
    Markets Regulation Report, the McKinsey Report, and a report from the
    U.S. Chamber of Commerce--raise concerns about the competitiveness of
    the U.S. capital markets. These reports concluded that the
    competitiveness of the U.S. markets is being hampered by our
    overzealous regulatory and litigation environment.
        All three reports relied on the same fact to support their claim--
    that the U.S. share of the global IPO market dropped between 2000 and
    2006. This statistic, however, is highly misleading. In fact, since the
    implementation of the Sarbanes-Oxley Act, the number of U.S. IPOs has
    risen dramatically. According to a recent article in Barron's, IPOs in
    2006 increased 22 percent over 2005, and 170 percent over 2003. During
    that same period, the number of foreign companies listing in U.S.
    markets and the amount of money they raised here have also increased.
        Furthermore, a recent study by Craig Doidge of the University of
    Toronto and Andrew Karolyi and Rene Stulz of Ohio State University
    found that there remains a significant premium for companies that list
    in the United States, and this premium has not declined in recent
    years, despite recent regulatory developments. The professors also
    found that an exchange listing in New York still continues to provide
    significant benefits to firms.
        These facts confirm that U.S. markets are among the most highly
    competitive in the world, and suggest that we are so competitive
    precisely because of the unmatched protections we provide to our
    investors.
        What is your opinion? Do you believe that a market that provides
    such protection and transparency actually increases competitiveness?
        Answer. Yes. I agree. U.S. markets thrive because of the global
    trust we've earned. That makes the SEC itself a key part of America's
    capital markets that helps secure our global leadership, maintain our
    markets' competitive edge, and secure the benefits of robust capital
    formation for millions of Americans as well as countless people the
    world over. But the SEC can only continue in this role if we constantly
    update our rules, our policies, and our own way of operating to keep
    pace with the increasingly rapid changes in the world of finance that
    we regulate. The new global competition is good in that it tends to
    reduce the cost of capital. But we are working to make sure that that
    competition is not a regulatory competition that lowers standards for
    investor protection and ultimately undercuts America's role as the
    leading capital market in the world.
                        investor fraud targeting seniors
        Question. Chairman Cox, in your prepared statement you discuss the
    SEC's initiatives to combat investor fraud schemes which particularly
    target seniors. I understand that the SEC recently teamed with the
    University of Illinois College of Law and the Federal Reserve Bank of
    Chicago to host a symposium focusing on this issue in Chicago.
        Are there certain schemes that are aimed at older Americans?
        What recommendations do you have for older Americans to better
    guard their retirement funds? What is the SEC doing to inform and
    educate consumers?
        What specific actions has the SEC taken to reduce the prevalence of
    these unscrupulous practices? What remedies have been the most
    effective?
        Answer. It was a great pleasure to be in Chicago on May 18 for the
    Senior Symposium the Commission hosted with the Elder Law Journal of
    the University of Illinois College of Law and the Federal Reserve Bank
    of Chicago. The Symposium featured a distinguished panel of
    representatives from the business, law, regulatory and academic
    communities with significant experience tackling the issues facing
    seniors as they prepare for and enjoy their retirement. The panelists
    discussed how older Americans can protect themselves from investment
    fraud while financially preparing for the future. It was a very
    instructive and successful event.
        As you know, fighting fraud against seniors requires aggressive
    action. That's why last year I launched the SEC's ``Seniors
    Initiative,'' which is designed to better coordinate the work of the
    SEC's various offices and divisions and with state securities
    regulators when it comes to prosecuting and preventing securities fraud
    aimed at swindling senior citizens.
        Educational efforts are an important of the Commission's strategy
    for seniors and we are dedicated to putting better information in their
    hands so they can make informed investment decisions. We are conducting
    a series of seniors events around the country and will hold the second
    Senior's Summit this fall.
        We know that many seniors, and many children and caregivers of
    seniors, use the Internet to search for information on investing. That
    is why we created a section on our website (http://www.sec.gov/
    investor/seniors.shtml) aimed specifically at senior investors.
        The information on this website can help seniors fend off high
    pressure sales pitches for legitimate, but arguably unsuitable
    products. After reading our materials on equity-indexed annuities, for
    example, seniors will know to avoid any salesperson claiming that
    individuals ``can't lose money'' in that product. Investors can lose
    money buying an equity-indexed annuity, especially if the investor
    needs to cancel the annuity early.
        In addition to providing critical information on other investments
    commonly marketed to seniors, such as variable annuities, promissory
    notes, and certificates of deposit, the website also provides key
    information about how to detect and avoid fraudulent schemes.
        This is also a top enforcement priority for the SEC. Since many of
    the scams targeted at seniors involve ongoing fraud or Ponzi schemes,
    time is often of the essence--both to stop the ongoing fraud and to
    recover lost investor funds. In these instances, the staff may move
    very quickly and seek emergency relief in the district courts. Once
    emergency relief is obtained and the status quo is preserved to the
    extent possible, the Enforcement staff generally goes through the same
    detailed process it would in any investigation, which include
    interviewing witnesses, requesting and reviewing documents, and taking
    formal testimony.
        The existing statutory penalties provide a broad range of available
    sanctions, including cease-and-desist orders, censures, injunctive
    relief, disgorgement, civil penalties, and industry bars. Moreover,
    civil monetary penalties may be imposed in cases involving repeat
    violations and severe frauds. I believe that the Commission's full
    range of existing remedies allows enough flexibility to ensure that the
    Commission can effectively prosecute cases involving fraud against
    seniors. This is particularly true given the SEC's ability to make
    criminal referrals in the most egregious cases.
                   stock option backdating and springloading
        Question. Numerous media accounts in recent months have reported
    that many companies may have bent our securities laws by engaging in
    stock option backdating and springloading as a way to provide senior
    corporate management with manufactured gains.
        Do you view the proliferation of this practice as a serious threat
    to the integrity of the securities laws which you oversee?
        If so, how many cases has the SEC brought in this area in the last
    year?
        Does the SEC need greater enforcement resources to combat
    compensation practices such as these?
        Answer. The SEC's Division of Enforcement is currently
    investigating more than 140 companies for possible fraudulent reporting
    of stock option grants. The companies under investigation are located
    across the country, are of various sizes, and span multiple industry
    sectors. All of the SEC's regional offices are currently involved in
    these investigations.
        Longstanding SEC policy precludes the disclosure of any information
    about these ongoing investigations; however, enforcement actions have
    been filed against former executives of Symbol Technologies, Peregrine,
    Brocade, Comverse Technology, McAfee, Monster Worldwide, TakeTwo
    Interactive Software, Engineered Support Systems, Apple Inc. and
    Mercury Interactive. To date, the Commission has brought enforcement
    cases against 4 issuers and 19 former executives. These cases involved
    alleged misconduct of chief executive officers, general counsels, chief
    financial officers, and other accounting and human resources employees.
    The Department of Justice has also brought parallel criminal actions
    against 10 of the 18 former executives charged by the Commission.
        The SEC has taken many steps to ensure clear, full, and fair
    disclosure about executive compensation, including that relating to
    employee stock options. The revised executive compensation disclosure
    rules the Commission adopted in July 2006 include a number of
    provisions that directly or indirectly address backdating of options.
    For example:
      --A company must now disclose how it determines when it will make
            equity awards. This will require a company to disclose how, and
            why, it backdates for its executives.
      --A company must disclose the grant date of equity awards. If the
            grant date is different than the date on which the board took
            action, the company must disclose the date of the board's
            action.
      --A company must disclose the exercise or base price of an option if
            it is less than the market price of the underlying security on
            the grant date. If it is less than the market price on the
            grant date, the company must disclose the market price on the
            grant date. This disclosure is intended to provide an investor
            with a complete picture of the true terms of each option award
            by allowing the investor to compare the grant date market price
            to the in-the-money exercise price.
      --Further, if the exercise or base price of an option grant is not
            the closing market price per share on the grant date, a company
            must describe its methodology for determining the exercise or
            base price.
        In addition, the Sarbanes-Oxley Act of 2002 tightened up a
    company's obligation to report stock option grants. Before Sarbanes-
    Oxley, officers and directors were not required to disclose their
    receipt of stock option grants until after the end of the fiscal year
    in which the transaction took place--which meant that an individual, in
    some cases, had more than a year to disclose a grant. In August 2002,
    the SEC issued rules requiring officers and directors to disclose
    option grants within two business days.
        In combination, these steps are an important contribution to
    preventing backdating abuse. They have effectively eliminated easy
    opportunities for companies to secretly grant options. Companies are
    beginning to file reports with disclosure of executive stock option
    grants in accordance with the Commission's new rules. Staff from the
    Commission's Division of Corporation Finance will selectively review
    these reports for compliance with the new rules, including those
    relating to stock option awards. Where the disclosures indicate
    possible violations of the federal securities laws, appropriate
    referral of the matter will be made to our Division of Enforcement.
                    commission approval for settlement talks
        Question. On April 13, 2007, the Washington Post reported that SEC
    had made a change in procedures such that your enforcement lawyers must
    seek approval from the Commission before they begin settlement talks
    that involve fining corporations, including seeking ranges for possible
    fines. It has also been reported that this action may lead to lower
    penalties.
        Please comment on whether this report is accurate and whether you
    believe it will lead to lower penalties and if so, was that its intent?
        Answer. The Commission's procedures for authorizing settlement
    negotiations in cooperate penalties cases are not designed to increase
    or decrease the amount of monetary penalties paid by companies or to
    make penalty payments more or less frequent. Rather, they are intended
    to strengthen the negotiating position of our Enforcement Division in
    settlement negotiations involving corporate penalties and streamline
    the approval process for those cases. The implementation of the
    procedures will be carefully monitored, and the procedures will not be
    continued if they do not achieve these key objectives.
        The process is designed to ensure that the laws are vigorously
    enforced by giving the professional enforcement staff the full backing
    of the Commission in the staff's settlement negotiations.
        The pilot streamlines the settlement process by shortening final
    Commission review and approval when the staff reaches a settlement
    within the range authorized by the Commission.
        The staff may always return to the Commission to recommend a higher
    or lower penalty range if their recommendation changes based on new
    information or a development that occurs during the settlement
    negotiations.
                  weaknesses in information security controls
        Question. In carrying out its mission to ensure that securities
    markets are fair, orderly, and efficiently maintained, the SEC relies
    extensively on computerized systems. Integrating effective information
    security controls into a layered control strategy is essential to
    ensure that SEC's financial and sensitive information is protected from
    inadvertent or deliberate misuse, disclosure, or destruction. In fact,
    one of SEC's four strategic goals is ``maximizing the use of SEC
    resources,'' which expressly includes ``enhancing internal controls.''
        A recent GAO study acknowledged that the SEC has made progress
    toward correcting previous weaknesses in information systems security,
    and attributed progress to active engagement by SEC senior management
    in implementing reforms. However, GAO emphasized that despite progress,
    the SEC has not consistently implemented key controls to effectively
    safeguard the confidentiality, integrity, and availability of its
    financial and sensitive information and systems.
        GAO recommends that the SEC Chairman improve the implementation of
    its policies and procedures, control tests and evaluations, and
    remedial action plans as part of its agency-wide information security
    program.
        Chairman Cox, what is the SEC actively doing to implement GAO's
    recommendations to correct information security control weaknesses?
        Answer. The SEC now devotes about 7 percent of the agency's
    information technology budget on technology security--a significantly
    greater share of overall information technology resources than many
    other agencies. Our efforts run the gamut from highly technical
    initiatives such as server configuration management, to equally
    critical but ``softer'' programs such as user awareness training.
        In one major improvement initiative, the SEC has invested over $2
    million during fiscal year 2006 to enhance our core financial
    management system. These upgrades include new hardware and software, as
    well as implementing a more secure database. As part of this upgrade,
    the SEC will continue to make enhancements to business processes and
    automated workflows that will improve internal controls, eliminate
    traditional financial management paper processes, and enhance reporting
    capability and efficiency. Beyond these benefits, the updated hardware
    and software will provide much greater assurance that the system
    complies with modern information security standards.
        We have also taken significant steps to upgrade physical security
    throughout SEC buildings. Specialists have evaluated the structures and
    installed computerized identification card authentication systems,
    cameras, and alarms in key facilities. The number of entrances at our
    data operations center has been reduced. Guards have been redeployed
    and retrained. We have also put in place new technology and changes in
    procedures to restrict access to sensitive rooms on SEC premises, such
    as data centers and network closets.
        We are continuing our efforts to tighten access controls that
    prevent, limit, or identify inappropriate access to data, equipment,
    and facilities. All of these controls are designed to prevent
    unauthorized disclosure, modification, or destruction of sensitive
    information.
        While the SEC has strong access control policies, a number of
    issues identified during the audit were related to inadequate
    compliance with existing agency policies by individuals responsible for
    the system and technical staff. To address this concern, the SEC has
    stepped up educational and enforcement efforts. System owners--
    individuals responsible for the system--have been presented with all
    agency information technology policies and have been directed to sign
    documentation showing that they have reviewed those policies. Beyond
    developing an educated population, we are also focused on errors that
    can happen through inattention. To address such issues, the SEC is
    implementing a systemic scanning program administered by teams that are
    organizationally separate from the system owners. System owners will be
    presented with the results of those scans and directed to correct any
    vulnerabilities and mitigate risks on systems that do not comply with
    SEC policies. By implementing a continuous scanning approach, the
    agency expects to achieve dramatic cost savings. These savings can be
    achieved because configurations will be corrected early on, before they
    can have a negative effect on operations. Such practices will also
    reduce the amount of resources and time required to correct problems in
    the future.
        The SEC also is making efforts to address weaknesses in its IT
    ``change management'' processes. These are the processes and procedures
    that govern the way that software and other technologies are deployed
    into the SEC's environment. The GAO has recommended a number of
    improvements to ensure that such deployments do not introduce security
    weaknesses, whether inadvertently or as the result of an insider with
    malicious intent. Therefore, we are taking steps to better oversee our
    environment through such measures as weekly change control board
    meetings, better communication between the involved groups, improved
    version management procedures, and an enhanced test environment.
        As Chairman, I am committed to implementing all of the GAO's
    recommendations. I anticipate that we will again see significant
    improvements in our information security posture at the conclusion of
    this year's audit.
                  risk-based examinations--targeted activities
        Question. In your budget justification document for fiscal year
    2008, in the section covering the Office of Compliance Inspections and
    Examinations and your risk-based examination program, you explain that
    SEC's resources will be focused on those firms and practices that have
    the greatest potential for violative conduct that can harm investors.
        You state that ``higher-risk activities'' include those that
    ``create significant conflicts of interest where compliance policies
    and procedures are insufficient to mitigate those conflicts.''
        Please explain in greater detail what these ``higher risk
    activities'' include, and how you target them.
        Answer. Higher risk activities at adviser, funds, and broker-
    dealers include business practices that create significant conflicts of
    interest that, if not monitored and mitigated in some fashion, may
    result in harm to clients or investors, such as: soft dollar
    arrangements; directed brokerage; performance advertising; custody and
    possession of client funds and securities; difficult-to-value
    securities; access to non-public information; and significant personal
    trading by employees of the firm. In examinations of broker-dealers,
    our risk-based focus is on areas such as: compliance with capital
    requirements and operational issues; sales practices including
    suitability, churning, and unauthorized trading; supervision; new
    products; order handling and trading rules; and anti-money laundering
    rules.
        The Office of Compliance Inspections and Examinations (OCIE) has
    implemented a risk-based approach to examinations. OCIE's goal is to
    identify emerging areas of compliance risk, conduct examinations and
    take steps to remedy identified problems. Given the number of firms
    registered with the SEC and the breadth of their operations, the staff
    continues to focus examination resources on those registrants and
    activities where the investing public or market integrity is most at
    risk.
        In recent years, the examination program has enhanced its efforts
    to proactively detect and address potential risks, and provide
    balanced, cost-effective and reasonable oversight of the regulated
    community. Many of these higher risk activities have been identified
    through years of experience with examinations and enforcement
    activities at registered firms. However, we are continually searching
    for areas of risk that are new or unique to the investment management
    community. To assist the staff in identifying risks warranting
    examination follow-up, OCIE utilizes a risk-identification and risk-
    assessment methodology. This methodology uses an internal database to
    identify and prioritize risks, consider mitigating and aggravating
    conditions, and recommend regulatory or other actions to be taken to
    remove or mitigate the risks. As part of this risk assessment process,
    examination staff nationwide provide feedback about where risks may
    exist in the industry and to propose possible solutions. This risk-
    assessment process is used to identify risks requiring regulatory or
    examination follow-up and to build a culture of risk-assessment within
    the examination program.
        Higher risk activities are targeted primarily through our
    examination process. All of our routine examinations will focus on
    those activities and areas presenting the greatest concern to investors
    (many of which are identified above). In addition, exam staff may
    specifically conduct focused risk targeted examination sweeps to
    determine the extent and interpret emerging risks in the regulated
    community. In such examinations, examiners review risk conditions and
    responsive controls for a particular compliance risk at a sample of
    firms. This approach allows the staff to obtain a more comprehensive
    view of the particular risk, assess the gravity of the risk, evaluate
    the compliance performance of individual firms compared to that of
    their peers, and suggest regulatory solutions. These examinations may
    often identify specific areas of interest and risk that are
    incorporated into our regular examination process.
                                     ______

                  Questions Submitted by Senator Sam Brownback
        Question. As I mentioned in my statement, recent articles in the
    ``New York Times,'' ``Wall Street Journal,'' ``Financial Times'' and
    ``The Economist'' have all suggested that tenets of Sarbanes-Oxley are
    cause for a decrease in American-listed public companies compared to
    foreign exchanges such as London and Hong Kong, because the Act takes
    away incentives to list on an American exchange. Do you agree with this
    assessment?
        A recent report by McKinsey & Company commissioned by Senator
    Schumer and New York City Mayor Bloomberg found that over the first ten
    months of 2006 U.S. exchanges attracted barely one-third of the share
    of IPOs they captured back in 2001. During that same time, European
    exchanges increased market share by 30 percent and Asian exchanges
    doubled their share. Most importantly, the study found this trend was
    ``due to non-U.S. issuers' concerns about compliance with Sarbanes-
    Oxley Section 404 and operating in what they see as a complex and
    unpredictable legal and regulatory environment.'' Do you agree with
    these findings? What can we do to stem the flow of companies to foreign
    exchanges?
        Answer. Over the past year, a number of reports have been published
    which advise the SEC and Congress on how to deal with increasingly
    global capital markets. They have offered the Commission and
    policymakers in Congress and the Executive Branch many recommendations.
    These reports, including the report by McKinsey & Company commissioned
    by Senator Schumer and Mayor Bloomberg frequently cite the increase in
    foreign-listed IPOs as cause for concern about the competitiveness of
    U.S. markets, and cite the Sarbanes-Oxley Act as a contributor to
    capital flight from the United States.
        I agree that Sarbanes-Oxley is a factor in the decision of some
    issuers to list overseas. I am comfortable stating this because several
    issuers, underwriters, accountants, and attorneys have shared the
    reasons behind their decisions to list overseas with me and have cited
    SOX as a reason. But despite this kind of unfiltered, episodic
    information much more is at work here. We need to recognize that our
    capital markets are changing at an accelerating pace and that we are
    living in a very dynamic, much more competitive world. There are more
    opportunities to raise money and deeper, more varied pools of capital
    in other countries than ever before. Even if SOX were provably and
    quantifiably a determinant in the increase in foreign market IPOs--and
    sound science does not permit such neat conclusions--the fact is there
    are simply greater competitive challenges than ever before to the
    United States' leading position in the world as the largest, deepest,
    and most liquid markets.
        Our continued global market leadership is not America's birthright.
    We have to constantly earn it. That is true for our private sector and
    it is true for our regulatory system. As regulators, we must constantly
    work to sharpen our competitive edge as well. When it comes to SOX,
    that has meant completely overhauling the expensive, inefficient
    auditing standard that was used to implement section 404. We recently
    repealed it and replaced it with a new standard that is clearly written
    in plain English, is less than half as long, and is risk-based,
    materiality-focused, and scalable for companies of different sizes. We
    expect it to dramatically reduce the costs of SOX 404 compliance.
        That said, the evidence of some high profile foreign IPOs no longer
    listing in the United States may simply be an indication that other
    markets have improved, not that the United States has become
    unattractive. A steady stream of foreign companies continues to tap the
    U.S. markets. In fact, according to Thomson Financial, this year is on
    pace to add the most foreign listings on U.S. exchanges since 1997. It
    was also recently reported that foreign companies accounted for 23.4
    percent of IPO proceeds last year--the highest amount since 1994.
        Question. Chairman Cox, the press has reported that the SEC intends
    to put forward its management guidance in the next few weeks. Can you
    comment on the timeline to putting forth this guidance and the process
    for its adoption?
        Answer. On May 23, 2007, the Commission unanimously approved
    interpretive guidance to help public companies strengthen their
    internal control over financial reporting while reducing unnecessary
    costs, particularly at smaller companies. The new guidance will enhance
    compliance under Section 404 of the Sarbanes-Oxley Act of 2002 by
    focusing company management on the internal controls that best protect
    against the risk of a material financial misstatement. It is currently
    in effect.
        The Commission also approved rule amendments providing that a
    company that performs an evaluation of internal control in accordance
    with the interpretive guidance satisfies the annual evaluation required
    by Exchange Act Rules 13a-15 and 15d-15. The Commission also amended
    its rules to define the term ``material weakness'' as ``a deficiency,
    or combination of deficiencies, in internal control over financial
    reporting, such that there is a reasonable possibility that a material
    misstatement of the company's annual or interim financial statements
    will not be prevented or detected on a timely basis.'' The Commission
    also voted to revise the requirements regarding the auditor's
    attestation report on the effectiveness of internal control over
    financial reporting to more clearly convey that the auditor is not
    evaluating management's evaluation process but is opining directly on
    internal control over financial reporting. These changes, too, are now
    in effect.
        In addition, the SEC in July 2007 repealed the costly Auditing
    Standard No. 2, which had made Sarbanes-Oxley compliance so difficult,
    and replaced it with a completely new standard that is top down, risk-
    based, materiality focused, and scalable for companies of all sizes.
    The replacement standard, Auditing Standard No. 5, is now in effect.
        Question. The data shows that smaller public companies have
    experienced a disproportionate burden from Sarbanes-Oxley. Given that
    you are re-writing the rule-book for management, are you going to do
    anything to grant further relief for the non-accelerated filers? Some
    of my colleagues (Sen. Snowe and Sen. Kerry) have called for delayed
    implementation of the Sarbanes-Oxley Section 404 requirements for small
    public firms to ease the burden on complying with the expected new
    auditing standards.
        Answer. The question of further deferral for non-accelerated filers
    is still open. The SEC has, however, already deferred compliance for
    non-accelerated filers four times in an effort to ensure that the
    burden of compliance did not unduly impact smaller companies. The very
    positive result of our determination to phase in 404 for smaller
    companies is that we and they have had the opportunity to field test
    the requirements so that smaller companies have the benefit of learning
    from the experiences of larger firms.
        These experiences have deeply informed the SEC's new Interpretive
    Guidance and the PCAOB's new auditing standard. The continued phased
    implementation will allow smaller firms to start complying with section
    404(a) of SOX starting in 2008, while the first audit under section
    404(b) won't be due until 2009.
        The SEC's new guidance is intended to be of significant help to
    small companies. Completing the implementation of Section 404 is
    important to further enhancing the quality of reporting and increasing
    investor confidence in the fairness and integrity of the securities
    markets. The Commission and the PCAOB will continue our ongoing
    outreach efforts over the coming months to ensure that the changes
    recently made in the implementation of section 404 live up to our
    expectations for a more effective and efficient system for all filers.
    In particular, we will focus on the extent of the expected cost
    reductions for first-time accelerated filers during 2008 under the new
    Auditing Standard No. 5 and our new Interpretive Guidance.
        Question. The majority of the problems with Sarbanes-Oxley have
    been the implementation--not the language itself. What is the SEC going
    to do to ensure that the fixes put forward in its new guidance are
    successfully implemented in order to bring the cost-benefit back into
    alignment?
        Answer. With new guidance that allows management to scale and
    tailor evaluations to focus on what matters most--and with a new
    auditing standard that enables auditors to deliver more cost-effective
    audit services--one final step remains. The SEC and the PCAOB expect a
    change in the behavior of the individuals who are responsible for
    following these new procedures. To that end, the PCAOB's inspection
    program will monitor whether audit firms are implementing the new
    auditing standard in a cost-effective way that is designed to achieve
    the intended results. And the SEC, in our oversight capacity, will
    monitor the effectiveness of the PCAOB's inspections. So both the SEC's
    and the PCAOB's inspectors will be focused on whether audit firms are
    achieving the desired audit and cost efficiencies in the implementation
    of 404. The SEC staff will also conduct an economic analysis--using
    real-world information--to evaluate whether the costs and benefits of
    implementing section 404 are in line with our expectations.
        Question. I understand that, due to concerns about the burdensome
    effects of section 404 of Sarbanes-Oxley, the Chamber of Commerce has
    asked that you delay 404 compliance for smaller public companies. Do
    you plan to delay 404 compliance? How can you limit the burden of
    section 404 on small companies?
        Answer. With respect to the potential for a further delay of 404
    compliance for smaller public companies, see the answer to Question 4,
    above. With respect to other ways that the SEC can reduce the burden of
    section 404 on small companies, we have very recently approved
    Interpretive Guidance recognizes that smaller public companies
    generally have less complex internal control systems than larger public
    companies.\1\ The new Interpretive Guidance is intended to assist
    management of smaller companies in scaling and tailoring their
    evaluation methods and procedures, recognizing that what is necessary
    in a large company may not be appropriate for smaller companies with
    less complex internal controls systems.
    ---------------------------------------------------------------------------
        \1\ Final Report of the Advisory Committee on Smaller Public
    Companies to the United States Securities and Exchange Commission (Apr.
    23, 2006) at 39-40, (``Advisory Committee Report'') available at http:/
    /www.sec.gov/info/smallbus/acspc/acspc-finalreport.pdf.
    ---------------------------------------------------------------------------
        The Interpretive Guidance is intended to allow management
    sufficient and appropriate flexibility to design an evaluation process
    that fits its facts and circumstances. We are encouraging smaller
    public companies to take advantage of the flexibility and scalability
    afforded in the guidance to conduct an evaluation of internal controls
    that is both efficient and effective at identifying material
    weaknesses.
        In order to help smaller companies understand how they can tailor
    their evaluation efforts, the guidance specifically highlights some of
    the key areas where the evaluation at a smaller company might be
    different than for a larger company. For example, three key points
    within the evaluation process are the overall determination of
    effectiveness of the design of controls, the testing of the operating
    effectiveness, and the documentation needed to sufficiently support
    both. The Interpretive Guidance includes guidance on each of those
    points indicating how a smaller company may accomplish those
    requirements of the evaluation process.
        The guidance explains how a small company might approach 404
    differently than a large company. For example:
      --A smaller company would probably follow fewer and different steps
            in evaluating whether its controls will provide reasonable
            assurance about the reliability of its financial reports.
      --Management in a smaller company can go about obtaining information
            on whether its controls operate as designed in different and
            less elaborate ways than would be necessary in a large company.
      --The documentation needed to provide reasonable support for a
            smaller company's controls will normally be less than what's
            required in a larger company.
        Question. The Chamber of Commerce has asked that you clarify a
    number of defined terms so that companies have better guidance about
    what is required of them to comply with section 404. These terms
    include ``material weakness,'' ``significant deficiency,'' and
    ``materiality.'' Have you further clarified the use of these terms?
        Answer. On May 23, 2007, the Commission adopted amendments to its
    rules to define the term ``material weakness'' as ``a deficiency, or
    combination of deficiencies, in internal control over financial
    reporting (ICFR), such that there is a reasonable possibility that a
    material misstatement of the company's annual or interim financial
    statements will not be prevented or detected on a timely basis.'' Our
    intention is to re-focus 404 compliance on the specific problem that
    Congress had in mind: material risks to reliable financial reporting.
    In that way, we will better protect investors and companies can more
    wisely spend their money on meaningful evaluations of internal
    controls. In addition, the definition of material weakness, including
    the indicators of material weakness, has been aligned between the
    Commission's management guidance and the PCAOB's Auditing Standard No.
    5 to promote consistency in the considerations made by management and
    auditors in evaluating deficiencies.
        In addition, on June 20, 2007, the Commission issued a release
    seeking additional comment on a proposed definition of a ``significant
    deficiency.'' The proposal defines ``significant deficiency'' as ``a
    deficiency, or combination of deficiencies, in internal control over
    financial reporting that is less severe than a material weakness, yet
    important enough to merit attention by those responsible for oversight
    of a registrant's financial reporting.'' In drafting the proposed
    definition, we considered comments received by the PCAOB in response to
    its proposed auditing standard. We believe that the proposed definition
    reflects the Commission's belief that the focus of the term
    ``significant deficiency'' should be the underlying communication
    requirement that results between management, audit committees and
    independent auditors. The comment period on this proposal ends on July
    18, 2007 and we will evaluate comments received to ensure that the
    final definition effectively communicates the Commission's objectives.
        With regards to materiality, both the SEC and PCAOB received a
    number of comments, including those received from the Chamber of
    Commerce, suggesting that more guidance should be issued related to
    materiality and how it applies to the evaluation and assessment of
    ICFR. For management, judgments regarding materiality often must
    consider many factors that can vary based on each company's individual
    facts and circumstances. These areas are frequently complex and involve
    significant judgment, which makes providing ``bright-line'' guidance
    and examples difficult and presents the risk of unduly restricting
    management's ability to effectively utilize and apply its informed
    judgment. Nonetheless, we are continuing to seek feedback on the more
    challenging issues relative to materiality considerations and the
    appropriateness of providing additional guidance.
        Question. Past chairman of the National Venture Capital
    Association, Robert Grady, wrote a few weeks ago that section 404 is
    causing an outcry because it requires ``tiny companies to provide shelf
    after shelf of process-oriented paperwork, at the cost of millions of
    dollars, that no investor is even likely to read.'' Do you agree with
    this assessment? How can we--as Grady says--``bring sanity to this
    process?''
        Answer. The SEC is keenly attuned to making sure that the U.S.
    capital markets remain robust and competitive, and to helping small
    businesses remain competitive in the global marketplace. To date, no
    tiny company--this is, no company with public float of less than $75
    million--has had to comply with section 404.
        To ``bring sanity to this process,'' as Mr. Grady suggests, the SEC
    is working to make sure that its regulations are scalable and that they
    do not impose an undue burden on small businesses. In May 2007, the SEC
    proposed and adopted a number of changes--in the way private offerings
    are conducted in the United States, and in the section 404 internal
    controls reports that companies are required to file with us--that
    address both scalability and competitiveness.
        We continually review our regulations with a view towards reducing
    the burdens of being a public company and to remove obstacles to
    raising capital, consistent with investor protection. On May 23 the
    Commission approved an entire package of rule change proposals designed
    to modernize and streamline capital raising and reporting requirements
    affecting small business. The small business improvements that the SEC
    recently proposed include:
      --Giving small businesses access to the expedited ``shelf''
            registration process for their own securities offerings, which
            previously was available only to big companies.
      --Cutting paperwork for thousands of small businesses, by allowing
            them to raise capital in a private offering after filing a
            simplified Form D online.
      --Establishing shortened holding periods for restricted securities,
            making it easier for small business shareholders to put their
            securities on the market sooner and hopefully reducing the
            discount that small businesses must absorb to sell restricted
            securities.
      --Giving issuers the benefit of a new, limited offering exemption
            from Securities Act registration requirements for offerings and
            sales of securities to a newly defined category of ``qualified
            purchasers'' in which limited advertising would be permitted.
      --Eliminating the limit on the number of employees who can receive
            stock options from their fast-growing private firms, improving
            the ability of emerging growth companies to attract and retain
            talent without prematurely triggering the requirements of the
            Exchange Act.
      --Providing a simplified system of disclosure for almost 1,600
            additional smaller public companies, an increase of over 45
            percent in the number of small companies that are currently
            eligible.
        Many of these rule proposals address key recommendations made by
    the Commission's Advisory Committee on Smaller Public Companies. We
    look forward to further input from the small business community as we
    receive the public comments on those proposals. We will continue to
    consider additional recommendations made by the Advisory Committee.
        Question. A new undertaking of the SEC is the oversight of credit
    rating agencies. Could you please tell me a little bit more about this
    and what led the SEC to begin this new project?
        Answer. On May 23, 2007, the Commission voted to adopt final rules
    to implement provisions of the Credit Rating Agency Reform Act of 2006,
    which was enacted into law in September 2006. The Credit Rating Agency
    Reform Act defines the term ``nationally recognized statistical rating
    organization'' (NRSRO), provides authority for the Commission to
    implement registration, recordkeeping, financial reporting, and
    oversight rules with respect to registered credit rating agencies. The
    Commission acted well in advance of the statutory deadline to establish
    the regulatory regime for rating agencies and to lower the barriers to
    entry into this market.
        The goal of this new law is to improve credit ratings quality by
    fostering competition, accountability, and transparency in the credit
    rating industry. The heart of the Act calls on the Commission to
    replace the barriers to entry that had previously existed. The
    replacement is a transparent and voluntary Commission registration
    system that favors no particular business model. The SEC adopted rules
    in each of these areas that would implement the Credit Rating Agency
    Reform Act.
        Question. What are the methods of enforcement used against
    violators of federal securities laws?
        Answer. Investigations begin when the staff obtains information
    from any of a wide range of sources about a possible violation of the
    securities laws. Sources include the surveillance units at the
    exchanges, examinations of regulated entities, issuer filings, news
    reports, and investor complaints. When the staff first obtains a lead,
    it conducts a preliminary inquiry. If the lead seems promising, the
    staff opens an informal investigation and requests voluntary submission
    of documents and sworn testimony from witnesses. If the staff cannot
    obtain documents or testimony voluntarily, the Commission can issue a
    formal order of investigation, which authorizes the staff to issue
    subpoenas for testimony and the production of documents. If an
    investigation uncovers evidence of wrongdoing, the staff meets with the
    Commission, presents a description of the case, suggests what action is
    appropriate and discusses various alternatives. The Commission may then
    authorize the staff to begin public enforcement action in a federal
    district court or before a Commission administrative law judge. The
    Commission may also accept proposals submitted by the alleged violated
    to settle the proposed charges.
        The securities laws provide for a broad range of sanctions,
    including: cease-and-desist orders, censures, injunctive relief,
    disgorgement, civil penalties, and industry bars. Moreover, civil
    monetary penalties may be imposed in cases involving repeat violations
    and severe frauds. The Commission's full range of existing remedies
    ensure that the Commission can effectively prosecute cases. This is
    particularly true given the SEC's ability to make criminal referrals in
    the most egregious cases.
        Question. Commissioner Cox, would you please explain how the SEC
    cooperates with foreign authorities especially regarding cross-border
    enforcement?
        Answer. Because fraudsters take advantage of borderless capital
    markets, the SEC requests assistance from foreign counterparts in all
    types of investigation--from fraud committed by investment advisers, to
    market manipulation schemes, to account intrusion cases, to
    international insider trading rings. To promote information sharing in
    cross-border securities investigations, the SEC was a founding member
    of the International Organization of Securities Commissions (IOSCO),
    and supported IOSCO's endorsement of the Multilateral Memorandum of
    Understanding (MMOU) in 2002. The MMOU requires signatories to meet
    international standards for international enforcement cooperation. The
    growing number of signatories to the MMOU is strong evidence of the
    increasing ability of our foreign colleagues to assist in international
    investigations. In fact, a number of foreign counterparts have
    strengthened their laws in order to be able to meet the international
    standard required to join the MMOU and thus be considered among the
    responsible members of the international enforcement community. As of
    September 2006, 34 securities and derivatives regulators had become
    signatories to the MMOU, and 9 additional IOSCO members had expressed
    their commitment to become signatories.
        We are also witnessing an increase in the number of investigations
    (and, consequently, the number of requests for assistance) in major
    capital markets, such as Canada and Australia, with enforcement
    programs similar to our own. We are also seeing fervent enforcement
    efforts in other less developed markets. Some of the nations whose
    markets are emerging, whose enforcement laws are newly minted or
    strengthened, or whose regulatory agencies are recently established are
    keen to establish robust enforcement programs. The tremendous demand
    for the SEC to send staff to train foreign investigators demonstrates
    our counterparts' interest in effective enforcement and in combating
    securities fraud. In response, the SEC conducts technical assistance
    and training which, over the course of close to 20 years, has resulted
    in more effective enforcement programs around the world.
        The most prominent type of illegal activity as to which our foreign
    counterparts seek assistance is in the area of insider trading. In the
    past 13 months, the SEC has received over 50 requests from our foreign
    counterparts to assist in insider trading investigations. During this
    same time frame, we have also received a substantial number of requests
    from abroad seeking assistance in market manipulation investigations
    (that is, cases where fraudsters may have manipulated the market price
    of a company's stock by false representations about the company or by
    illegal trading in the stock.)

                             CONCLUSION OF HEARINGS

        Senator Durbin. This meeting of the subcommittee will stand
    recessed.
        [Whereupon, at 3:58 p.m., Wednesday, May 16, the hearings
    were concluded, and the subcommittee was recessed, to reconvene
    subject to the call of the Chair.]

                 Material Submitted Subsequent to the Hearings

                     FEDERAL DEPOSIT INSURANCE CORPORATION

     Prepared Statement of Jon T. Rymer, Inspector General, Office of the
                               Inspector General
        Mr. Chairman and Members of the Subcommittee: I am pleased to
    present the fiscal year 2008 budget request totaling $26.8 million for
    the Office of Inspector General (OIG) at the Federal Deposit Insurance
    Corporation (FDIC), the first budget request since I took office on
    July 5, 2006. This request will allow us to continue meeting our
    statutory responsibilities and assist the FDIC in effectively carrying
    out its mission.
        As you know, the Congress created the FDIC in 1933 as an
    independent executive agency, during the Great Depression, to maintain
    stability and public confidence in the nation's banking system. Our
    nation has weathered several economic downturns since that era without
    the severe panic and loss of life savings unfortunately experienced in
    those times. The federal deposit insurance offered by the FDIC is
    designed to protect depositors from losses due to failures of insured
    commercial banks and thrifts. The Congress enacted deposit insurance
    reform legislation that will maintain insurance coverage for individual
    accounts at $100,000, but provides for inflation indexing every 5 years
    beginning in 2011. Also, as of April 1, 2006, coverage for certain
    retirement accounts increased to $250,000 from $100,000, with similar
    inflation indexing. According to most recent FDIC data, as of December
    31, 2006, the FDIC insured $6.6 trillion in deposits for 8,693
    institutions, of which the FDIC supervised 5,220. The FDIC promotes the
    safety and soundness of these institutions by identifying, monitoring,
    and addressing risks to which they are exposed.
        The Corporation reports that industry earnings are at record-high
    levels, bank capital is historically high, and loan performance has
    slipped only slightly from record levels. Currently, there are 50
    institutions on the ``problem list''--one of the lowest numbers in the
    history of the FDIC. Unfortunately, the 31-month streak of no
    failures--the longest in FDIC history--ended in February 2007, when one
    small institution, Metropolitan Savings Bank, failed. Still, the
    financial health of the banking industry remains very good overall. As
    for the economy, it is now in a sixth year of expansion; however, U.S.
    economic growth appears to be slowing significantly and some negative
    trends are emerging in the banking sector. They include a narrowing of
    net interest margins; increasing concentrations of riskier commercial
    real estate loans; and signs of credit distress in subprime mortgage
    portfolios. As economic conditions shift, the OIG is poised to focus
    its work on the challenges facing the FDIC in monitoring and assessing
    various existing and emerging risks to insured depository institutions
    and the Deposit Insurance Fund.
        The FDIC OIG is an independent and objective unit established under
    the Inspector General Act of 1978, as amended. The OIG's mission is to
    promote the economy, efficiency, and effectiveness of FDIC programs and
    operations, and protect against fraud, waste, and abuse to assist and
    augment the FDIC's contribution to stability and public confidence in
    the nation's financial system.
        Before discussing our budget needs for fiscal year 2008, I would
    like to highlight some of our accomplishments from the past fiscal
    year, our assistance to FDIC management, our planning and internal
    initiatives to improve the OIG, and the management and performance
    challenges facing the FDIC.
          a review of the fdic oig's fiscal year 2006 accomplishments
        As in past years, during fiscal year 2006, our work in audits,
    evaluations, and investigations resulted in a number of major
    achievements, as follows: $44.9 million in actual and potential
    monetary benefits; 26 audit and evaluation reports issued; 82 non-
    monetary recommendations to FDIC management; 49 referrals to the
    Department of Justice; 42 indictments/informations; 26 convictions; 1
    employee/disciplinary action.
        More specifically, our accomplishments included investigations that
    led to the above indictments and convictions as well as fines, court-
    ordered restitution, and recoveries that constitute slightly over $39
    million in actual and potential monetary benefits from our work. Our
    audit and evaluation reports included about $3.4 million in questioned
    costs and $1.5 million in recommendations that funds be put to better
    use. The audit and evaluation reports contained non-monetary
    recommendations to improve FDIC policies, operations, and controls that
    ultimately are designed to improve the FDIC's ability to effectively
    and efficiently accomplish its mission.
        On the whole, the OIG accomplished all of its organizational goals
    during the fiscal year, as outlined in our annual performance plan. Our
    2006 Performance Report shows that we met or substantially met 100
    percent of our goals. In a measurable way, this achievement shows the
    progress we continue to make in adding value to the Corporation with
    our audits, investigations, and evaluations in terms of impact,
    quality, productivity, and timeliness.
        The following audit, evaluation, and investigative work illustrates
    some of the OIG's accomplishments in fiscal year 2006:
      --Audit reports addressed significant issues. For example, one report
            contained recommendations to ensure that the FDIC periodically
            validates key assumptions, estimates, or other components that
            factor into the calculation of the reserve ratio, which is the
            ratio of the balance in the Deposit Insurance Fund to estimated
            deposits in the banking system. In connection with corporate
            governance practices, this report also recommended improved
            communication of information relevant to deposit insurance
            assessment determinations and other corporate matters and
            activities to the FDIC Board of Directors. Several reports
            dealt with various consumer protection and community
            reinvestment issues, including predatory lending, use of Home
            Mortgage Disclosure Act data to identify and assess instances
            of potential discrimination in FDIC-supervised institutions,
            and the FDIC's process for addressing the violations and
            deficiencies reported in compliance examinations. Our Federal
            Information Security Management Act-related audits have
            contributed to the FDIC making significant progress in the past
            several years in improving security controls and addressing
            current and emerging information security requirements.
      --Evaluation reports focused on a number of important corporate
            issues, including the industrial loan company application
            process, the FDIC's safeguards over personal information,
            contract administration, and the FDIC's emergency response
            plan. The reports have generally contributed to strengthened
            program controls and improved corporate governance of FDIC
            operations.
        Successful investigative outcomes included the following:
      --The former president and chief executive officer of Hawkeye State
            Bank (HSB) was ordered to pay $3.7 million in restitution based
            on his stipulating to having caused $4.9 million in losses to
            HSB. He was sentenced to 65 months of incarceration and 5 years
            of supervised release.
      --The former president of the First National Bank of Blanchardville
            was sentenced to 9 years' incarceration and ordered to pay
            restitution of $13 million to the FDIC.
      --The former chairman of the board and chief executive officer of
            Hamilton Bank was sentenced to 30 years of incarceration and 36
            months of supervised released. He had earlier been convicted on
            all 16 charges of making false filings to the Securities and
            Exchange Commission and to bank examiners, making false
            statements, wire fraud, bank fraud, securities fraud,
            obstruction of a bank examination, and conspiracy. He, along
            with two other convicted Hamilton Bank officers, was ordered to
            pay $32 million in total restitution for bank and securities
            fraud, $16 million of which is payable to the FDIC.
      --The former chief executive officer (CEO) of the now defunct Sunbelt
            Savings and Loan of Dallas, Texas, an institution whose
            insolvency cost taxpayers approximately $1.2 billion, was
            sentenced to 15 years' imprisonment and ordered to pay a
            criminal forfeiture of $2 million to the United States
            Government and restitution in the amount of $312,828 to the
            FDIC. The former CEO was convicted on 27 counts involving
            defrauding the FDIC of its payments of $7.5 million and $8.5
            million in a civil judgment resulting from his 1990 guilty plea
            to federal fraud charges in connection with the collapse of
            Sunbelt.
                         assistance to fdic management
        In addition to audits, investigations, and evaluations, the OIG
    made valuable contributions to the FDIC in several other ways. Among
    these contributions were the following activities:
      --Reviewed 14 proposed corporate policies and offered comments and
            suggestions when appropriate (e.g., Employee Rights and
            Responsibilities under the Privacy Act of 1974, Encryption and
            Digital Signatures for Electronic Mail, Protection of Privacy
            Information, the FDIC's Software Configuration Management
            Program, and Enterprise Risk Management);
      --Participated in division-level conferences and meetings to
            communicate our audit, evaluation, and investigation work and
            processes;
      --Provided technical assistance and advice to several FDIC groups
            working on information technology issues, including
            participating at the FDIC's information technology security
            meetings;
      --Reviewed and/or commented on four draft legislative documents and
            regulations.
        We are committed to continuing to demonstrate to the Congress, the
    public, the FDIC, and the banking industry that the OIG is doing the
    right things and generating results that are a worthy return on the
    investment made in us.
                     oig planning and internal initiatives
        In fiscal year 2006, we undertook a comprehensive and integrated
    approach to planning OIG audits, evaluations, investigations, and
    internal activities, resulting in a Business Plan that captures our
    strategic goals, performance goals, and key efforts. We have been
    planning, conducting our work, and reporting our results in the context
    of these strategic goals since that time and will continue to do so in
    fiscal years 2007 and 2008. The OIG's work is centered on five
    strategic goals that link directly to the FDIC's mission, principal
    business lines, and significant challenges: Supervision, Insurance,
    Consumer Protection, Receivership Management, and Internal Resources
    Management. To these, we added a goal related to our internal processes
    in the interest of continuing to build and sustain a high-quality OIG
    work environment. We are pursuing that goal intently through a number
    of operational improvement projects.
        These projects include professional development; human capital
    management and leadership development; client, stakeholder, and staff
    relationships; quality and efficiency of OIG work; strategic and annual
    performance planning and measurement; and information technology. These
    initiatives are important for the OIG to ensure that we build and
    sustain the quality of our work and remain a results oriented high-
    performance organization, use our resources wisely, and stay abreast of
    the significant and ever-changing challenges facing the FDIC and the
    financial services industry.
        The complete 2007 Business Plan can be found on our Web page at
    http://fdicig.gov or obtained by contacting our office. Consistent with
    our working Business Plan, we are currently developing performance
    goals and key efforts for fiscal years 2008 and 2009, which will
    continue building on our six strategic goals. We will also continue to
    coordinate closely with the Congress, FDIC management, financial
    regulatory OIGs, others in the IG community, the U.S. Government
    Accountability Office, and law enforcement agencies as we plan and
    conduct our upcoming work.
          management and performance challenges facing the corporation
        As part of our planning and budgeting process, the OIG annually
    assesses the most significant management and performance challenges
    facing the Corporation, in the spirit of the Reports Consolidation Act
    of 2000. In identifying those challenges, we consider the FDIC's
    strategic goals and the Chairman's corporate priorities and objectives.
    Identifying these challenges helps guide our work. In February 2007, we
    identified the following management and performance challenges facing
    the Corporation for inclusion in the Corporation's Performance and
    Accountability Report: addressing risks in large banks; maintaining
    strong regulatory capital standards; implementing deposit insurance
    reform; maintaining an effective examination and supervision program;
    granting insurance to and supervising industrial loan companies;
    guarding against financial crimes in insured institutions; safeguarding
    the privacy of consumer information; promoting fairness and inclusion
    in the delivery of information, products, and services to consumers and
    communities; ensuring compliance with consumer protection laws and
    regulations and follow-up on violations; being ready for potential
    institution failures; and promoting sound governance and managing and
    protecting human, financial, information technology, physical, and
    procurement resources.
        FDIC Chairman Bair recently expressed her views on several
    challenges that the Corporation is facing and that she believes will
    continue to warrant attention over the next few years. The Chairman
    highlighted the following challenges as ``front-burner'' issues:
      --Making sure the FDIC has a strong, vigilant supervisory program and
            creating a strong interrelationship between compliance and risk
            management;
      --Implementing deposit insurance reform to help ensure a deposit
            insurance pricing system that reinforces the supervisory
            program;
      --Maintaining strong regulatory capital standards under Basel II;
      --Granting insurance to and supervising industrial loan companies;
      --Promoting fairness and inclusion in the delivery of information,
            products, and services to consumers and communities; and
      --Promoting sound governance and managing resources.
        In addition to these priorities, Chairman Bair recently testified
    before the House Subcommittee on Financial Institutions and Consumer
    Credit of the Committee on Financial Services regarding other
    management and performance challenges facing the Corporation. Chairman
    Bair focused on the following:
      --Strengthening protections available to borrowers in the subprime
            mortgage market; and
      --Ensuring that predatory lending practices do not take root in the
            banking system.
        Clearly, our assessment of corporate challenges and the Chairman's
    articulation of priority issues are closely aligned. We look forward to
    continuing to work with the Congress and corporate officials to address
    all of these challenges successfully.
                         oig's fiscal year 2008 request
        Our fiscal year 2008 budget request seeks the resources necessary
    to allow the OIG to continue its efforts in audit, investigative, and
    evaluation work. In addition, our funding allows us to continue to
    enhance knowledge capacity, employee programs, and operational
    improvement projects. These funds are essential to helping us remain
    prepared to meet the complex issues and challenges confronting the
    FDIC. The funds are critical to ensure that OIG can continue to provide
    our clients with timely, objective, and reliable information on how
    well FDIC programs, operations, and policies are working, and, when
    needed, recommendations for improvement. The OIG is an invaluable tool
    for helping the FDIC protect against fraud, waste, and abuse to assist
    and augment the Corporation's contribution to stability and public
    confidence in the nation's financial system.
        At this time, we anticipate handling a 2008 investigative workload
    comparable to that of 2007. With respect to 2008 audit and evaluation
    work, we also anticipate a similar level of effort, with sustained
    attention to many of the Chairman's corporate priorities. Some key
    efforts begun in fiscal year 2007 will carry over into fiscal year
    2008. To remain responsive to ever-changing priorities and emerging
    issues, we will keep close track of our planned work and make
    adjustments, as needed, to maximize the value that we add.
        After 11 years of consecutive budgetary decreases, our fiscal year
    2008 budget request in the amount of $26,848,000 represents a modest
    increase of $592,000 (or 2.2 percent) over our fiscal year 2007 funding
    level. This budget request reflects a stabilized OIG operating
    environment and will support a full-time equivalent staff of 127, down
    3 from fiscal year 2007. Even with the reduction in staffing, the
    slight increase in budget is required to help absorb higher projected
    expenses for employee salaries and benefits costs and non-personnel
    related expenses. As in past years, funds for the OIG budget would be
    derived from the Deposit Insurance Fund and the Federal Savings and
    Loan Insurance Corporation Resolution Fund.
                               concluding remarks
        I appreciate the support and resources we have received from this
    Subcommittee, the Congress, and the FDIC. As a result, the OIG has
    continued to pursue successful investigations and to make a difference
    in FDIC operations in terms of financial benefits and improvements and
    strengthened internal operations and efficiency. I look forward to
    continue working with this Subcommittee in years to come. I believe our
    fiscal year 2008 budget strikes an appropriate balance between the
    mandate of the Inspector General Act, other legislative requirements,
    our judgments of OIG workload needs, and the changing conditions in the
    banking industry. We continue to seek your support so that we will be
    able to effectively and efficiently conduct our work on behalf of the
    Congress, the FDIC, and the American public.
                                     ______

                            NONDEPARTMENTAL WITNESS

                    Prepared Statement of Independent Sector
        Mr. Chairman and Members of the Committee: Independent Sector
    appreciates the opportunity to comment on fiscal year 2008 federal
    appropriations for Internal Revenue Service activities.
        Independent Sector is a nonprofit, nonpartisan coalition of
    approximately 575 charities, foundations, and corporate philanthropy
    programs, collectively representing tens of thousands of charitable
    groups in every state across the nation. Our mission is to advance the
    common good by leading, strengthening, and mobilizing the charitable
    community. We have worked since our inception to help our member
    organizations meet the highest standards of ethical practice,
    accountability, and effectiveness.
        We support increased funding of the Internal Revenue Service's
    fiscal year 2008 budget and write today to urge you to appropriate the
    level recommended by the IRS Oversight Board: $11.406 billion, $310.1
    million above the President's budget request.\1\ The increased funding
    is necessary to develop more effective oversight and enforcement of the
    laws regulating charities and foundations as well as comprehensive
    education of nonprofit organizations about their obligations under
    those laws.
    ---------------------------------------------------------------------------
        \1\ IRS Oversight Board, ``Fiscal Year 2008 IRS Budget
    Recommendation, Special Report,'' at 13 (April 2007).
    ---------------------------------------------------------------------------
    An Ethical, Accountable Nonprofit Community is Essential to Nonprofits'
            Ability to Improve Lives
        Our country's growing nonprofit community works to improve lives in
    communities across America and around the world. It provides vital
    services in such fields as health, education, social assistance,
    community development, and the arts.
        Crucial to fulfilling our missions is our ability to demonstrate to
    our stakeholders--donors, beneficiaries, volunteers, and policymakers--
    that we operate ethically and accountably. Only if we earn and maintain
    their trust will we receive their continued support. Preservation of
    that trust depends upon a combination of vigorous self-regulation by
    charitable organizations and effective enforcement of the law.
        In recent years, media stories have revealed a number of instances
    of abuse by taxpayers using charitable organizations for personal gain
    and individuals claiming excessive contributions. Former IRS
    Commissioner Mark Everson encapsulated this threat in testimony before
    Senate appropriators in April 2005, ``[i]f we do not act expeditiously,
    there is a risk that Americans will lose faith in our nation's
    charitable organizations. If that happens, Americans will stop giving
    and those in need will suffer.'' \2\
    ---------------------------------------------------------------------------
        \2\ Hearing on Internal Revenue Service Fiscal Year 2006 Budget
    Request Before the Senate Comm. on Appropriations, Subcommittee on
    Transportation, Treasury, the Judiciary, Housing and Urban Development,
    and Related Agencies, 109th Cong. 8 (2005) (statement of Mark W.
    Everson, Commissioner, Internal Revenue Service).
    ---------------------------------------------------------------------------
        Concerned about the cumulative impact of abuse and convinced of the
    need for better enforcement, in 2004, at the encouragement of the
    Chairman and Ranking Member of the Senate Finance Committee,
    Independent Sector brought together leaders from all corners of the
    nonprofit community to create the Panel on the Nonprofit Sector. The
    Panel was charged with considering and recommending actions to ensure
    that charities and foundations maintain the highest possible ethical
    standards. It submitted its Final Report to Congress and the Nonprofit
    Sector \3\ in June 2005 proposing more than 120 actions to be taken by
    charitable organizations, Congress, and the IRS.
    ---------------------------------------------------------------------------
        \3\ Panel on the Nonprofit Sector, ``Strengthening Transparency,
    Governance, and Accountability of Charitable Organizations: A Final
    Report to Congress and the Nonprofit Sector,'' available at http://
    www.nonprofitpanel.org/final/Panel_Final_Report.pdf (June 2005).
    ---------------------------------------------------------------------------
        A key recommendation of the Panel is to increase resources
    allocated to the IRS for oversight of charitable organizations as well
    as overall tax enforcement. As noted by the Panel, effective oversight
    of the nonprofit community requires vigorous enforcement of the law. It
    continued, ``without adequate resources for oversight and enforcement,
    those who willfully violate the law will continue to do so with
    impunity.'' \4\
    ---------------------------------------------------------------------------
        \4\ Id. at 25.
    ---------------------------------------------------------------------------
        Comptroller General David Walker echoed the Panel's recommendation
    in congressional testimony in 2005: ``Oversight can help sustain public
    faith in the sector and ensure that exempt entities stay true to the
    purposes that justify their tax exemption. It also can help protect the
    entire sector from potential abuses initiated by a small minority.''
    \5\
    ---------------------------------------------------------------------------
        \5\ Tax-Exempt Sector--Governance, Transparency, and Oversight are
    Critical For Maintaining Public Trust: Hearing on an Overview of the
    Tax-Exempt Sector Before the House Comm. on Ways and Means, 109th Cong.
    1 (2005) (statement of David M. Walker, Comptroller General of the
    United States, Government Accountability Office).
    ---------------------------------------------------------------------------
    Additional Resources are Needed to Restore and Grow IRS Enforcement
            Capacity
        Following a dramatic decline in IRS enforcement resources during
    the 1990s, Congress has in recent years enacted targeted increases to
    the IRS budget. We applaud and appreciate these investments, which have
    enabled the IRS to initiate critical investigations into potential
    areas of noncompliance, including political intervention by nonprofits,
    executive compensation practices, and abuses by credit counseling
    agencies.
        However, the IRS's enforcement capacity has not yet fully
    rebounded. As the Government Accountability Office noted in a recent
    statement before this subcommittee, ``[a]lthough IRS has increased
    direct revenue collected through its enforcement programs in recent
    years, enforcement continues to be included on our list of high-risk
    federal programs.'' \6\
    ---------------------------------------------------------------------------
        \6\ Internal Revenue Service, Assessment of the 2008 Budget Request
    and an Update of 2007 Performance: Hearing on the Department of
    Treasury's Budget Request and Justification for Fiscal Year 2008 Before
    the Senate Comm. on Appropriations Subcommittee on Financial Services
    and General Government, 110th Cong. 1 (2007) (statement of James R.
    White, Director, Strategic Issues, Government Accountability Office and
    David A. Powner, Director, Information Technology Management Issues,
    Government Accountability Office).
    ---------------------------------------------------------------------------
        IRS enforcement resources have not kept pace with the dynamic
    growth of the nonprofit community. Over the past 20 years, the number
    of charities and foundations has nearly doubled in size, with
    applications for tax-exempt status increasingly steadily. During that
    time period, the number of staff within the IRS Tax Exempt and
    Government Entities Division has remained essentially unchanged.\7\ In
    fiscal year 2006, the most recent year for which data is available, the
    IRS examined 34 percent fewer tax-exempt returns than it did in fiscal
    year 1997.\8\
    ---------------------------------------------------------------------------
        \7\ Statement of David M. Walker, supra note 5, at 17.
        \8\ Internal Revenue Service, ``Fiscal Year 2006 Enforcement and
    Service Results,'' at 7 (November 20, 2006).
    ---------------------------------------------------------------------------
        The recent enactment of the Pension Protection Act of 2006 (Public
    Law No. 109-280) has put yet additional pressure on the IRS, making the
    need to strengthen the IRS more urgent. The Pension Protection Act
    (PPA) included what one IRS official has categorized as the most
    ``significant, comprehensive legislation'' affecting tax-exempt
    organizations since 1969.\9\ It contained various provisions, many of
    which reflected the recommendations of the Panel on the Nonprofit
    Sector, designed to deter individuals who would use charitable
    organizations for personal benefit and to ensure that donations are
    used for charitable purposes.
    ---------------------------------------------------------------------------
        \9\ Christopher Quay, IRS Focusing on Forms, Education Issues
    Related to Pension Act, Official Says, Tax Analysts, March 14, 2007, at
    Doc 2007-6377.
    ---------------------------------------------------------------------------
        Since enactment of PPA, the IRS has issued several pieces of
    guidance implementing and explaining the new law. However, much more
    has yet to be done. For example, PPA mandated that the IRS complete a
    study on supporting organizations and donor-advised funds by August
    2007. The IRS has additionally pledged to develop guidance on a number
    of issues in the coming year as well as to continue efforts to overhaul
    the Form 990, the annual Return of Organization Exempt From Income Tax,
    to reflect new filing requirements enacted as part of PPA as well as
    other much-needed modifications.
        Recognizing the importance of building staff capacity and stronger
    enforcement mechanisms, the Administration requested in its fiscal year
    2008 budget funding to support 12 IRS enforcement initiatives,
    including a program to increase tax-exempt entity compliance. Echoing
    the IRS Oversight Board, we applaud the President's commitment to
    restoring and strengthening the oversight capacity of the IRS. However,
    we urge you to fund the initiatives at the level recommended by the
    Board--$351.4 million, or $105 million above the President's
    request.\10\ Increased funding will better equip the IRS to serve its
    enforcement functions--to ensure nonprofits meet the requirements of
    the tax laws, in particular the new mandates included in PPA, and help
    to protect charitable organizations from unscrupulous individuals
    looking to exploit them for personal gain.
    ---------------------------------------------------------------------------
        \10\ IRS Oversight Board, supra note 1, at 17-19.
    ---------------------------------------------------------------------------
    Education and Outreach are Needed to Enhance Voluntary Compliance
        As articulated in its guiding principle--``service plus enforcement
    equals compliance''--the IRS will only achieve maximum compliance with
    our nation's tax laws if it balances its oversight activities with a
    strong program of education, outreach, and accessibility.
        Recent increases in the IRS budget have enabled the agency to
    develop myriad new educational tools for charitable organizations,
    including issue-specific teleconferences and web forums; an online
    training workshop, www.stayexempt.org; and numerous fact sheets and
    notifications. As in the enforcement arena, however, the passage of PPA
    makes additional IRS education crucial.
        PPA increased the complexity of laws governing charitable
    organizations. Nonprofits will look to the IRS for explanation and
    guidance as they attempt to comply with these important new mandates.
    Tax practitioners too will turn to the IRS for technical guidance to
    ensure that they accurately and effectively advise their nonprofit
    clients.
        The large number of small organizations within the nonprofit
    community magnifies the need for stronger education. The majority of
    nonprofit organizations are community-based groups, many of which rely
    entirely on voluntary staff. Of the one million 501(c)(3) organizations
    registered with the IRS in 2004, approximately 63 percent had annual
    revenues of less than $25,000 and were not required to file with the
    IRS. Of those obligated to file with the agency, nearly 63 percent
    reported total budgets of less than $200,000.\11\
    ---------------------------------------------------------------------------
        \11\ Independent Sector analysis of the National Center for
    Charitable Statistics Core Data Files for Public Charities and Private
    Foundations. Analysis run on May 16, 2007. Internal Revenue Service,
    ``Internal Revenue Service Data Book, 2006,'' at 56.
    ---------------------------------------------------------------------------
        PPA mandates a new reporting requirement for the smallest
    organizations, those with annual receipts of less than $25,000. Failure
    to comply for three consecutive years will result in revocation of tax-
    exempt status. Oversight alone will not ensure these organizations--
    some 600,000 groups, the majority of which do not have access to tax
    and accounting advisers--comply with the law. It will be incumbent upon
    the IRS to find and notify these organizations of their new
    responsibility. The IRS Oversight Board's budget recommendation would
    enable the IRS to meet these service needs--to reach out to and educate
    nonprofit organizations that want to comply with the law but may not
    know how--while balancing its enforcement responsibilities.
                                   conclusion
        Following a significant decline in resources, the Internal Revenue
    Service has made great strides toward restoring its tax enforcement
    program while maintaining adequate taxpayer services. This achievement
    is due in large measure to recent investments by Congress. We applaud
    and appreciate these efforts.
        However, we concur with the recommendations of former IRS
    Commissioner Everson, the GAO, and others that additional resources are
    necessary to enable the IRS to continue to ensure effective oversight
    of the charitable sector and enforcement of our tax laws, while also
    maintaining taxpayer service. In order to help preserve and grow public
    trust in the nonprofit community's ability to improve lives and
    strengthen communities, we urge you to fund the IRS in fiscal year 2008
    at the level recommended by the IRS Oversight Board: $11.406 billion.
        We thank you for your consideration of these comments. If you have
    any questions, please feel free to contact Patricia Read, Independent
    Sector's Senior Vice President of Public Policy and Government Affairs,
    by phone at (202) 467-6100 or by email at patr@independentsector.org.

           LIST OF WITNESSES, COMMUNICATIONS, AND PREPARED STATEMENTS

                                  ----------
                                                                       Page
    Allard, Senator Wayne, U.S. Senator From Colorado:
        Prepared Statements of............................32, 121, 183, 300
        Questions Submitted by......................................18, 198
        Statements of..........................................50, 300, 342

    Bond, Senator Christopher S., U.S. Senator From Missouri:
        Prepared Statement of........................................    15
        Questions Submitted by.......................................    46
    Brown, Hon. Kevin, Deputy Commissioner for Services and
      Enforcement, Internal Revenue Service, Department of the
      Treasury.......................................................   253
        Oral Statement of............................................   255
        Prepared Statement of........................................   256
        Questions Submitted to.......................................   316
    Brownback, Senator Sam, U.S. Senator From Kansas:
        Prepared Statements of.....................................121, 164
        Questions Submitted by..............16, 44, 105, 145, 196, 249, 367
    Buchanan, Avis E., Esq., Director, Public Defender Service,
      Courts, District of Columbia...................................   221
        Prepared Statement of........................................   222

    Cox, Hon. Christopher, Chairman, Securities and Exchange
      Commission.....................................................   341
        Prepared Statement of........................................   347
        Summary Statement of.........................................   342

    Duff, James C., Director, Administrative Office of the U.S.
      Courts, the Judiciary..........................................    78
        Prepared Statement of........................................    81
    Dunn, Mike, Commissioner, Commodity Futures Trading Commission...     1
    Durbin, Senator Richard J., U.S. Senator From Illinois:
        Questions Submitted by..............39, 96, 135, 184, 316, 328, 362
        Statements of........................1, 49, 111, 155, 201, 253, 341

    George, J. Russell, Inspector General for Tax Administration,
      Internal Revenue Service, Department of the Treasury...........   253
        Prepared Statement of........................................   276
        Statement of.................................................   274
    Gibbons, Hon. Julia S., Judge, U.S. Court of Appeals, Sixth
      Circuit; Chair, Budget Committee, Judicial Conference of the
      United States, the Judic-
      iary...........................................................    49
        Opening Statement of.........................................    51
        Prepared Statement of........................................    53
    Gist, Deborah A., State Education Officer, Government of the
      District of Columbia, Courts, District of Columbia.............   233
        Prepared Statement of........................................   234

    Independent Sector, Prepared Statement of........................   377

    Jeffery, Hon. Reuben, III, Chairman, Commodity Futures Trading
      Commission.....................................................     1
        Prepared Statement of........................................     5
        Statement of.................................................     3

    Kelley, Colleen M., President, National Treasury Employees Union,
      Prepared Statement of..........................................   333
    King, Rufus G., III, Chief Judge, Superior Court of the District
      of Columbia, Courts, District of Columbia......................   213
        Prepared Statement of........................................   215

    Lautenberg, Senator Frank R., U.S. Senator From New Jersey,
      Questions Submitted by.........................................   105
    Lukken, Walt, Commissioner, Commodity Futures Trading Commission.     1

    Michel, Paul R., Chief Judge, United States Court of Appeals for
      the Federal Circuit, the Judiciary, Prepared Statement of......    65

    Nelson, Senator Ben, U.S. Senator From Nebraska, Questions
      Submitted by.................................................327, 331

    Olson, Nina E., National Taxpayer Advocate, Internal Revenue
      Service, Department of the Treasury............................   253
        Prepared Statement of........................................   285
        Questions Submitted to.......................................   328
        Statement of.................................................   283

    Paulson, Hon. Henry M., Jr., Secretary, Office of the Secretary,
      Department of the Treasury.....................................   111
        Prepared Statement of........................................   112
        Statement of.................................................   112
    Portman, Robert J., Director, Office of Management and Budget....   155
        Opening Statement of.........................................   156
        Prepared Statement of........................................   158
    Powner, David A., Director, Information Technology Management
      Issues, Government Accountability Office.......................   253
    Preston, Hon. Steven, Administrator, Small Business
      Administration.................................................    19
        Prepared Statement of........................................    22

    Quander, Paul A., Jr., Esq., Director, Court Services and
      Offender Supervision Agency, Courts, District of Columbia......   217
        Prepared Statement of........................................   219

    Restani, Jane A., Chief Judge, United States Court of
      International Trade, the Judiciary, Prepared Statement of......    66
    Rothstein, Barbara J., Director, Federal Judicial Center, the
      Judiciary, Prepared Statement of...............................    68
    Rymer, Jon T., Inspector General, Office of the Inspector
      General, Federal Deposit Insurance Corporation, Prepared
      Statement of...................................................   373

    Shea, Robert, Associate Director for Management, Office of
      Management and Budget..........................................   155
    Shelby, Senator Richard C., U.S. Senator From Alabama, Question
      Submitted by...................................................    48
    Stiff, Linda A., Deputy Commissioner for Operations, Internal
      Revenue Service, Department of the Treasury....................   253

    United States Sentencing Commission, the Judiciary, Prepared
      Statement of the...............................................    75
    Washington, Eric T., Chief Judge, District of Columbia Court of
      Appeals, Courts, District of Columbia..........................   201
        Prepared Statement of........................................   205
        Questions Submitted to.......................................   249
    White, James R., Director, Strategic Issues, Government
      Accountability Office..........................................   253

                                 SUBJECT INDEX

                                  ----------

                      COMMODITY FUTURES TRADING COMMISSION

                                                                       Page

    Additional Committee Questions...................................    16
    Commission Structure.............................................     7
    Critical Information Technology Systems..........................    13
    Enforcement......................................................     4
    Fiscal Year 2008 President's Budget Request......................    10
    Increased Funding for Agency.....................................     4
    Mission of the Agency............................................     6
    Record Growth in Futures Industry................................     4
    Student Loan Repayment Program...................................    13

                           DEPARTMENT OF THE TREASURY

                            Internal Revenue Service

    A Strategic Plan to Improve Voluntary Compliance and Reduce the
      Tax Gap........................................................   265
    Additional Committee Questions...................................   316
    Business Systems Modernization...................................   321
    Collection Notices for Delinquent Debt of $100 or Less...........   315
    Comparison of IRS to PCA Costs...................................   306
    Congress Should Provide Increases in IRS Personnel Funding at a
      Steady but Gradual Pace, Perhaps Two Percent to Three Percent a
      Year Above Inflation...........................................   286
    Conservation Easements.........................................301, 307
    Delivery of Interactive Taxpayer Assistance......................   317
    Effect of New Non-Cash Charitable Contribution Rules.............   327
    Electronic:
        Filing.......................................................   319
        Fraud Detection System.......................................   314
    Enhance Enforcement of the Tax Laws..............................   279
    Estate and Gift Attorneys........................................   311
    Felony Failure to File...........................................   299
    Funding for the Private Debt Collection Initiative Should be
      Redirected to Fund Collection Activity by IRS Employees........   291
    ID Theft and Taxes...............................................   312
    Implementation of New Nonprofit Laws.............................   326
    Improve Taxpayer Service.........................................   276
    Information Sharing With the SSA.................................   308
    Internal Revenue Service:
        Funding Increases Should be Balanced Between Taxpayer Service
          and Enforcement............................................   287
        Recruitment Tools............................................   298
        Workforce....................................................   323
    Legislative Proposals..........................................282, 299
    Mandatory E-Filing by Charitable Organizations...................   320
    Modernize the IRS Through Its People, Processes and Technology...   280
    Narrowing the ``Tax Gap'' and Misclassification..................   323
    Nonprofit Election-Related Activity..............................   325
    Observations of Government Accountability Office.................   304
    Other Issues.....................................................   270
    Overview of the IRS' Fiscal Year 2008 Budget Request.............   276
    Preparation of Returns...........................................   300
    President's Fiscal Year 2008 Budget Maintains the Balance Between
      Taxpayer Service and Enforcement...............................   264
    Private Debt Collection..............................303, 305, 310, 318
    Producing Results................................................   257
    Protection of Personal Information...............................   311
    Qualified Appraisers.............................................   302
    Recruitment and Retention: Student Loan Repayment................   325
    Relief From ID Theft Expenses....................................   313
    Safe Harbor and Misclassification................................   324
    Taxpayer Assistance Blueprint....................................   316
    Technology Improvements at the IRS...............................   315
    The IRS Should:
        Address the Impact of IRS Business Systems Modernization
          Limitations on Both Taxpayer Service and Enforcement
          Initiatives................................................   291
        Devote More Resources to Obtaining Better Research to Improve
          its Strategic Planning and Resource Allocation Decisions...   288
    The Overriding Mission of the IRS Should be to Increase Voluntary
      Compliance.....................................................   285
    Treasury Inspector General for Tax Administration Fiscal Year
      2008 Budget Request............................................   282
    Trends in Taxpayer Advocate Service (TAS) Case Inventory.........   292
    2007 Filing Season.............................................259, 278
    Volunteer Income Tax Assistance..................................   298

                            Office of the Secretary

    Additional Committee Questions...................................   135
    Alternative to Outsourcing: FedSource--Stay at Treasury or Move
      to GSA?........................................................   135
    Assistant Secretary for International Affairs....................   125
    Bank Secrecy Act Direct..........................................   118
    Committee on Foreign Investment in the United States.............   139
    Community Development Financial Institutions Program.............   116
    Dialogue With China..............................................   131
    Economy and Wages................................................   128
    Establishment of Dynamic Tax Office at Treasury..................   143
    Financial:
        Credit.......................................................   130
        Reporting..................................................126, 127
    H.R. 556--National Security Foreign Investment Reform and
      Strengthened Transparency......................................   140
    Housing Market...................................................   129
    Information:
        Security.....................................................   144
        Technology Management........................................   117
    Iraq Threat Finance Cell.......................................126, 127
    Managing U.S. Government Finances................................   114
    Overseas Attache Program.........................................   142
    PART Program...................................................123, 125
    Personally Identifiable Information..............................   143
    Private Capital..................................................   132
    Promoting Economic Growth, Security and Opportunity..............   113
    Risk Management..................................................   133
    Sarbanes-Oxley Requirements......................................   133
    Statement of Administration Policy...............................   140
    Strengthening:
        Financial Institutions.......................................   115
        National Security............................................   113
    Sudan Policy.....................................................   127
    Tax Enforcement..................................................   122
    Terrorist Financing..............................................   119
    Treasury Foreign Intelligence Network............................   119

                              DISTRICT OF COLUMBIA

                                     Courts

    Additional Committee Questions...................................   249
    Background.......................................................   223
    Budget Priorities................................................   203
    Capital Budget Priorities........................................   214
        Restoration of the Old Courthouse............................   206
    Complete Budget Request Summary..................................   211
    District of Columbia Court of Appeals............................   249
    District of Columbia Courts......................................   250
        Capital Request..............................................   239
        Infrastructure...............................................   208
    Family Court.....................................................   241
        Update.......................................................   214
    Favorable Survey Results.........................................   222
    Fiscal Year:
        2006 Accomplishments.........................................   225
        2008 Request.................................................   224
    General Program Accomplishments..................................   225
    Operating Budget Priorities....................................205, 213
    PDS's Immediate Needs............................................   224
    Recent Achievements..............................................   206
    Responsiveness to the Community..................................   215
    Technology.......................................................   216
    The President's Recommendation.................................204, 206

                     FEDERAL DEPOSIT INSURANCE CORPORATION

    A Review of the FDIC OIG's Fiscal Year 2006 Accomplishments......   373
    Assistance to FDIC Management....................................   374
    Management and Performance Challenges Facing the Corporation.....   375
    OIG:
        Fiscal Year 2008 Request.....................................   376
        Planning and Internal Initiatives............................   375

                        OFFICE OF MANAGEMENT AND BUDGET

    Additional Committee Questions...................................   183
    Administering Earmarks...........................................   165
    Are Political Activities Being Encouraged at Federal Agencies?...   193
    Balanced Budget..................................................   162
    Competitive Sourcing: Inherently Governmental vs. Commercial
      Activities.....................................................   184
    Consolidation....................................................   161
    E-Government Initiative..........................................   188
    Earmarks.........................................................   167
    Enterprise Services Initiative...................................   185
    Fiscal Year 2008 Budget..........................................   159
    Information Technology...........................................   189
    Management/ExpectMore.gov........................................   159
    Medicare:
        And Medicaid.................................................   163
        Part D.......................................................   172
    Office of Information and Regulatory Affairs.....................   168
    Office of Management and Budget:
        Budget.......................................................   158
        Request......................................................   155
    Outsourcing--``Competitive Sourcing'' OMB Circular A-76..........   192
    President's Budget...............................................   156
    Privacy and Civil Liberties Oversight Board......................   186
    Privacy and Security:
        For Information Systems: OMB Directives on Budget Requests...   195
        Of Personal Information Role of OMB in Government Computer
          Data Breaches..............................................   193
    Program Assessment Rating Tool (PART)............................   186
    Program Evaluation...............................................   178
    Regulatory Policy................................................   191
    Social Security..................................................   170
    Staffing.......................................................160, 185
    War Supplemental...............................................171, 173

                       SECURITIES AND EXCHANGE COMMISSION

    Additional Committee Questions...................................   362
    Arbitration......................................................   362
    Commission Approval for Settlement Talks.........................   365
    Credit Rating Agencies...........................................   351
    Decline in IPOs on U.S. Exchanges................................   357
    Expediting Fair Fund Disbursements...............................   359
    Fighting Fraud Against Seniors...................................   348
    Fiscal 2008 Request..............................................   351
    Global Security Risk.............................................   349
    Interactive Data.................................................   350
    Investor Fraud Targeting Seniors.................................   363
    Market Competitiveness...........................................   362
    NASD-NYSE Consolidation..........................................   354
    Privatizing Sallie Mae...........................................   353
    Program Assessment Ratings.......................................   355
    Returning Funds to Wronged Investors.............................   349
    Rights and Remedies Available to Investors.......................   358
    Risk-based Examinations--Targeted Activities.....................   366
    Scheme Liability Litigation......................................   361
    Simplifying Investment Information...............................   352
    Stock Option Backdating and Springloading........................   364
    Student Loan Repayment for Securities and Exchange Commission
      Employees......................................................   361
    Sudan Divestment.................................................   353
    Volume of Disclosure Reviews.....................................   360
    Weaknesses in Information Security Controls......................   365

                         SMALL BUSINESS ADMINISTRATION

    Additional Committee Questions...................................    39
    Agency Staffing..................................................    36
    Compliant and Accountable Organization...........................    25
    Contingency Planning.............................................    38
    Customer-oriented................................................    26
    Disaster.........................................................    25
        Loans........................................................    36
    Employee Enabled.................................................    28
    Highlights of the Budget Request.................................    24
    Loan Oversight...................................................    33
    Microloans.......................................................    34
    Outcomes Driven..................................................    29
    PART.............................................................    33
    Reform Agenda....................................................    22
    Small Business:
        Development Centers..........................................    29
        Innovative Research..........................................    31

                                 THE JUDICIARY

    About the Federal Judicial Center................................    69
    Adam Walsh Child Protection and Safety Act.......................    95
    Additional Committee Questions...................................    96
    Administrative Office:
        Budget Request...............................................    85
        Cost Containment.............................................    85
        Director James C. Duff.......................................    53
    Caseload and Staffing: A Historical Perspective..................    57
    Collecting, Analyzing and Reporting Sentencing Data..............    76
    Colorado District Court..........................................    92
    Conducting Research..............................................    77
    Contributions of the:
        Administrative Office........................................    61
        Federal Judicial Center......................................    62
    Cost Containment.................................................    79
        Efforts......................................................    54
    Education and Training...........................................    69
    Education Programs and Materials for:
        Court Staff..................................................    71
        Judges and for Legal Staff...................................    69
    Education Programs for Judges and Court Staff....................    71
    Federal Judicial Center Foundation...............................    74
    Federal Judicial:
        History......................................................    74
        Television Network...........................................    74
    Federal Protective Service.......................................    58
        Security.................................................52, 86, 88
    Fiscal Year 2007 Funding.....................................51, 53, 78
    Fiscal Year 2008 Budget Request......................50, 51, 59, 80, 91
    General Services Administration:
        Construction Projects for the Judiciary......................    91
        Rent.........................................................    50
    Increase in Non-capital Panel Attorney Rate......................    60
    Information Services.............................................    74
    Justification for the Commission's Appropriation Request.........    75
    Media Library....................................................    74
    National Academy of Public Administration Report.................    50
    Panel Attorney Rate Increase.....................................    90
    Probation and Pretrial Services..................................    94
    Programs for Foreign Judicial Officials..........................    73
    Publications.....................................................    74
    Relationship with General Services Administration................    79
    Reporting on Impacts and Results.................................    95
    Research.........................................................    72
    Resources Requested..............................................    75
    Role of the:
        Administrative Office........................................78, 81
        Federal Judiciary............................................    54
    Security of Judges...............................................    87
    Sentencing Policy Development and Guideline Promulgation.........    75
    The Administrative Office--In Service and Support................    82
    The Courts' Caseload.............................................    93
    The Judiciary's:
        Role in Homeland Security....................................    55
        Workload.....................................................    56
    Training and Outreach............................................    77
    2008 Request.....................................................    68
    Working With:
        Our Executive Branch Partners................................    82
        The General Services Administration..........................    89

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