[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.
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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\
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\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.
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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\
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\1\ See http://www.fintrac.gc.ca/publications/guide/Guide8/
81_e.asp.
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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.
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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\
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\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\
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\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.
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--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.
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\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.
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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.
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\2\ Pub. L. No. 105-33, Title X (1997).
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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.
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\3\ D.C. Code 11-2601 et seq. (2001 Ed).
\4\ An additional 75 CJA attorneys handle juvenile matters.
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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\
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\5\ 20 U.S.C. 1400, et seq.
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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.
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\6\ 5 U.S.C. 8147 (1993).
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--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.
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\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.
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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.
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\8\ Emergency medical situations already have streamlined
procedures in place.
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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.
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\9\ Brady v. Maryland, 373 U.S. 83 (1963).
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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.
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\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).
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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.
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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.
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\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).
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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.''
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\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.
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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\
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\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.
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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.
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\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.
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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.
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\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.
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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\
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\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).
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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.
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\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.
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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\
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\10\ Taxpayer Service Is Improving, but Challenges Continue in
Meeting Expectations (TIGTA Reference Number 2006-40-052, dated
February 2006).
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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\
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\11\ Ongoing Audit--Telephone Excise Tax Refund (TIGTA Audit Number
200630036).
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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.
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\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.
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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.
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\13\ The Earned Income Tax Credit (EITC) is a refundable credit
designed to help move low-income taxpayers above the poverty level.
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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\
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\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).
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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\
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\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).
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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.
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\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.).
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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\
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\17\ U.S. Department of the Treasury Fiscal Year 2008 Budget in
Brief, February 5, 2007, pages 29-31.
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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.
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\1\ The views expressed herein are solely those of the National
Taxpayer Advocate. The National Taxpayer Advocate is appointed by the
Secretary of the Treasury and reports to the Commissioner of Internal
Revenue. The statute establishing the position directs the National
Taxpayer Advocate to present an independent taxpayer perspective that
does not necessarily reflect the position of the IRS, the Treasury
Department, or the Office of Management and Budget. Accordingly,
congressional testimony requested from the National Taxpayer Advocate
is not submitted to the IRS, the Treasury Department, or the Office of
Management and Budget for prior approval. However, we have provided
courtesy copies of this statement to both the IRS and the Treasury
Department in advance of this hearing.
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the overriding 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.
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\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.
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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.
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\6\ Government Accountability Office, GAO-07-136, Financial Audit:
IRS's Fiscal Years 2006 and 2005 Financial Statements 68 (Nov. 2006).
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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\
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\7\ Commissioner Charles O. Rossotti, Report to the IRS Oversight
Board: Assessment of the IRS and the Tax System 16 (Sept. 2002).
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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\
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\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).
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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\
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\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.
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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\
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\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.
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\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).
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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.
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\13\ IRS Strategic Plan 2005-2009.
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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.
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\14\ Department of the Treasury, Fiscal Year 2008 Budget-in-Brief
at 56.
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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\
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\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.
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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\
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\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.
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The IRS Can and Should Do a Better Job of Measuring the Impact of
Taxpayer Service on Compliance
The Taxpayer Assistance Blueprint (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\
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\17\ As I discuss in the Appendix, existing data suggest that EITC
returns prepared in the TACs are more compliant than other returns.
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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.
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\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).
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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\
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\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).
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I have written at length elsewhere on the need to understand the
causes of noncompliance so that the IRS doesn't adopt a one-size-fits-
all enforcement approach.\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.
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\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).
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Because taxpayer service and enforcement are the drivers of overall
compliance, we need to measure taxpayer service needs concurrently with
our efforts to measure the tax gap. Thus, the National Research Program
should update its analysis of taxpayer service needs at the same time
it is measuring taxpayer noncompliance for the particular taxpayer
population it is studying. The IRS can make informed resource
allocation decisions only if it is armed with both types of
information.
the irs should address the impact of irs business systems modernization
limitations on both taxpayer service and enforcement initiatives
When I was in private practice as an attorney representing clients
before the IRS, I did not have a full appreciation of how significant a
role Business Systems Modernization (BSM) plays in both creating and
solving problems for taxpayers and the IRS. As the National Taxpayer
Advocate, I know that on a regular basis my office identifies systemic
problems for which the complete solution requires some sort of BSM fix.
When 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\
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\24\ Internal Revenue Service, F&PC Advisory Council Deck (Mar. 7
2007).
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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\
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\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.
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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.
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\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.
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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.
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\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.
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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.
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\1\ Internal Revenue Service, The 2007 Taxpayer Assistance
Blueprint Phase 2 (April 2007).
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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.
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\2\ Id. at 82.
\3\ Id.
\4\ Id.
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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.
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\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.
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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.
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\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).
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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\
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\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.
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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.
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\10\ IRS Compliance Data Warehouse, Individual Returns Transaction
File data for tax years 2002-2004.
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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\
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\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).
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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\
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\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).
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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.
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\15\ IRM 21.3.4.14.4, Tax Return and Tax Account Transcript
Requests (Jan. 16, 2007).
\16\ Id.
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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.
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\17\ See IRS News Release, IRS Updates Tax Gap Estimates, (Feb. 14,
2006) (accompanying charts).
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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\
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\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).
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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.
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\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).
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the irs should make it possible for taxpayers to prepare and file their
tax returns electronically without paying a fee
Electronic filing of tax returns brings benefits to both taxpayers
and the IRS.\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\
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\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.
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In my view, the IRS should place a basic, fill-in template on its
website and allow any taxpayer who wants to self-prepare his or her
return to do so and file it directly with the IRS for free.\23\
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\23\ See National Taxpayer Advocate 2004 Annual Report to Congress
471-477 (Key Legislative Recommendation: Free Electronic Filing for All
Taxpayers).
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Some representatives of the software industry have taken the
position that such a template would place the IRS in the position of
improperly competing with private industry or, worse, create a conflict
of interest between the IRS's role of tax preparer and tax auditor.
This is nonsense. Since the inception of the tax system, there have
always been two categories of taxpayers--those who are comfortable
enough with the rules to self-prepare their returns and those who turn
to paid professionals for assistance. In the paper-filing world, the
IRS has always made its forms and instructions universally available
without charge to all taxpayers, and those taxpayers who require help
have always been free to seek the assistance of paid preparers.
Imagine that, shortly after the income tax was enacted, a large
group of bricks-and-mortar tax preparers had launched a lobbying
campaign to try to persuade Congress to prohibit the IRS from making
forms and instructions available to the public on the ground that the
availability of these materials improperly placed the government in the
position of competing with private industry. Or on the ground that it
created a conflict between the government's role as preparer and
auditor. Congress almost certainly would have rejected such arguments
as ludicrous. Yet those are exactly the same conceptual arguments being
raised today by those who contend that the government's provision of a
basic web-based, fill-in form to all taxpayers would undercut the
private sector.
The answer to these arguments in today's electronic environment
should be the same answer that Congress would have provided 80 years
ago in a paper environment. For those taxpayers who are comfortable
preparing their returns without assistance, the government will provide
the means to do so without charge. For those taxpayers who do not find
a basic template sufficient and would prefer to avail themselves of the
additional benefits of a sophisticated software program, they are free
to purchase one.
A brief personal anecdote. Although I prepared tax returns
professionally for 27 years before I became the National Taxpayer
Advocate and don't need assistance from others to prepare my return, my
government salary places me above the income cap to qualify to use Free
File products. To prepare my return electronically last month, I
therefore 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).
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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.
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\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.
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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\
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\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.
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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\
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\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.
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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.
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\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.
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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.
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\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.
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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.
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\1\ IRS Oversight Board, ``Fiscal Year 2008 IRS Budget
Recommendation, Special Report,'' at 13 (April 2007).
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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\
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\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).
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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).
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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.
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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\
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\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).
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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\
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\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 [email protected].
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
-