[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



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                               index.html

                               __________


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                      COMMITTEE ON APPROPRIATIONS

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

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

       Subcommittee on Financial Services and General Government

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

                           Professional Staff

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

                         Administrative Support

                              Robert Rich
                       LaShawnda Smith (Minority)























                            C O N T E N T S

                              ----------                              

                         Friday, March 9, 2007

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

                       Wednesday, March 21, 2007

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

                       Wednesday, March 28, 2007

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

                       Wednesday, April 11, 2007

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

                         Wednesday, May 2, 2007

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

                         Wednesday, May 9, 2007

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

                        Wednesday, May 16, 2007

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

              Material Submitted Subsequent to the Hearing

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















 
  FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL 
                               YEAR 2008

                              ----------                              


                         FRIDAY, MARCH 9, 2007

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

                  COMMODITY FUTURES TRADING COMMISSION

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


                 statement of senator richard j. durbin


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


                     statement of chairman jeffery


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


                   record growth in futures industry


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


                              enforcement


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


                      increased funding for agency


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


                           prepared statement


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

                Prepared Statement of Reuben Jeffery III

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




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

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


               Figure 2.--CFTC Actively Traded Contracts

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



               Figure 3.--Customer Funds in FCM Accounts

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

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


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


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

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



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

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



                    Figure 6.--Technology Investment

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

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

                     STUDENT LOAN REPAYMENT PROGRAM

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

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

                CRITICAL INFORMATION TECHNOLOGY SYSTEMS

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

           Prepared Statement of Senator Christopher S. Bond

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

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

                     ADDITIONAL COMMITTEE QUESTIONS

    Senator Durbin. As I mentioned at the outset, for those who 
weren't here, we have a 9:30 vote and I'll have to--it was 
originally scheduled for 9:15. I think it was changed to 9:30. 
We'll double-check on that and so I may have to break and leave 
here to tend to my responsibilities on the floor and then 
return.
    [The following questions were not asked at the hearing, but 
were submitted to the Commission for response subsequent to the 
hearing:]
              Questions Submitted by Senator Sam Brownback
    Question. Some members of Congress have introduced legislation 
placing additional regulations on energy derivatives and the over-the-
counter (OTC) markets? Do you think these proposals are necessary?
    Answer. We believe that the CFTC has adequate authority to address 
fraud and manipulation on the regulated futures exchanges subject to 
CFTC oversight. In regard to transactions on Exempt Commercial Markets 
(ECM) or bilateral over-the-counter (OTC) transactions, the CFTC 
supports legislation that would clarify the Commission's fraud 
jurisdiction in certain principal-to-principal energy transactions 
under the Commodity Exchange Act (CEA). The CFTC requested the 
enactment of such legislation during the reauthorization proceedings 
conducted in the 109th Congress. We support this clarification that the 
CFTC has the authority to bring anti-fraud actions in off-exchange 
principal-to-principal transactions, such as those connected with Enron 
Online. These provisions were included in the House-passed 
reauthorization bill last year and the bill reported out of the Senate 
Agriculture Committee.
    In regard to legislation directed at ECMs, it is important to note 
that in recent months the CFTC has exercised its existing ``special 
call'' authority under the CEA to obtain market information from the 
electronic ECM operated by Intercontinental Exchange (ICE) in Atlanta. 
The CFTC has utilized this authority to request trader position data on 
an ongoing basis related to those ICE natural gas contracts that are 
directly linked to NYMEX contracts. Compliance with these special calls 
by ICE is mandatory, not voluntary. These special calls have enhanced 
the CFTC's surveillance of the NYMEX contracts by providing a better 
window into this marketplace. In regard to the trading of futures 
contracts based on NYMEX crude and heating oil contracts traded on 
ICE's London subsidiary, a foreign board of trade fully regulated under 
U.K. law, the CFTC also has stepped up its coordinated surveillance 
efforts with the Financial Services Authority in the United Kingdom and 
is receiving position information on those contracts on an ongoing 
basis as well.
    In regard to bilateral OTC energy transactions, legislation 
proposing additional regulation could confront significant practical 
obstacles due to the absence of a centralized marketplace. Under 
existing enforcement authority, though, the CFTC's Division of 
Enforcement has committed significant resources to combating problems 
in the energy arena, and has achieved significant success in 
prosecuting manipulation and false price reporting cases. During the 
last four fiscal years, the CFTC has filed actions charging more than 
50 defendants with false reporting, attempted manipulation, or 
manipulation in the energy sector and has obtained over $300 million in 
penalties. These cases have been based on well-established CFTC cash 
market enforcement authority that has been clearly recognized by the 
courts.
    Since the passage of the CFMA in 2000, the futures markets continue 
to rapidly evolve and grow, domestically and globally--and the CFTC is 
always monitoring these developments.
    Question. It is my understanding that some companies use these 
over-the-counter (OTC) trading markets to hedge their energy risk and 
that some of the proposals may provide a disincentive for companies to 
use these markets. Would a decrease in participants in the OTC markets 
lead to less transparency?
    Answer. There are a number of different kinds of over-the-counter 
markets, all of which have different levels of transparency. They 
include cash spot and forward physical markets, bilateral OTC swaps and 
options markets, and ECMs. It is possible that regulations aimed at 
increasing transparency in some OTC markets generally could discourage 
some traders from participating in these markets, resulting in their 
trading positions being moved to venues not visible to U.S. regulators. 
However, transparency to the regulator will not necessarily be less 
than is currently the case. For example, as discussed in the answer to 
question number one above, transactions moved to ICE in London actually 
became more transparent to foreign regulators and the CFTC. Finally, it 
is important to note that exchange markets under CFTC jurisdiction are 
among the most transparent in the world for both market participants 
and the regulator.
    Question. I am concerned with the recent regulatory direction that 
the Commission has taken, in apparent conflict with the spirit and 
intent of the Commodity Futures Modernization Act of 2000 (``CFMA''). 
As you know, the CFMA eliminated prescriptive regulation in favor of 
Core Principles that provide exchanges flexibility in determining the 
best method for achieving compliance with each such guiding Principle. 
An example of my concern with your regulatory direction is the 
Commission's final rules regarding acceptable practices for safe harbor 
compliance with Core Principle 15 pertaining to conflicts of interest 
in self-regulatory organizations. While there are a few provisions 
within this final rule that I have concerns with, one in particular is 
the definition of a ``public director'' which by its literal reading 
would appear to exclude almost everyone in corporate America and 
academia. The test of $100,000 of payments from the exchange or any 
member or affiliate thereof collectively will result in not only a 
requirement difficult if not impossible to test for, but will eliminate 
nearly everyone an exchange could draw from for public director 
service. How do you expect exchanges to cope with such a wide reaching 
``public director'' definition that eliminates almost all qualified 
possible public director candidates?
    Answer. The CFTC is strongly committed to both the spirit and 
intent of the CFMA. The CFTC believes that its new Acceptable Practices 
for Core Principle 15--safe-harbors which exchanges may choose to 
implement--are an important indicator of that commitment. The 
Acceptable Practices promote the flexibility inherent to all Core 
Principles while simultaneously offering the specificity necessary for 
effective, ``pre-approved'' regulatory safe-harbors.
    With respect to the definition of ``public director,'' the CFTC has 
determined that it is important to offer all exchanges a clear 
articulation of those director relationships that may interfere with a 
director's ability to deliberate objectively and impartially. The 
definition of ``public director'' adopted by the CFTC reflects that 
determination, and is consistent with Core Principle 15's instruction 
that exchanges must minimize conflicts of interest in their decision-
making processes. The CFTC is confident that qualified, competent 
public directors are available and can be readily identified by all 
exchanges.
    At the same time, as sometimes is the case with legislative text or 
rule making, the Commission recently proposed certain technical 
amendments to the definition of ``public director'' in the Acceptable 
Practices to correct a drafting error and clarify ambiguities. Among 
other things, the proposed amendments would clarify, with respect to 
the $100,000 payments from the exchange test, that ``payments'' means 
compensation for professional services. The amendments also provide 
that, consistent with the Acceptable Practices as originally proposed, 
entity affiliates of members are not included as payment providers for 
purposes of the $100,000 payments test. The Commission believes that 
these amendments should facilitate the inclusion of public directors on 
exchange boards while maintaining the strong level of public director 
independence intended by the Acceptable Practices.
    The proposed amendments to the definition of public director will 
be published in the Federal Register and will be open for a 30-day 
public comment period.
                                 ______
                                 
               Question Submitted by Senator Wayne Allard
    Question. CFTC is currently the only federal financial regulator 
that is not supported by fees paid by the entities it regulates. 
Accordingly, the budget proposes a new transaction fee to fund the 
commission. Can you please describe how this fee would work? How would 
the fee be paid and at what level would it be set? What would be the 
impact in the marketplace of adding a new transaction fee?
    Answer. In the President's Budget for fiscal year 2008, the 
Administration included a user fee based on its view that it is 
appropriate for futures markets to at least partially offset or 
contribute toward the cost of providing those programs which provide 
clear benefits to market participants. Unlike last year's proposal, 
this year's budget recommendation is not dependent on the Appropriators 
enacting the fee proposal.
    If enacted, the proceeds from the fees would be returned to the 
general fund of the Treasury, to be used to offset the deficit impact 
of continuing to fund the CFTC's operations through direct 
appropriations. They would not impact the discretionary spending 
allocations for the relevant Appropriations subcommittees. The fees 
would be set at a level equal to the costs to the taxpayer of funding 
Market Oversight and Clearing & Intermediary Oversight functions, about 
$86 million during 2008. The Office of Management and Budget in the 
Administration has not provided us with final details as to how exactly 
the fee would work or at what level it would be set.
    The CFTC has not studied the impact of a transaction fee, nor is it 
aware of any executive branch agencies that have done so. The 
Congressional Research Service prepared a report entitled ``The 
Proposed Transaction Fee on Futures Contracts'' in April 2006 (RS2241).
                     SMALL BUSINESS ADMINISTRATION

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

                           PREPARED STATEMENT

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

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

                   SMALL BUSINESS DEVELOPMENT CENTERS

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

                   SMALL BUSINESS INNOVATIVE RESEARCH

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

                             LOAN OVERSIGHT

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

                                  PART

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

                               MICROLOANS

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

                             DISASTER LOANS

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

                            AGENCY STAFFING

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

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

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

                          CONTINGENCY PLANNING

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

                     ADDITIONAL COMMITTEE QUESTIONS

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

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

    Question. What procedures are used to provide oversight of lenders 
and monitor loan performance for your guaranteed loan portfolio? Do you 
think these procedures and your capacity are adequate?
    Answer. In fiscal year 1999, SBA formally recognized the need for 
greater oversight and risk management of SBA's lenders and loan 
portfolios, creating SBA's Office of Lender Oversight (OLO). Since that 
time, OLO has implemented numerous procedures to provide oversight of 
7(a) Lenders and Certified Development Companies and to monitor loan 
performance of the 7(a) and 504 guaranteed loan programs. In Today, OLO 
continues to implement and improve SBA's monitoring and oversight 
processes.
    The procedures OLO has put in place have taken several forms. The 
following is a highlight of key procedures. OLO has established a 
system of risk management through the development of an off-site 
monitoring and review system for all 7(a) and 504 loans and SBA Lenders 
that has been recognized as an ``industry best practice.'' OLO has also 
strengthened on-site reviews and exams of SBA's larger SBA Lenders. OLO 
has increased interoffice coordination and communications on oversight 
of high-risk SBA Lenders, though formation of interoffice lender 
oversight and portfolio analysis continues. Finally, OLO is in the 
process of implementing other initiatives that will add to its 
oversight capabilities a more detailed discussion of SBA's Lender and 
loan oversight procedures and processes follows.
    Loan and Lender Monitoring.--System Off-site monitoring is provided 
through the OLO's Loan and Lender Monitoring System (L/LMS). OLO's L/
LMS system was originally developed and implemented in fiscal year 
2003. L/LMS enables OLO to perform off-site monitoring of SBA Lenders 
by providing periodic credit quality and portfolio performance 
assessments of individual lender portfolios, as well as the overall 
7(a) and 504 loan portfolios. L/LMS also uses current and historical 
performance data to generate predictive measures of future performance. 
These performance data and predictive measures form the basis of OLO's 
Lender Risk Rating System.
    Risk Rating System.--The Risk Rating System is an internal tool to 
assist SBA in assessing the risk of each SBA lender's loan operations 
and loan portfolio. The Risk Rating System enables SBA to monitor SBA 
Lenders on a uniform basis and identify those institutions whose loan 
operations and portfolio require additional monitoring or other action.
    Risk-based Reviews and Examinations.--OLO has also implemented 
several measures to improve the quality of on-site SBA Lender reviews 
and examinations. On-site reviews have been expanded from purely 
compliance-based reviews into more comprehensive, risk-based reviews. 
The new risk-based approach was put into operation in fiscal year 2005-
06. It includes a review of the SBA Lender's portfolio, its SBA 
management and operations, and an assessment of the SBA Lender's credit 
administration policies, in addition to a compliance review. Reviews 
are generally performed on larger 7(a) lenders and the largest 
Certified Development Companies (CDCs). Small Business Lending 
Companies (SBLCs) may receive a more rigorous safety and soundness 
examination, similar to those performed by federal financial 
institution regulators. These safety and soundness examinations include 
more detailed analyses of some of the same components of the risk-based 
review; however, the examinations also focus extensively on the 
financial condition of the SBLC, as measured by the institution's 
liquidity, capital and earnings strength.
    The reviews and examinations are performed by contractors with 
significant audit experience. Reviews and examinations follow SBA's On-
Site Lender Reviews/Examinations SOP. This SOP, published in fiscal 
year 2006, details review components, procedures, and issues that may 
lead to review findings. The SOP is available to all SBA Lenders to 
enable them to understand the review process and help them comply with 
the requirements of the loan programs SBA contractors receive periodic 
training covering SBA's on-site and off-site review and monitoring 
policies and procedures contained in the SOP.
    Lender Portal.--The Lender Portal allows SBA Lenders to view their 
portfolio data online, and compare their performance to the averages of 
their peers and the overall portfolio. The Lender Portal allows SBA 
Lenders access to the same information OLO uses to measure risk, and 
enables the SBA Lenders to be proactive in addressing performance 
issues rather than reacting to problems after they are contacted. By 
becoming more proactive in correcting portfolio performance problems, 
SBA Lenders can reduce SBA's portfolio and SBA Lender risk. Having the 
Portal information available also assists SBA Lenders in managing their 
SBA operations and managing their SBA portfolio risk, and can be an 
important part of their decision to expand their presence in the SBA 
market.
    Corrective Action Plans.--OLO has implemented a corrective action 
process whereby SBA Lenders work with SBA to address problems and 
deficiencies identified by OLO through on-site reviews, off-site 
monitoring and referrals. SBA Lenders are requested to respond to the 
issues identified and to provide a corrective action plan that 
addresses the problems. If the institution fails to correct the 
problem, SBA may then pursue enforcement actions.
    Lender Oversight Committee.--Through delegations of authority 
published in fiscal year 2005, SBA created a Lender Oversight Committee 
(LOC). The LOC is composed of senior SBA management, as well as OLO 
management, and meets on a regular basis. Among other activities, the 
LOC reviews the performance of individual SBA Lenders, and will 
determine whether to impose certain enforcement actions, as necessary.
    Portfolio Analysis Committee.--OLO has also instituted monthly 
Portfolio Analysis Committee (PAC) meetings. The PAC is comprised of 
senior and mid-level managers. The PAC reviews overall 7(a) and 504 
portfolio performance, trends, and characteristics. The PAC helps 
ensure that offices throughout SBA are aware of performance activity 
and potential trends that could affect either loan program.
    Coordination with Office of Chief Financial Officer.--As part of 
the credit subsidy modeling process, the Office of the Chief Financial 
Officer (OCFO) monitors on a quarterly basis and annually updates 
purchase and recovery rates for all loan programs. The impact on 
subsidy rates from changes in purchase and recovery rates are recorded 
in an analysis of change document that is maintained for all of SBA's 
loan programs. The CFO attends the monthly PAC meetings. The CFO also 
provides an analysis of the impact of proposed program changes on the 
subsidy rates and assists in identifying ways to reduce losses and 
increase recoveries.
    In conclusion, OLO believes that all of the processes and 
procedures described in this response indicate that SBA has in place a 
comprehensive system of lender oversight and portfolio monitoring that 
will reduce the Agency's risk in the 7(a) and 504 loan programs. While 
capacity in a program of oversight involving over 5,000 SBA Lenders and 
a portfolio of over $60 billion is always a challenge, SBA is assisted 
with contract support. SBA has the statutory authority to charge 7(a) 
lenders fees to cover the cost of oversight including contractor 
support. This current fee authority along with the CDC fee authority, 
if enacted should fully support SBA's ability to conduct oversight. SBA 
has requested similar fee authority for the DCS in the 504 program to 
ensure that there are adequate resources available to oversee this 
program as well.
    Question. The 7(a) program makes loans available to borrowers who 
cannot obtain credit at reasonable terms from the private sector 
without the federal guarantee. Specifically, what borrowers are you 
trying to reach? How is this purpose affected by the presence of a zero 
subsidy for the 7(a) program? Would returning to a positive subsidy 
help you meet your policy objectives?
    Answer. The 7(a) loan program is designed for those borrowers who 
are credit-worthy (the lender's analysis concludes that the loan will 
repay in a timely manner and not default based on historical 
performance and credit histories) but that either do not meet the 
lender's collateral requirements, require a longer repayment term than 
the lender gives to non-guaranteed borrowers for the same use of 
proceeds, or are for new businesses with an unproven track record.
    When SBA under the Bush administration converted the 7(a) loan 
program to a zero subsidy loan program for fiscal year 2005, the fees 
supporting the 7(a) program were returned to their pre-September 11 
levels. (After September 11, 2001, fees for the 7(a) program were 
reduced for fiscal years 2003 and 2004 in the hopes of stimulating the 
economy that suffered from the terrorist attack.) Prior to that, the 
fees had been the same since December, 2000. Before December, 2000, the 
fees under the Clinton administration were higher. Since the 7(a) 
program became a zero subsidy program, the only fee that has been 
adjusted slightly upward has been the on-going annual fee paid by the 
lender. That fee increased by only 4.5 basis points from 0.50 percent 
to 0.545 percent during fiscal year 2006. For fiscal year 2007, the fee 
is 0.55 percent, an increase of only one-half of 1 basis point. And for 
fiscal year 2008, the fee will decrease to 0.494 percent which will 
bring the fees for 7(a) below those charged pre-11 when the 7(a) 
program was subsidized.
    SBA believes that for the 7(a) loan program, zero subsidy is still 
the best policy for the long term stability and growth of the 7(a) loan 
program. Since the 7(a) program went to zero subsidy, SBA has had two 
record-breaking years of lending.
    Volume during fiscal year 2005 (the first year that the 7(a) 
program was a zero subsidy program) was 95,900 loans--an increase of 
more than 18 percent over 2004 when the program was subsidized. Volume 
during fiscal year 2006 maintained this trend and actually increased by 
another 1,390 loans. Fiscal year 2007 YTD continues to maintain the 
strong demand by growing another 9 percent as of March 16, 2007.
    Question. What is your default rate in the basic 7(a) program?
    Answer. The default rate, as a percent of disbursements, for the 
2008 budget submission is 6.96 percent.
    Question. What is the default rate in the disaster loan program?
    Answer. The default rate, as a percent of disbursements, for the 
2008 budget submission is 24.10 percent.
    Question. On page 10 of the budget justification, you make this 
statement: ``the agency's entire business loan operation runs on a 
Cobol-based system developed in-house. Parts of this system are over 50 
years old. The system is operated on an expensive mainframe that is 
dependent on obsolete technology . . .''. What are you doing to address 
this situation?
    Answer. We have initiated the Loan Modernization Program to address 
this situation. We have formed a Steering Council and assigned a 
Program Manager. We have also submitted the business case (Exhibit 300) 
for fiscal year 2008 to OMB. The fiscal year 2008 Budget request 
includes $8 million to start acquiring the solution. Currently, we are 
in the process of developing the acquisition strategy to identify and 
implement the solution that will replace the Cobol-based legacy 
systems.
    Question. What other significant information technology (IT) 
systems are currently under development in the agency and what stage 
are they in?
    Answer.
    Loan Management and Accounting System (LMAS).--As described in 
response to the previous question, the LMAS will support FSIO (JFMIP) 
compliant loan Origination, Servicing, and Liquidation. The project 
scope includes an Integrated Financial Management System to support 
FSIO compliant Loan Accounting. LMAS is a financial management, mixed 
lifecycle system with the bulk of its development costs scheduled to 
occur in fiscal year 2008.
    Business Development Management Information System ``e-
application''.--The BDMIS e-application will allow the Office of 
Business Development's 8(a) and Small Disadvantaged Businesses to 
submit applications for certification electronically via the WEB. This 
is an enhancement to an existing Business Development system. BD-MIS is 
mixed lifecycle system and features the e-application within its 
development segment.
    Disaster Credit Management System, E-Loan Application (ELA).--
During fiscal year 2007-08, SBA's Office of Disaster Assistance (ODA) 
is developing an Electronic Loan Application that will integrate with 
DCMS. One of the ODA's Strategic Management Goals is to offer disaster 
victims accessible, easy-to-use and time saving services through the 
electronic filing of disaster loan applications. By using the Internet, 
ODA plans to transform loan-making into a virtual loan process that 
provides efficient and timely loan decisions to disaster victims. DCMS 
is a mixed lifecycle system; ELA represents an enhanced set of 
capabilities within the development segment of DCMS.
    E-Gov Business Gateway.--This is one of 25 E-Gov projects within 
the President's Management Agenda for E-government. The Business 
Gateway provides a government-wide one stop website for use by 
businesses and entrepreneurs. SBA and partner agencies develop tools to 
assist small businesses seeking to comply with laws and regulations, 
locate government forms and obtain relevant government information. 
Business Gateway is currently a mixed lifecycle system planned to be 
out of the development stage in fiscal year 2008.
    Contract Management System (CMS).--CMS will be an information 
system enabling SBA to perform end-to-end electronic processing of its 
internal contracts, bringing the Agency into conformance with OMB's E-
Procurement guidance. CMS is a mixed lifecycle system planned to be out 
of the development stage in fiscal year 2008.
    Question. The Office of Inspector General's management challenge #1 
also identifies flaws in the procurement system that allow large firms 
to obtain small business awards and agencies to count contracts 
performed by large firms towards their small business goals. What 
resources is the agency committing to allow SBA to fulfill a bigger 
role in ensuring the accuracy of reporting on small business 
contracting and limiting errors by contracting personnel and fraud by 
contractors?
    Answer. The integrity of the data reported to Congress and the 
Public is crucial to provide for the confidence in the Federal 
contracting system. SBA recognizes this, and is taking the lead, along 
with the Office of Management and Budget's Federal Procurement Policy 
to work with agencies to ensure their past numbers a scrubbed and 
future numbers are accurate. The agencies are currently in the process 
of validating their fiscal year 2005 data to identify the reasons for 
coding discrepancies and to correct any errors that occurred.
    Question. The Office of Inspector General has issued a management 
challenge finding serious problems with the SBA 8(a) minority 
contracting program. What resources is the Agency committing to improve 
this program and address these problems?
    Answer. Because the 8(a) Program is a business development 
program--not a contracting program--it is intended to foster the 8(a) 
firm's growth (through various forms of technical, management, 
procurement and financial assistance) and viability during the nine 
year term. The 8(a) BD Program is for socially and economically 
disadvantaged entrepreneurs (which include non-minorities) who meet the 
eligibility criteria.
    SBA is committed to improving the 8(a) BD Program and has committed 
several resources that are aimed at refocusing the Program to emphasize 
``business development.'' On September 30, 2006, SBA engaged a contract 
to conduct a review/assessment of the business processing functions of 
the 8(a) BD Program (i.e. those processes related to initial 
certification, continuing eligibility, management and technical 
assistance, legislative and regulatory requirements) and design a plan 
consisting of both short and long term methodologies for re-engineering 
and improving those functions.
    Specifically, this process improvement plan will:
  --Identify and define each program element and the requirement(s) 
        related to the delivery of the 8(a) BD Program;
  --Identify significant issues and problems that exist;
  --Identify key issues in the 8(a) BD Program and processes and 
        systems that need to be updated; and
  --Review/assess programmatic requirements to ensure relevance and 
        consistency with legislative and regulatory compliance.
    In addition, the Office of Business Development conducts monthly 
training sessions (via teleconferencing) for BD field staff in SBA's 
district offices. This training (which covers various programmatic and 
regulatory issues) is designed to improve 8(a) Program delivery and 
ensure consistency and uniformity as it relates to servicing 8(a) 
firms.
    Finally, SBA is considering various other changes to the program to 
promote its integrity and efficiency, and the Agency intends to issue a 
proposed rule to amend its regulations in the near future.
    Question. In particular, one of the actions that the OIG has called 
upon SBA to take is to exert greater oversight over 8(a) contracts 
issued by procuring agencies since SBA has now delegated authority to 
those agencies to monitor compliance by 8(a) contractors with SBA 
regulations and requirements. What resources is SBA devoting towards 
conducting adequate oversight to ensure that procuring agencies are 
fulfilling their responsibilities?
    Answer. In an effort to ensure greater oversight as it relates to 
8(a) contracts issued by procuring agencies, SBA's Office of Business 
Development has revised the language in the Partnership Agreements 
(between SBA and the procuring agencies) to clarify roles and 
responsibilities. The revised Partnership Agreements specifically 
require the procuring agencies to monitor 8(a) firms' compliance with 
contract performance. In February 2007, the Office of Business 
Development began conducting training for the procuring agencies with 
regard to rules and regulations governing the 8(a) Program and the 
revised language in the Partnership Agreements. This training is 
intended to ensure that contracting officers and technical 
representatives are adequately advised of their responsibilities 
concerning 8(a) contract compliance.
    Question. The Office of Inspector General issued an Audit Report in 
May, 2005 on contract bundling. Excessive contract bundling by agencies 
limit the opportunities for small businesses to obtain government 
contracts. That report found that SBA had not reviewed 87 percent of 
the reported contract bundling by procuring agencies even though SBA 
has a statutory duty to do so, and had not developed a data base to 
track bundling activity. The report also determined that there was a 
lack of resources in that the Agency had only 43 Procurement Center 
Representatives in the entire country to monitor over 2,000 procurement 
locations for the Federal Government, and that a large percentage of 
government contracts were not being reviewed by PCRs. What resources is 
SBA devoting towards addressing these issues?
    Answer. The integrity of the data reported to Congress and the 
Public is crucial to provide for the confidence in the Federal 
contracting system. SBA recognizes this, and is taking the lead, along 
with the Office of Management and Budget's Office of Federal 
Procurement Policy to work with agencies to ensure their past numbers 
are scrubbed and future numbers are accurate. The agencies are 
currently in the process of validating their fiscal year 2005 data to 
identify the reasons for coding discrepancies and to correct any errors 
that occurred.
                                 ______
                                 
              Questions Submitted by Senator Sam Brownback
    Question. Currently the microloan program costs $0.85 for every 
dollar loaned. Why is it so costly to administer such loans? How will 
the program change if it were shifted to zero subsidy as proposed in 
the President's fiscal year 2008 budget?
    Answer. The technical assistance component is a significant factor 
in the cost of the Microloan program. Subsidized interest rates are 
another extremely high cost. In addition to Subsidy costs, overhead 
costs are high since SBA makes direct loans to each microloan 
intermediary and must continue to process and administer the loan, 
including additional loan disbursements. The Administration's proposed 
change in the Microloan program increases the interest rate charged on 
the loan from 3.77 percent to the microlender to 1.06 percent above the 
5-year Treasury rate (estimated in OMB's economic assumption at 4.93 
percent). SBA would also eliminate the technical assistance funding for 
SBA microborrowers, but would provide technical assistance through the 
Agency's Entrepreneurial Development (ED) resources (SBDCs, SCORE, and 
WBCs)
    The Administration's proposed change in the Microloan program 
increases the interest rate charged on the loan from SBA to the 
microlender from 1.25 to 2 percent less than the 5-year Treasury rate 
(depending on the microlender's average microloan size) to 1.06 percent 
above the 5-year Treasury rate (estimated in OMB's economic assumption 
at 4.93 percent).
    Question. The fiscal year 2008 budget proposes $484 million in new 
budget authority. How would this benefit SBA programs? And 
specifically, what benefits would be passed along to the American Small 
Business owner?
    Answer. SBA's fiscal year 2008 budget request reflects the 
President's commitment to America's small businesses and the vital role 
they play in our economy. Enactment of this request will enable SBA to 
continue serving the small business community while ensuring 
stewardship of taxpayer dollars.
    These resources will support a total of $28 billion in lending 
authority for small business financing, which represents a potential 40 
percent increase over business lending for fiscal year 2006, through 
the 7(a), 504, and SBIC debentures programs. For its flagship 7(a) 
program, SBA requests authority for $17.5 billion--a 27 percent 
increase over the fiscal year 2006 lending level. SBA also requests 
authority for $7.5 billion for the 504 program, a 32 percent increase 
over loans made in fiscal year 2006--a record year for 504 lending. 
Finally, SBA requests an SBIC Debenture program of $3 billion.
    In addition, this budget will support the following:
  --A disaster loan volume of $1.064 billion (the Agency's ten-year 
        average based upon fiscal year 1996-2005 average activity, 
        excluding the WTC disaster, adjusted for inflation).
  --Counseling and training to small business people through SBA's 
        network of resources partners in Small Business Development 
        Centers (SBDC), Service Corps of Retired Executives (SCORE), 
        and Women's Business Centers.
  --Assist federal agencies targeting a total of $84 billion in prime 
        federal contracting dollars to be awarded to small businesses 
        in fiscal year 2008.
  --Investing in the Agency's human capital through job skills 
        training, mentoring programs, succession planning, proactive 
        recruitment of highly qualified staff, and implementation of an 
        automated personnel records system.
  --Maintaining employee security through continued implementation of 
        Presidential Homeland Security Directive #12 and support of 
        major security improvements in the headquarters building.
  --Continuing the process of implementing a loan operations system to 
        replace the current outdated system in order to better track 
        payments as well as increase the Agency's loan portfolio 
        oversight.
  --Enhancing SBIC oversight and recoveries.
  --Providing a cost effective microloan program.
  --Continuing efforts to make it easier and faster for small 
        businesses to comply with government regulations.
  --Improving SBA products, services and delivery.
    Question. What is the $100 million savings to taxpayers stemming 
from the 7(a) loan program being changed to zero subsidy derived from? 
Are there other benefits to the zero subsidy program?
    Answer. The $100 million savings is an estimate based on the last 
year (2004) the 7(a) program had a subsidy rate. If the 7(a) program 
had a zero subsidy rate that year it would have saved the taxpayers 
about $100 million.
    SBA believes that for the 7(a) loan program, zero subsidy is the 
best policy for the long term stability and growth of the 7(a) loan 
program. Since the 7(a) program went to zero subsidy, SBA has had two 
record-breaking years of lending--years not hampered by slowdowns as a 
result of moving beyond the projected levels prescribed by Congress 
legislatively.
    Question. What is the potential cost to the taxpayers of reducing 
or eliminating fees on 7(a)?
    Answer. Assuming a loan level of $17.5 billion the cost to the 
taxpayers would be $590 million if all 7(a) fees were eliminated. At 
the same loan level, the cost to the taxpayers would be $236 million 
only if the ongoing fee were eliminated and $354 million if only 
upfront fees were eliminated.

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

    Question. Does the success of the 7(a) change to zero subsidy have 
any bearing on the fiscal year 2008 proposal for the microloan program 
to go to zero subsidy?
    Answer. The success of the 7(a) loan program at zero subsidy has 
influenced this decision, especially since the 7(a) Community Express 
program has surpassed the Microloan program in loans of $35,000 or less 
(the definition of a microloan).
    Not only does zero subsidy save taxpayers approximately $.85 for 
every dollar lent under the current microloan program but it expands 
the opportunities to reach more microborrowers and provide them with 
more options for counseling and training.
    Question. Can you describe in more detail how the new microloan 
program would work and its benefits (cost and non-cost related)?
    Answer. SBA would amortize each microlender's loan at a rate of 
1.06 percent above the 5-year Treasury rate (estimated in OMB's 
economic assumption at 4.93 percent). SBA would also rely on the 
Agency's ED resource partners (SCORE, Women's Business Centers, Small 
Business Development Centers) to provide counseling and assistance 
instead of providing additional grant money to Microlender 
Intermediaries for technical assistance which represents a savings of 
$13 million over fiscal year 2006 while actually encouraging a wider 
variety of entrepreneurial development opportunities. Moving to a zero 
subsidy in the program would also enable SBA to reach out to a larger 
number of microborrowers across the country. Microlending 
intermediaries can still access the numerous other Federal, State and 
Local grant programs for technical assistance and more intermediaries 
will be able to leverage the more rare lending program offered by SBA. 
Currently only 172 of the total 600 microlending intermediaries are 
registered with the SBA microloan program. This proposal would allow 
SBA to offer lending opportunities to other qualified intermediaries 
and reach a wider geographic area and market.
    Question. How many microlenders are in close proximity, or co-
located, with other small business counseling centers receiving federal 
funding?
    Answer. SBA doesn't have information on the locations of all small 
business centers receiving federal funding, but based on an analysis of 
the locations of the centers that SBA funds, almost all (about 95 
percent) of the Agency's microloan intermediaries are located within 
close proximity to an SBA ED resource partner, which include SBDCs, 
WBCs, and SCORE. In addition, SBA believes the approximately 10 
intermediaries not located in close proximity to an SBA small business 
counseling center could be served by circuit rides established by SBA's 
existing resource partners.
    Question. Do microlenders receive funds from other sources? If so, 
what are they and how much of their funding comes from government 
sources?
    Answer. SBA has not evaluated the alternative funding sources 
available to SBA's microloan intermediaries or to the microloan 
industry as a whole. However, according to 2005 information developed 
by the Association for Enterprise Opportunity, the leading trade 
association for the industry, in association with the Aspen Institute, 
there are about 18 federal sources of funding for the microloan 
industry and undoubtedly a number of state sources.
    Question. How would Senators Kerry, Snowe, Landrieu and Vitter's 
proposal for a private guaranteed lending programs for the regular 7(b) 
loan program in S. 163 affect the disaster subsidy rate and funding 
needs?
    Answer. CBO estimated that an identical proposal in S. 3778, that 
the estimated subsidy rates for the different types of business loans 
and loan guarantees offered by SBA currently range from zero for 7(a) 
and section 504 programs to about 17 percent for the NMVC program. 
Incorporating program amendments in this bill and using historical 
demand and default rates for those loan programs, CBO estimates that 
the subsidy costs for the authorized levels of guaranteed and direct 
business loans would be $23 million in 2007 and about $128 million over 
the 2007-2011 period.
    Question. How much would the Energy Emergency Loan Program in S. 
163 cost?
    Answer. Section 402, Small Business Energy Emergency Disaster Loan 
Program.--Based on the information provided, and the proposed loans are 
funded within SBA's existing Disaster Assistance direct loan program, 
it appears this proposal will not impact the subsidy rate.
    Section 403, Agricultural Producer Emergency Loans.--It appears 
USDA would provide funding for the proposal but the legislation does 
not provide sufficient information to estimate the impact on SBA's 
Disaster Assistance program subsidy rate.
    Question. How much would the Energy Emergency Loan Program in S. 
163 cost? CBO says it would cost approx. $85 million (subsidy and 
admin) 2007-2011.
    Answer. We estimate that the administrative cost would be 
approximately $50 million.
                                 ______
                                 
           Questions Submitted by Senator Christopher S. Bond
    Question. With respect to the SBIR program: As I mentioned earlier, 
I am concerned that we are shooting ourselves in the foot by limiting 
biotechnology companies' access to this program. We recently received 
this data chart from NIH. It shows that for the last 2 consecutive 
years, the number of applications to NIH's SBIR program has decreased. 
This is significant because the new SBIR rules were first applied to a 
specific company (Cognetix decision) in 2003, but the agencies (such as 
NIH) did not fully implement them until 2004. So it is fair to say that 
the 2005 and 2006 numbers represent the first 2 years that the new 
restriction on venture capital financing has been fully in effect. Look 
at the impact on applications at NIH.



    The chart also includes figures for R01 applications. I am told 
that it is the largest NIH grant program to universities and academia. 
So while applications for NIH's SBIR program fell significantly in 2005 
and 2006, applications for R01s continued to increase (albeit at a 
slower rate than previously). Would you agree this makes the case that 
the decrease in SBIR applications is specific to something going on 
with the NIH SBIR program and not a result of scientific trends or some 
other outside factor?
    Answer. The Small Business Administration is currently reviewing 
the issue of venture capital investment in firms that compete for SBIR 
awards. The National Academy of Sciences is conducting a study on the 
SBIR program and expects to issue its report in the coming months. This 
is an important issue concerning the SBIR program. As such, the Agency 
will review as it addresses this issue.
    Question. Mr. Preston, as you evaluate the SBIR program with an eye 
toward regulatory or legislative changes, I urge you to look at ways to 
ensure that the most innovative small firms--including those that raise 
private funds, such as venture capital--are able to participate in the 
program. The SBIR authorizing statute listed the raising of private 
funds by a company as a positive factor that agencies should take into 
account when awarding SBIR Phase II grants. Congress viewed raising 
private research funding as a good thing in 1982; that has not changed.
    As America's high-technology companies compete for funding in an 
increasingly global marketplace, the ability to attract and retain 
capital has become more important than ever. The SBA should not 
discriminate against good science by small entrepreneurial companies 
simply because they have been successful in raising venture capital.
    Are you willing to work with us to address this problem 
administratively, so that a legislative fix will not be necessary?
    Answer. We would be happy to discuss this issue with you prior to 
making a final determination.
    Question. With respect to the HUBZone program: Our agencies have 
never achieved the 3 percent minimum mandatory HUBZone contracting 
level, yet the fiscal year 2008 funding for the HUBZone Program has 
been reduced to $8.79 million from an fiscal year 2007 level of $9.077 
million. Why are the funds for this vital program that focuses on the 
underserved areas of our Nation continually reduced?
    Answer. The bulk of the HUBZone Program's funding request is spent 
on support provided by the SBA district office staff. The services 
these district office personnel, known as liaisons, provide is twofold. 
They conduct marketing outreach to the local community and execute the 
in-depth program examinations that ensure only qualified firms receive 
HUBZone benefits. Program examinations are executed on approximately 
five percent of the portfolio and supplement the program's alternate 
continuing eligibility tool--HUBZone recertification.
    A smaller portion of the request ($2 million) supports the 
Headquarters staff who are responsible for policy development, 
certification and eligibility, adjudication of protests as well as 
maintenance and technological advancement of the HUBZone system. What 
these funds produced most recently are two online systems dedicated to 
increasing HUBZone contracts. One system scrubs each day the contracts 
listed in FedBizOpps and, if it identifies a suitable non-HUBZone 
contract, a letter is sent to the responsible contracting officer 
asking that the contract be reclassified as a HUBZone set-aside. The 
second system, when fully deployed will allow HUBZone certified 
concerns to generate requests to contracting officials that contracts 
contemplated in the near-future be reserved for HUBZone firms. It is 
anticipated that these two internet based tools will increase 
contracting opportunities for HUBZone firms and assist agencies in 
achieving the 3 percent statutory goal.
    The HUBZone Office is continuing to enhance its multiple systems 
through the use of high-end technology. The cost savings brought about 
by the efficient application of technology is reflected in the 
Administration's ability to decrease the fiscal year 2008 budget 
request.
    Question. The SBA 2008 budget eliminates the separate line item for 
HUBZone funding. Why is this no longer a priority program for the 
Administration?
    Answer. As seen in Table 6 of SBA's fiscal year 2008 budget 
request, Note 2 states that funding for the HUBZone program is included 
in the GCBD Operating Budget. This is the same method of budgeting used 
for the 8(a) program. For HUBZones, SBA is seeking $888,000 plus a 
staff cost of $1.1 million each year. Our overall financial spending on 
the HUBZones program is approximately $9 million. SBA has proposed 
eliminating a line item that does not accurately reflect our commitment 
to the program and inhibits the agency from exercising flexibility in 
its budget. The SBA considers HUBZones a vital part of overall 
procurement effort.
                                 ______
                                 
            Question Submitted by Senator Richard C. Shelby
    Question. I know there were problems with the Small Business 
Administration conducting its normal loan business, while addressing 
loan needs stemming from the impact of Hurricane Katrina. Has this 
issue been resolved?
    Answer. The 2005 hurricanes which hit the Gulf Coast were the 
largest natural disaster in the history of the SBA. This required an 
unprecedented response from the Office of Disaster Assistance as well 
as the dedicated staff throughout the Agency. In response to the Gulf 
Coast hurricanes, SBA processed over 420,000 loan applications for 
homes and businesses.
    During the same time period, the SBA guaranteed a record number of 
loans under its two primary small business loan programs, setting 
records for both the number of loans and the dollars loaned.
    So while the Agency certainly experienced some strains and was 
stretched thin to respond to the overwhelming disaster caused by 
Hurricanes Katrina, Rita and Wilma, it is safe to say the team at SBA 
worked hard to overcome these and focus their efforts on serving our 
small business customers.

                          SUBCOMMITTEE RECESS

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



























  FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL 
                               YEAR 2008

                              ----------                              


                       WEDNESDAY, MARCH 21, 2007

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

                             THE JUDICIARY

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

                 STATEMENT OF SENATOR RICHARD J. DURBIN

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

                        FISCAL YEAR 2008 BUDGET

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

            NATIONAL ACADEMY OF PUBLIC ADMINISTRATION REPORT

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

                   STATEMENT OF SENATOR WAYNE ALLARD

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

                  GENERAL SERVICES ADMINISTRATION RENT

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

                   OPENING STATEMENT OF JUDGE GIBBONS

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

                        FISCAL YEAR 2007 FUNDING

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

                        FISCAL YEAR 2008 REQUEST

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

                  FEDERAL PROTECTIVE SERVICE SECURITY

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

                          PREPARED STATEMENTS

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



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

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

                                 ______
                                 
Prepared Statement of Paul R. Michel, Chief Judge, United States Court 
                   of Appeals for the Federal Circuit
    Mr. Chairman, thank you for allowing me to submit my statement 
supporting the United States Court of Appeals for the Federal Circuit's 
fiscal year 2008 budget request.
    Our request totals $28,442,000, an increase of $3,131,000 (12 
percent) over the fiscal year 2007 appropriation of $25,311,000.
    Fifty-six percent of that increase, $1,761,000, is for 
congressionally- and contractually-mandated adjustments to base (such 
as COLAs and escalation in rent and contracts), as well as one 
adjustment to the base appropriation for lease of judges' workspace.
    This lease increase, a request for $496,000, will allow us to 
provide the work space necessary for four judges (and their staff) now 
eligible to take senior status and an additional three judges who 
become eligible to take senior status in fiscal year 2009. Even now our 
courthouse simply does not have space for the judge who took senior 
status during the past year, much less offer chambers to seven other 
judges eligible to take senior status in this fiscal year and the next.
    The retention of judges through senior status is what has allowed 
this court to remain current. Since this court's inception in 1982, the 
number of active judges on our court has remained the same, even though 
our caseload has nearly doubled and the technology of our patent 
caseload has become increasingly complex. Clearly, the provision of 
adequate work space for judges willing to take senior status (as 
opposed to leaving the court through retirement) is critical to our 
being able to retain these highly valuable contributors to our court's 
output. If adequate work space cannot be provided, it is likely that 
some judges may simply retire, or remain active resulting in a very 
significant loss of judicial capacity.
    Funding for off-site leased space was not provided in our fiscal 
year 2007 appropriation even though requested. Nevertheless the 
Administrative Office of the United States Courts (AO) has authorized 
GSA to seek suitable off-site space and negotiate a lease for senior 
judges, in accordance with Judicial Conference policy. The search is 
on-going. We are told, and know from past experience, that securing a 
lease and preparing chambers will take 6 to 12 months, making it 
necessary for us to have the funding available in fiscal year 2008.
    Forty-four percent, $1,370,000, of the requested increase over the 
fiscal year 2007 approved appropriation is to fund programmatic 
increases for: (1) additional law clerk positions; (2) upgrades to six 
of the court's automated systems; and (3) two-way video and audio 
transmission capability between the court and remote sites around the 
country.
    Additional Law Clerk.--$732,000 of the amount requested covers the 
cost of hiring an additional law clerk for each of the court's active 
judges for 6 months of fiscal year 2008. The increased workload now 
requires funding a fourth law clerk. The court presently has funding 
for only three law clerks for each judge and one secretary. This added 
funding would provide a fourth law clerk or assistant for each active 
judge. Indeed, Article III judges serving in the other 12 circuits of 
the Federal Judiciary have had funding for a fourth law clerk for 
years.
    The Federal Circuit did not previously need parity, but I now ask 
for this funding for new positions because they are necessary in order 
to keep up with the sharp increase in the number of appeals filed. 
After years of steady increases in filings, case filings in fiscal year 
2006 alone increased by 14 percent from fiscal year 2005. In addition, 
we face a sharp rise in the complexity of cases, many involving 
advanced and emerging technologies of great economic importance for 
American businesses.
    Upgrade to Automated Systems.--$388,000 of the amount requested 
under program increases is necessary to provide new and improved 
electronic information technology services to the court, namely (a) 
improved automated case tracking and management; (b) automated e-filing 
of briefs by attorneys; (c) e-voting and commenting by judges; (d) 
automated conflict screening; (e) improved public Web site with posting 
of all briefs and opinions; and (f) off-site continuity of operations 
set-up, configuration and support for a back-up computer system at the 
administrative office site in Missouri.
    The court is developing an improved electronic case tracking 
system, as well as electronic filing, voting, and conflict screening 
systems. All of these systems are recommended or required by the 
Judicial Conference. Their development requires hiring contractors, 
purchasing new equipment, and training court information technology 
staff. These new systems provide better, more accessible, and faster 
services for litigating lawyers, judges and judges' staffs, as well as 
making available to judges and court staff a more efficient method for 
tracking cases. The automated conflict screening system reduces the 
risk of judges inadvertently participating in cases despite a financial 
conflict, and thus assists in assuring compliance with ethics 
requirements. It also is required by Judicial Conference policy. The 
Web site is our primary contact system with attorneys, academics, and 
the interested public.
    Funding is included in this amount for off-site back-up computer 
equipment necessary to support the continuing operations of the court 
if a disaster disables our courthouse in Washington, D.C., which is 
located very near to the White House--a primary target for terrorists.
    Remote Video Conferencing.--The remaining $250,000 of the requested 
amount covers the cost to provide remote video conferencing in one of 
our three courtrooms, in accordance with Judicial Conference and 
administrative office policy on funding such capability. Recently, the 
Judiciary adopted information technology initiatives for reducing the 
reliance on paper, achieving economy in its business processes, and 
providing better service to citizens at locations around the country. 
These initiatives are especially critical to our court because with our 
nationwide jurisdiction, our lawyers and their clients are scattered 
all across the country. The request is based on recommendations from 
the Judicial Conference and the Administrative Office of the United 
States Courts to provide two-way video and audio transmission between 
courtrooms and remote sites. With this beneficial technology attorneys 
can present oral arguments from anywhere in the country and avoid the 
cost in time and money of traveling to Washington, D.C., and staying 
here overnight. In addition, the court and citizens benefit greatly 
from hearing oral arguments which might otherwise not be presented to 
the court.
    I would be pleased, Mr. Chairman, to answer any questions the 
committee may have or to meet with the committee members or staff about 
our budget request.
    Thank you.
                                 ______
                                 
Prepared Statement of Jane A. Restani, Chief Judge, United States Court 
                         of International Trade
    Mr. Chairman, members of the committee: I would like to again thank 
you for providing me the opportunity to submit this statement on behalf 
of the United States Court of International Trade, a court established 
under Article III of the Constitution with exclusive nationwide 
jurisdiction over civil actions pertaining to matters arising out of 
the administration and enforcement of the customs and international 
trade laws of the United States.
    The Court's fiscal year 2008 original budget request of $16,727,000 
represented an overall increase of $690,000 or 4.3 percent over the 
fiscal year 2007 assumed appropriation of $16,037,000. This assumed 
appropriation included an across the board cut of 1 percent. In 
February, the Court received an appropriation of $15,825,000. Based on 
this enacted appropriation, and after a detailed and careful review, 
the Court's fiscal year 2008 budget request has been reduced to 
$16,632,000. This represents an overall increase of 5.1 percent over 
the enacted fiscal year 2007 appropriation. Despite the reduction, we 
anticipate that this request will enable the Court to maintain current 
services and provide for mandatory increases in pay, benefits and other 
inflationary adjustments to base, including increases in costs paid to 
GSA for rent and to the Federal Protective Service for building basic 
and building-specific security surcharges. These security surcharges 
provide for the Court's pro-rata share of installing, operating and 
maintaining systems for the critical and necessary security of the 
Federal Complex in lower Manhattan.
    As it has done in the past, the Court continues to budget and 
expend funds in a conservative and cost effective manner, and will 
continue to do so to manage within the reduced request. Through the use 
of its annual appropriation and the Judiciary Information Technology 
Fund (JITF), the Court continues to promote and implement the 
objectives set forth in its long range plan for providing access to the 
Court through the effective and efficient delivery of information to 
litigants, bar, public, judges and staff. This access is of particular 
importance in realizing the Court's mission to resolve disputes by: 
Providing cost effective, courteous and timely service by those 
affected by the judicial process; providing independent, consistent, 
fair and impartial interpretation and application of the customs and 
international trade laws; and fostering improvements in customs and 
international trade law and practice and improvements in the 
administration of justice.
    The Court continues to make substantial progress in implementing 
its information technology and cyclical maintenance programs. In fiscal 
year 2006, the Court: Purchased a new server for a public access 
terminal that will allow access to the Court's customized version of 
the Federal Judiciary's Case Management/Electronic Case Files (CM/ECF) 
System; purchased an additional server for storing utility files and 
desktop images; purchased a high speed digital networked copier with 
scanning and faxing capabilities; cyclically upgraded laptops and 
purchased desktop computers, monitors and printers for a new judge; 
upgraded vital existing software applications, continued maintenance 
agreements for computer hardware and software applications; implemented 
the on-line system (pay.gov) for the payment of filing fees and the 
electronic application of CM/ECF for filing appeals and opening cases; 
upgraded to a new version of CM/ECF; and provided training in the new 
electronic case opening and filing of appeals applications to 
attorneys, staff and the public. Additionally, in fiscal year 2006, the 
Court continued its cyclical maintenance program by refurbishing 
chambers for a new judge, and offices for a new clerk of court, 
replacing aging furniture/chairs and upgrading public access corridors.
    In fiscal year 2007, the Court has planned to: Purchase new 
courtroom and conference room technology systems, including an upgraded 
video conferencing system; replace the Court's Internet server and the 
server for the Court's library on-line cataloguing and acquisition 
system; replace desktop computer systems, laptops and printers in 
accordance with the Judiciary's cyclical replacement program; upgrade 
and support existing software applications; purchase new software 
applications to ensure the continued operational efficiency of the 
Court; support Court equipment by the purchase of yearly maintenance 
agreements; and upgrade copier machines in chambers and clerks' 
offices. The Court also will expand its developmental and educational 
programs for staff in the areas of job-related skills and technology.
    In fiscal year 2008, the Court remains committed to using its 
carryforward balances in the Judiciary Information Technology Fund to 
continue its information technology initiatives and to support the 
Court's short-term and long-term information technology needs.
    Additionally, the Court will continue its commitment to its 
cyclical replacement and maintenance program for equipment and 
furniture and for the courthouse. This program not only ensures the 
integrity of equipment and furnishings, but maximizes the use and 
functionality of the internal space of the courthouse. Moreover, the 
fiscal year 2008 request includes funds for the support and maintenance 
of the security systems upgraded by the Court in fiscal years 1999 
through 2005, and the Court's COOP. Lastly, the Court will continue its 
efforts to address the educational needs of the bar and Court staff.
    As I have stated in previous years, the Court remains committed to 
maintaining its security systems to ensure the protection of those who 
work in and visit the courthouse. In July, 2005, GSA received Senate 
approval for fiscal year 2006 funding for the design and construction 
of a security pavilion for entry into the building. In fiscal year 
2006, the Court worked closely with GSA in the design and construction 
of this entrance pavilion. To that end, the Court, in fiscal year 2006, 
entered into a Reimburseable Work Authorization with GSA for a non-
prospectus security project for the purchase and installation of 
additional security equipment, including cameras and for the upgrade of 
the Court's security infrastructure. The design phase was completed in 
fiscal year 2006 and construction began in fiscal year 2007. The Court 
will continue in fiscal year 2008 to work in full partnership with GSA 
during the last phases of construction in order to ensure the total 
success of this project. GSA projects a completion date in fiscal year 
2008.
    I would like to again emphasize that the Court remains committed to 
an approach of conservatively managing its financial resources through 
sound fiscal, procurement and personnel practices. As a matter of 
internal operating principles, the Court routinely engages in cost 
containment strategies in keeping with the overall administrative 
policies and practices of the Judicial Conference, particularly 
regarding rent, security costs, equipment costs, technology, 
contractual obligations and personnel. I can assure you that this 
management approach with respect to the Court's financial affairs is 
on-going.
    Lastly, I would like to personally extend my deepest thanks and 
appreciation to Congress for recognizing the needs of the courts by 
providing, in fiscal year 2007, adequate funding to maintain current 
services so that the courts can remain committed to the administration 
of justice for all.
    The Court's ``General Statement and Information'' and 
``Justification of Changes,'' which provide more detailed descriptions 
of each line item adjustment, were submitted previously. If the 
committee requires any additional information, we will be pleased to 
submit it.
                                 ______
                                 
Prepared Statement of Barbara J. Rothstein, Director, Federal Judicial 
                                 Center
                              introduction
    Mr. Chairman and members of the subcommittee: My name is Barbara J. 
Rothstein. I have been a U.S. district judge since 1980 and Director of 
the Federal Judicial Center since September 2003. The Center is the 
Federal courts' agency whose statutory mandate is to provide continuing 
education of judges, education of court employees, and research and 
analysis of Federal judicial processes and procedures.
    I appreciate the opportunity to provide you this statement in 
support of our 2008 appropriations request. Because the Center, like 
the other judiciary accounts, is new to the subcommittee. I am taking 
this opportunity to provide a detailed description of our work.
    I must stress at the outset that while the Center continues to 
perform its basic statutory duties, the combination of budget 
shortfalls and the staff reductions which the shortfalls have 
necessitated is colliding with an increase in new requirements. In 
recent years we have been asked by the Judicial Conference to undertake 
several large research projects, most of which have been to enable the 
Conference to respond to proposals and inquiries from Congress. For 
example, in response to a congressional request that the Federal 
judiciary ``document how often courtrooms are actually in use,'' we are 
conducting a national study of how courtrooms are scheduled and 
actually used by Federal district and magistrate judges. In response to 
recent congressional proposals to streamline the processing of habeas 
corpus appeals of State capital convictions, the Center was asked by 
six committees of the Judicial Conference to conduct an extensive 
empirical study of all State prisoner capital habeas corpus petitions 
pending in the Federal courts. We are also in the midst of a multi-year 
study of the impact of the Class Action Fairness Act of 2005 (CAFA) on 
the resources of the Federal courts. The Center was asked to conduct 
this study by the Advisory Committee on Civil Rules as it considers 
whether rules changes may be needed in response to CAFA. In education, 
last year we were asked to provide enhanced training for judges and 
staff on new ethics-related guidance and on immigration cases in the 
circuit courts of appeals. Along with all of these tasks is the need to 
provide continuing education and study in connection with the changes 
brought about by the passage of a new bankruptcy statute.
    Our ability to meet specific requests like these and, at the same 
time, continue our regular education and research programs will be 
jeopardized without at least a small increase in our staff.
                              2008 request
    Our 2008 request is for $24,475,000, a 7 percent increase: 
$1,066,000 for standard adjustments to base to cover increases in 
compensation and benefits and inflationary increases in operating 
costs, and $535,000 for additional staff (7 FTE) to support the 
services the Center provides to the Judicial Branch.
    The Center's Board, which the Chief Justice chairs, considered our 
proposed request at its November 2006 meeting and approved it for 
submission to Congress. I am confident that you will find it 
responsible and well grounded.
    Our 2008 request seeks what is essentially a ``current services'' 
budget. The Center has been struggling with having received only one 
full current services increase since the early 1990s. Over these years, 
to compensate for appropriations that did not provide full adjustments 
to base, we reduced our staff 20 percent from 158 to 125. Even as our 
staff declined, the courts' need for our services has continued to 
grow. For this reason we are requesting funds to restore 10 (7 FTE) of 
the most critically needed of the 23 positions we have lost since 2003. 
Our budget submission provides greater detail on why these positions 
are needed and the services they will help provide.
    The Center is proud of its work to promote improved judicial 
administration in the courts of the United States, even as its 
resources have declined. To make the most of our limited resources, we 
have made great use of educational technologies that reduce the need 
for travel, and we have carried out rigorous cost controls, internal 
staff and operational adjustments and reallocations, and personnel 
cuts. We have reached the point where such measures are no longer 
viable without impacting the quality of the services we provide. I 
respectfully urge you to find a way to provide the Center with the 
modest 7 percent increase it needs in 2008 to continue to provide the 
educational and analytical services for which judges and their staffs 
look to the Center.
                   about the federal judicial center
    Below I highlight Center activities in 2006, focusing primarily on 
our education for Federal judges and the staffs of the courts and our 
research on court and case management. Much of this work involves 
coordination, cooperation, and consultation with committees of the 
Judicial Conference of the United States, with the Administrative 
Office, and with the U.S. Sentencing Commission.
    The Center provides orientation programs on substantive legal 
issues, ethics, and trial and case-management techniques to groups of 
newly appointed judges.
    The Center provides timely information and continuing instruction 
to help Federal judges and court staff comply with new legislation, 
Judicial Conference policies, and Supreme Court decisions. We also help 
courts apply effective leadership and management principles and engage 
in strategic planning for their near-term and future needs. Examples in 
this report include expanded ethics training for judges and staff, 
resources and programs on effective case management, an annual review 
of cases decided by the Supreme Court, programs for court units on 
strategic workforce planning, and a courtroom use study, conducted at 
the behest of the Judicial Conference in response to a congressional 
request that the Federal judiciary ``document how often courtrooms are 
actually in use.''
                         education and training
    More than 2,000 Federal judge participants, 10,000 court staff 
participants, 40 circuit mediators, and 1,100 Federal defenders and 
their staff attended Center educational programs in 2006. Those 
programs included orientation and continuing education programs 
delivered by a variety of methods. Programs for judges, circuit 
mediators, Federal defenders, and court unit executives are 
traditionally in-person presentations, affording interaction on court-
management and case-management issues, as well as on substantive and 
procedural matters. Court staff programs, designed for larger 
audiences, are typically not travel-based and include audio, video, and 
online conferences, as well as local training programs that are taught 
in the court units by Center-trained court staff or individuals with 
training experience using Center curriculum materials. We provided 
additional education through satellite broadcasts, streaming audio and 
video programs, web-based training programs, monographs and manuals, 
and videocassettes and audiocassettes. Advisory committees of court of 
appeals, district, magistrate, and bankruptcy judges, as well as court 
unit executives and staff, help in planning and producing Center 
education programs and publications.
    education programs and materials for judges and for legal staff

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

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

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

    2006 programs for clerks of court and their staffs included:
  --A biennial National Conference for District Court Clerks and Chief 
        Deputy Clerks, which emphasized strategic planning, succession 
        planning, implementing new Judicial Conference policies, 
        management issues, and electronic case filing;
  --two management training workshops for supervisors and managers in 
        appellate, district, and bankruptcy courts--a program for those 
        new to the position discussed such topics as performance 
        management, while the program for those with 3 or more years of 
        experience examined staff development and leadership during a 
        crisis;
  --several programs with the Administrative Office on Case Management/
        Electronic Case Filing were facilitated with our staff: three 
        forums--one for district court staff and two for bankruptcy 
        court staff--as well as two web-audio conferences and two audio 
        conferences for bankruptcy courts; and
  --an online conference conducted over several months for jury 
        administrators on customer communications and a web-audio 
        conference on best practices.
    Conferences and workshops for probation and pretrial services 
offices included:
  --A biennial National Conference for Chief Probation and Pretrial 
        Services Officers on succession planning, management issues, 
        optimizing efficiency through technology, offender supervision 
        methods, and coping with limited budgets;
  --an executive team workshop for chief probation and pretrial 
        services officers and their chief deputies that helps leaders 
        analyze district operations and create a strategic plan;
  --five regional symposia for experienced supervising officers that 
        dealt with supervision skills, staff motivation, change 
        management and other topics; and
  --two in-person workshops for new supervising officers participating 
        in a 2-year supervisors development program that also comprises 
        completion of a 40-hour self-study course and attendance at 
        several web-audio conferences.
    New FJTN programs in 2006 for officers included Cyber Crime 
Investigation and Supervision and Substance Abuse: Methamphetamine, the 
fourteenth program in a series. The cyber crime program and a 
rebroadcast of our Financial Investigation series were supplemented 
with five web-audio conferences.
    The Center offers extensive leadership and management education 
through its Professional Education Institute (PEI). PEI includes 
courses, programs, web-based resources, and self-development tools to 
aid leaders and managers at all levels.
    The Center has a variety of curriculum packages that Center-trained 
court staff or staff with training experience use to conduct training 
in local courthouses. Recent packages for managers in all court units 
include Planning for Fiscal Management, Planning for Strategic 
Workforce Management, and Developing a Strategic Court Web Site. A new 
training guide, Mentoring in the Courts, was published electronically 
on the Center's intranet site.
    New FJTN programs for all court personnel included a program on 
challenges and possibilities facing the courts, an orientation video on 
the Center's Federal Court Leadership Program, and a program on 
mentoring relationships. Four editions of the Court to Court video 
magazine spotlighting innovative court practices aired in 2006.
                                research
    The Center conducts empirical and evaluative research on Federal 
judicial administration and case management, mostly at the request of 
committees of the Judicial Conference. The results of most of our 
research are available in print, on our web sites, or in both formats. 
In 2006, we completed 10 major research projects and continued work on 
33 others. This research included:
  --Developing and implementing a research design and training 
        protocols for a major study of courtroom use in the district 
        courts as requested by a committee of the Judicial Conference 
        in response to a request from the chair of the Subcommittee on 
        Economic Development, Public Buildings and Emergency Management 
        of the House Committee on Transportation and Infrastructure. 
        This extensive study of how Federal courtrooms are scheduled 
        and actually used is scheduled to be completed in June 2008. 
        The study focuses on courtroom use in a random sample of 24 
        districts during two 3-month time periods in 2007. Three 
        additional districts are included in the study because they 
        face unusual circumstances involving their courtrooms;
  --producing a handbook to assist judges in managing class actions 
        under the Class Action Fairness Act of 2005 (CAFA). Managing 
        Class Action Litigation: A Pocket Guide for Judges concisely 
        describes the most important and relevant practices for 
        managing class action litigation as set out in the Center's 
        Manual for Complex Litigation, Fourth. The handbook is a 
        product of the Center's multi-year study of the impact of CAFA 
        on Federal judiciary resources as requested by the Advisory 
        Committee on Civil Rules;
  --examining a sample of class action activity, including appeals, 
        before and after CAFA went into effect, with the goal of 
        measuring its impact on various stages of litigation, including 
        remand, ruling on pretrial motions, ruling on class 
        certification, trial, settlement, and appeals;
  --conducting research and interviews with Federal judges who have 
        recently been assigned terrorism cases in order to develop 
        educational materials to for judges related to managing 
        terrorism cases;
  --assisting the Advisory Committee on Civil Rules as it considers a 
        number of possible amendments to the rules of civil procedure;
  --conducting a survey of a sample of district court judges and 
        attorneys involved with recently terminated patent cases to 
        identify the case management techniques that judges employed to 
        strengthen the claim construction process;
  --following up on research to our 2003 study of eleven courts' 
        experiences as pilots in providing remote public access to 
        electronic criminal case records. The follow-up research 
        included an assessment of remote public access to criminal, 
        civil, and bankruptcy electronic records in the district 
        courts. The research focused on related issues such as 
        redacting prohibited information in documents that are filed in 
        the federal courts;
  --examining a sample of over 700 capital habeas appeals of State 
        convictions in response to perceived delay and backlog issues 
        in the processing of these cases;
  --developing and publishing a pocket guide to help Federal judges 
        manage the discovery of electronically stored information: 
        Managing Discovery of Electronic Information: A Pocket Guide 
        for Judges;
  --conducting on-going research to support the Judicial Conference's 
        use of the recently developed statistical case weights for the 
        district courts to assess judgeship needs, including major 
        research to develop new statistical case weights for the 
        bankruptcy courts; and
  --supporting the Judicial Conduct and Disability Act Study Committee, 
        appointed by Chief Justice Rehnquist and chaired by Justice 
        Breyer, as it prepared its final report. Earlier work for the 
        committee included reviewing a stratified national sample of 
        complaints filed under 28 U.S.C.  351.
    We also responded to more than 50 informational requests for 
research-related assistance from the courts, Judicial Conference 
committees, State and Federal agencies, individuals from academic 
institutions and associations, and others.
                programs for foreign judicial officials
    In 1992, the Center's implementing legislation was amended to 
include a mandate to support the U.S. Government's efforts with 
promoting the rule of law abroad by providing information about 
judicial administration and education to the courts of other countries 
and also to obtain information from foreign judiciaries that might 
assist U.S. judges manage transnational litigation. To that end, in 
2006, the Center conducted 43 briefings for more than 226 foreign 
judges, court officials, scholars, and students from over 68 different 
countries; hosted visiting foreign judicial fellows from Brazil and 
Russia, who studied case management, intellectual property and treaty 
law, and judicial independence; and provided technical assistance 
abroad, including conference presentations, in Argentina, Jordan, 
Kazakhstan, Kosovo, Russia, and Serbia.
    No funding for these projects came from the Center's appropriation; 
they were supported with funds from U.S. Government agencies and host 
countries (or organizations within them). The Center's two-person 
International Judicial Relations Office coordinates this activity. The 
Center also held a conference on international law and litigation for 
U.S. judges, in collaboration with the American Society of 
International Law.
                        federal judicial history
    Congress has told us to conduct, coordinate, and encourage programs 
related to the history of the Federal judicial branch. Our 3-person 
Federal judicial history office does so by making available the results 
of our own historical research, helping judges and the courts with 
court history projects, and encouraging research and education projects 
about the judiciary. We have completed six units in our project to 
develop web-based curriculum materials to help educators teach about 
the history of the Federal courts, and we have conducted summer 
institutes that bring together teachers, judges, and scholars to study 
judicial history. We continue to update and expand the widely used 
History of the Federal Judiciary website, including the Federal Judges 
Biographical Directory.
                              publications
    Most Center publications are available in print and electronically. 
In addition to the judicial and legal education publications listed 
above, the Center also released the following research reports: The 
Impact of the Class Action Fairness Act of 2005: Second Interim Report 
to the Judicial Conference Advisory Committee on Civil Rules (on line 
only); Interim Progress Report on Class Action Fairness Act Study (on 
line only); Research on Appeals of Attorney-Fee and Merits Decisions 
(Fed. R. Civ. P. 58(c)(2)) As Presented to the Advisory Committee on 
Civil Rules in May 2006 (on line only); and Roundtable on the Use of 
Technology to Facilitate Appearances in Bankruptcy Proceedings.
                  federal judicial television network
    The Center operates the Federal Judicial Television Network (FJTN), 
a satellite broadcast network with viewing sites in more than 300 
Federal court locations, making it the second largest nonmilitary 
television network in the Federal Government. It transmits Center 
educational programs as well as those of the Administrative Office and 
the U.S. Sentencing Commission. In 2006, the FJTN broadcast 98 
programs, including 8 live programs. The Center produced 62 of these 
programs, 4 of which were live. The online FJTN Bulletin is a bimonthly 
program guide with broadcast schedules, program descriptions, and other 
news about the network. The Center is also streaming videos to enable 
judges and court staff to easily access information on their computers.
                             media library
    The Center's media library contains some 4,000 audio and video 
programs, including Center programs and almost 800 commercially 
produced video programs. In 2006, the media library loaned more than 
600 programs to Federal judges and judicial branch personnel and sent 
some 2,000 media programs directly to the courts for them to keep and 
use in local education and training programs.
                          information services
    The Center serves as a national clearinghouse for information on 
Federal judicial administration. In 2006, Information Services Office 
staff answered hundreds of requests for information from judges and 
court staff, congressional staff, other government agencies, academics, 
researchers, the media, and the public.
                   federal judicial center foundation
    Congress created the Foundation to receive gifts to support Center 
work in certain specialized areas. Its 7-person board is appointed by 
the Chief Justice, the President Pro Tempore of the Senate, and the 
Speaker of the House of Representatives. In 2006, Foundation funds 
helped support our project on alternative dispute resolution and 
programs for judges on advanced mediation strategy, environmental and 
natural resources law, emerging issues in neuroscience, law and 
science, and humanities and science.
                               conclusion
    Again, I appreciate the opportunity to submit this statement and 
stand ready to answer any questions you may have.
                                 ______
                                 
     Prepared Statement of the United States Sentencing Commission
    Chairman Durbin, Ranking Member Brownback, members of the 
subcommittee, the United States Sentencing Commission thanks you for 
the opportunity to submit this statement in support of the Commission's 
appropriation request for fiscal year 2008.
    For the past 3 fiscal years, the Commission has detailed for its 
appropriators the significant impact the Supreme Court's decisions in 
Blakely v. Washington \1\ and United States v. Booker \2\ have had not 
only on the Commission but the entire criminal justice community. 
Despite changes in case law governing federal sentencing policy, the 
Commission has continued to fulfill its statutory mission as set forth 
in the Sentencing Reform Act of 1984. Full funding of its fiscal year 
2008 request will ensure that the Commission can continue to fulfill 
its statutory responsibilities.
---------------------------------------------------------------------------
    \1\ 542 U.S. 296 (2004).
    \2\ 543 U.S. 220 (2005).
---------------------------------------------------------------------------
                          resources requested
    The Commission is requesting $15,477,000 for fiscal year 2008, 
representing a 6 percent increase over allotted funding for fiscal year 
2007. The Commission recognizes that Congress sent a strong message in 
passing the fiscal year 2007 continuing funding resolution that 
agencies should use allotted resources carefully. The Commission 
accordingly has tailored its request for funding to reflect the 
Commission's intent to be fiscally conservative while maintaining the 
resources it needs to meet its statutory mission.
        justification for the commission's appropriation request
    The statutory duties of the Commission include, but are not limited 
to: developing appropriate guideline penalties for new and existing 
crimes; collecting, analyzing, and reporting federal sentencing 
statistics and trends; conducting research on sentencing issues in its 
capacity as the clearinghouse of federal sentencing data; and providing 
training on sentencing issues to federal judges, probation officers, 
law clerks, staff attorneys, defense attorneys, prosecutors, and others 
in the criminal justice community.
    The Supreme Court's decisions in Blakely and Booker did not alter 
these core missions. In fact, the Supreme Court in Booker reaffirmed 
these statutory obligations by explaining that the Commission's post-
Booker mission remained ``writing guidelines, collecting information 
about district court sentencing decisions, undertaking research, and 
revising the guidelines accordingly.'' \3\ The Supreme Court explained 
further that the ``Commission will continue to collect and study 
appellate court decisionmaking. It will continue to modify its 
guidelines in light of what it learns, thereby encouraging what it 
finds to be better sentencing practices.'' \4\
---------------------------------------------------------------------------
    \3\ 543 U.S. at 264.
    \4\ 543 U.S. at 263.
---------------------------------------------------------------------------
    Over the past 3 fiscal years, the Commission has worked diligently 
to maximize resources overall and appreciates the funding and support 
it has received from Congress. The Commission, therefore, has tailored 
its fiscal year 2008 funding request to reflect its continued 
commitment to efficiently yet effectively meet its core mission.
        sentencing policy development and guideline promulgation
    The Commission promulgated a number of amendments to the guidelines 
in several substantive areas of criminal law, including immigration, 
steroids, terrorism, firearms, and intellectual property, that became 
effective in 2006. For the amendment cycle ending on May 1, 2007, the 
Commission also is considering a number of guideline amendments, 
including recommendations for penalty modifications for transportation, 
sex, terrorism, and drug offenses, and the fraudulent acquisition or 
unauthorized disclosure of phone records. These proposed amendments 
reflect the Commission's response to the USA Patriot Improvement and 
Reauthorization Act of 2005, the Safe, Accountable, Flexible, Efficient 
Transportation Equity Act: A Legacy for Users, the Adam Walsh Child 
Protection and Safety Act of 2006, the Stop Counterfeiting in 
Manufactured Goods Act, the Telephone Records and Privacy Protection 
Act of 2006, and a number of directives and changes to the criminal law 
made by the 109th Congress, as well as input received from the criminal 
justice community, the resolution of circuit conflicts on sentencing 
application issues, and other policy priorities of the Commission.
    Consistent with the requirements of the Sentencing Reform Act of 
1984, the Commission's process for sentencing policy development and 
guideline promulgation continues to include significant outreach to, 
and input from, criminal justice stakeholders, as well as the review of 
pertinent literature, data, and case law. The following examples of the 
Commission's work during the current amendment cycle illustrate this 
process.
    As part of its ongoing study of the criminal history guidelines and 
its consideration of how the guidelines might be simplified overall, 
the Commission held 2 days of meetings to discuss these topics with 
over 40 individuals, including federal judges, probation officers, 
defense attorneys, Department of Justice personnel, and academics. In 
addition, as part of its review of the guidelines with respect to 
cocaine offenses, the Commission held a day-long hearing to elicit 
testimony from representatives of the criminal justice community, 
including law enforcement, medical and treatment experts, academics, 
and community groups among others. The hearing provided a record for 
the criminal justice community to use as it debates the future of 
federal cocaine sentencing policy. The Commission also invited 
representatives of the Department of Justice, the defense bar, and 
industry groups to provide input on topics such as immigration 
penalties, sex offenses, and intellectual property offenses during a 
public meeting of the Commission.
    As the foregoing examples illustrate, the federal sentencing 
guidelines are a product of a collaborative and comprehensive process 
as required by the Sentencing Reform Act of 1984, including 
consideration of factors set forth in 18 U.S.C.  3553(a). Full funding 
of its fiscal year 2008 request will ensure that the Commission can 
continue to meet requirements of the Sentencing Reform Act of 1984 with 
respect to sentencing policy development and guideline promulgation.
          collecting, analyzing and reporting sentencing data
    The Supreme Court's recent jurisprudence has had a significant 
impact on the Commission's data collection, analysis, and reporting 
efforts. For over 70,000 federal felony and Class A misdemeanor 
criminal cases annually, the Commission extracts information from five 
documents that the courts are required to send to the Commission 
pursuant to 28 U.S.C.  994(w).\5\
---------------------------------------------------------------------------
    \5\ Section 994(w) of title 28, United States Code, requires the 
chief judge of each district court, within 30 days of entry of 
judgment, to provide the Commission with: The charging document; the 
written plea agreement (if any); the Presentence Report; the judgment 
and commitment order; and the statement of reasons form.
---------------------------------------------------------------------------
    Immediately after the 2004 Blakely decision, the Commission 
recognized that one of the most critical functions it could perform was 
reporting the most timely and accurate sentencing data available. The 
Commission therefore began to refine its efforts in this area so that 
it could produce data beyond its statutorily required annual reports. 
By the time the Supreme Court issued its Booker decision in January 
2005, the Commission had revised its data collection and reporting 
process so that it could provide ``real-time'' data about the effects 
of the Booker decision on national sentencing practices.
    The Commission further refined its data collection, analysis and 
reporting efforts throughout fiscal year 2006 to maximize the 
information it provides to the criminal justice community. It now 
provides detailed quarterly national sentencing data similar to the 
format and types of data produced in the Commission's year-end annual 
reports. Moreover, in February 2007, the Commission published on its 
website its Fiscal Year 2006 Annual Report and Sourcebook. These 
materials reflect the Commission's analysis of over 72,000 cases. This 
represents approximately 24,000 more cases than the Commission 
processed in fiscal year 1997, showing a 50-percent increase in 
caseload over a 10-year period. The Commission's fiscal year 2008 
funding request is designed to maintain personnel and other resources 
in the key areas of data collection, data analysis, and research. This 
funding also will ensure that the Commission can keep pace with 
increased demands made of its data collection and analysis efforts.
Information Technology Issues Associated with Data Collection, 
        Analysis, and Reporting
    The Commission has developed and implemented an electronic document 
submission system that enables sentencing courts to submit 
electronically the five statutorily required sentencing documents 
directly to the Commission. This has greatly alleviated the need to 
spend court resources on copying, bundling, and mailing hard copies. 
Currently, 80 of the 94 judicial districts are using the system, with 
another 11 slated to come on-line within the coming months. The 
Commission is hopeful that all 94 districts will be using the system by 
the end of fiscal year 2007.
    The electronic document submission system has enabled the 
Commission to take significant steps toward automating data collection 
and analysis. Increased automation contributes significantly to the 
success of the Commission's statutory missions and offers significant 
benefits to the entire criminal justice community. Automation better 
allows the Commission to provide the independent and objective analysis 
and reporting of federal sentencing practices contemplated by the 
Sentencing Reform Act. Automated data collection and analysis enable 
the Commission to provide even more detailed and accurate data on 
national sentencing trends to the criminal justice community. An 
automated system allows the Commission to work closely with other 
entities in the criminal justice community in creating an unparalleled 
system of document receipt and data reporting that promotes best 
practices throughout the system. By increasing internal efficiencies, 
the Commission is able to dedicate more resources to research-oriented 
tasks.
    The Commission is pleased that Congress has funded its efforts to 
become fully automated. During fiscal year 2008, the Commission intends 
to evaluate the technological base it has built and, working with other 
entities in the criminal justice community, determine the next steps 
for moving forward technologically. Full funding of its fiscal year 
2008 request will ensure that the Commission's automation systems work 
efficiently and effectively and allow the Commission to further develop 
its automation resources.
Increased Demands for Commission Work Product from Congress
    In addition to the new demands for national data placed on the 
Commission by the Supreme Court's recent decisions, the Commission also 
continues to experience increased demand for its work product from 
Congress. In addition to providing its quarterly and annual data 
reports on national sentencing practices, the Commission is required to 
assist Congress in assessing the impact proposed criminal legislation 
will have on the federal prison population. These assessments often are 
complex, time-sensitive, and require highly specialized Commission 
resources. Throughout the past 3 fiscal years, the Commission also has 
experienced an increase in more general requests for information from 
Congress on issues such as drugs, gangs, immigration, and sex offenses. 
The Commission anticipates an even higher volume of such requests 
throughout fiscal year 2008 and looks forward to fulfilling these 
requests in a timely and thorough manner.
                          conducting research
    Research is a critical component of the Commission's overall 
mission. Congress directed the Commission to establish a research 
agenda as part of its role as the clearinghouse on federal sentencing 
statistics and policy. As such, the Commission has undertaken a number 
of important research projects. In response to the recent Supreme Court 
decisions and as a result of the Commission's success with increasing 
its data collection and analysis efficiencies, the Commission has 
accelerated its research agenda. In fiscal years 2006 and 2007, the 
Commission undertook a number of internal and external reports that 
provide detailed examinations of key policy areas such as immigration, 
drugs, and firearms offenses. Also in fiscal year 2006, the Commission 
released a comprehensive report on the impact of Booker on federal 
sentencing.
    In fiscal year 2007, the Commission also anticipates reviewing and 
releasing reports on federal cocaine policy and various components of 
offender criminal history, along with review of other reports drafted 
to support the Commission's guideline amendment work. These reports are 
crucial to the Commission's overall objective of promulgating reasoned 
and well-informed guideline and policy statement amendments.
    In fiscal year 2008, the Commission expects that its research 
agenda will include additional reports associated with its policy work 
and the continuation of its comprehensive review of criminal history, 
including more reports based on its nationally recognized recidivism 
database. The Commission also anticipates undertaking several research 
and data analysis projects of interest to the criminal justice 
community. Full funding of its fiscal year 2008 request will allow the 
Commission to pursue its commitments to providing the criminal justice 
community with the most comprehensive and thorough reports on federal 
sentencing practices.
                         training and outreach
    The Commission is dedicated to providing specialized guideline 
training and technical assistance to federal judges, probation 
officers, law clerks, staff attorneys, prosecutors, and defense 
attorneys by providing educational programs throughout the year. The 
Commission continues to expand its training and outreach programs to 
ensure the criminal justice community has the tools necessary to 
operate in a post-Booker sentencing world. Throughout the remainder of 
fiscal year 2007, the Commission anticipates holding training programs 
in all 12 circuits and a majority of the judicial districts. The 
Commission will co-host an annual training program for several hundred 
participants in May 2007 in Salt Lake City, Utah, and in May 2008 in 
Florida. Full funding of its fiscal year 2008 request will allow the 
Commission to continue its expanded training program in all 12 circuits 
and its attendance at numerous academic and judicial programs and 
symposia on federal sentencing.
                                summary
    The Commission is uniquely positioned to assist all three branches 
of government in ensuring sound and just federal sentencing policy. An 
independent agency housed in the Judicial branch, the Commission is an 
expert bipartisan body of federal judges, individuals with varied 
experience in the federal criminal justice system, and ex-officio 
representatives of the Executive Branch whose work on sentencing policy 
must be reviewed by Congress. In short, the Commission is at the 
crossroads of where the three branches of government intersect to 
determine federal sentencing policy.
    The Commission has worked hard and performed well with the 
resources available, and it appreciates the funding it has received 
from Congress to meet its increasing needs. Full funding of the 
Commission's fiscal year 2008 request will ensure that the Commission 
continues to fulfill its statutory missions to develop appropriate 
guideline penalties, collect, analyze, and report federal sentencing 
statistics and trends, conduct research on sentencing issues, and 
provide training to the federal criminal justice community. The 
Commission respectfully requests that Congress support fully the 
Commission's fiscal year 2008 appropriation request of $15,477,000 so 
that it can continue its role as a leader in federal sentencing policy.

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

                        FISCAL YEAR 2007 FUNDING

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

                   ROLE OF THE ADMINISTRATIVE OFFICE

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

                            COST CONTAINMENT

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

           RELATIONSHIP WITH GENERAL SERVICES ADMINISTRATION

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

                        FISCAL YEAR 2008 REQUEST

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

                           PREPARED STATEMENT

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

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

                  FEDERAL PROTECTIVE SERVICE SECURITY

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

                           SECURITY OF JUDGES

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

                  FEDERAL PROTECTIVE SERVICE SECURITY

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

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

            WORKING WITH THE GENERAL SERVICES ADMINISTRATION

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

                      PANEL ATTORNEY RATE INCREASE

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

                        FISCAL YEAR 2008 REQUEST

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

GENERAL SERVICES ADMINISTRATION CONSTRUCTION PROJECTS FOR THE JUDICIARY

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

                        COLORADO DISTRICT COURT

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

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

                          THE COURTS' CASELOAD

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

                    PROBATION AND PRETRIAL SERVICES

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

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

               ADAM WALSH CHILD PROTECTION AND SAFETY ACT

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

                    REPORTING ON IMPACTS AND RESULTS

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

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

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

                     ADDITIONAL COMMITTEE QUESTIONS

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

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

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

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

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

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

    In addition to the reduced number of bankruptcy filings, the change 
in case mix between Chapter 7 filings and Chapter 13 filings may also 
be a cause of reduced fee revenue. Prior to the bankruptcy reform 
legislation, bankruptcy filings were comprised of 70 percent Chapter 7 
filings and 30 percent Chapter 13 filings. The current mix is 
approximately 55 percent Chapter 7 and 45 percent Chapter 13s. The 
change in case mix will likely result in a reduction in fee collections 
over the short-term, since various motion-related fees under Chapter 13 
may be collected over a period of up to 5 years, versus 90 days for 
Chapter 7 filings.
Department of Justice Proposals to Increase U.S. Trustee Fees
    In its fiscal year 2008 Budget Request, the Department of Justice 
included two proposals relating to the United States Trustee program. 
The first would amend Section 589(a) of title 28, United States Code, 
to designate the deposit of fines collected from bankruptcy petition 
preparers pursuant to BAPCPA. This provision would have no impact on 
the Judiciary.
    The second proposal, amending Section 1930(a) of Title 28, would 
increase the quarterly fees collected by the U.S. Trustee in Chapter 11 
cases. These fees are paid by debtors directly to the United States 
Trustee program, based upon the debtor's quarterly disbursements. This 
proposal would affect the Judiciary in that parallel Chapter 11 
quarterly fees are also collected in the six bankruptcy administrator 
districts in Alabama and North Carolina. The Judiciary would most 
likely increase quarterly fees in those districts, parallel to the 
increases proposed by the Department of Justice to the U.S. trustee 
quarterly Chapter 11 fee increases, to maintain national parity between 
the two programs. Such fees are deposited as offsetting receipts to the 
fund established under section 1931 of title 28, United States Code. 
Aside from a parallel increase in the Chapter 11 quarterly fee in the 
bankruptcy administrator districts, this proposal would not affect the 
Judiciary.
Chapter 7 Case Trustee Compensation
    For several years, the National Association of Bankruptcy Trustees 
(NABT) has sought increased compensation for Chapter 7 case trustees. 
Chapter 7 case trustees are paid $60 per case from a portion of the 
debtors' filing fee. The Chapter 7 case trustee's compensation is paid 
over to the trustee by the court if the debtor pays the full filing 
fee. The Judiciary merely acts as a pass-through for the fees paid by 
the debtor to the Chapter 7 trustee. The Judiciary has no 
responsibility to pay the Chapter 7 trustee's fees if the debtor does 
not pay a filing fee. Additionally, Chapter 7 trustees receive a 
percentage of distributions made in asset-Chapter 7 cases. Asset 
Chapter 7 case distributions made by the case trustee are reviewed and 
approved by the bankruptcy court.
    Under the provisions of bankruptcy reform legislation, if a Chapter 
7 debtor is granted in forma pauperis status, the debtor does not pay a 
filing fee. In this circumstance, none of the entities that usually 
receive a portion of the filing fee (Judiciary, case trustee, U.S. 
trustee fund and U.S. Treasury) receive any funds.
    One NABT proposal is to increase the case trustees' statutory per 
case compensation from $60 to $100. The case trustees are also seeking 
a way to receive payments in in forma pauperis cases. The Judicial 
Conference and the Judiciary have no position on the amount of money 
Congress determines the case trustees should be paid by the debtors. 
The only concern of the Judiciary is that the proposals should not 
impact the amount of fee revenue the Judiciary receives.
    Based upon the efforts of NABT, this proposal was included in the 
House version of the Financial Netting Improvements Act of 2006 
(``Contracts Netting Act''). However, it was stripped from the bill in 
the Senate before the ultimate enactment of the legislation as Public 
Law 109-390. The case trustee fee increase included in the House 
version of the Contracts Netting Act would also have streamlined the 
collection of fees for processing of payments to case trustees, thus 
reducing an administrative burden in bankruptcy clerks' offices.
    NABT continues to pursue various proposals to enhance Chapter 7 
bankruptcy trustees' compensation.
                                 ______
                                 
           Questions Submitted by Senator Frank R. Lautenberg
    Question. Judge Gibbons, in your experience, do current judicial 
pay levels pose a threat to the independence and success of the federal 
judiciary?
    Answer. I believe Chief Justice Roberts was correct when he stated 
in his 2006 Year-End Report on the Judiciary that judicial pay levels 
pose a threat to the independence of the federal judiciary.
    In the past, a federal judgeship was viewed as a capstone to a 
legal career. As the Chief Justice noted, judges have been leaving the 
federal bench in increasing numbers. In the past six years 38 judges 
have left the federal bench, including 17 in the last two years. While 
this may not represent a mass exodus, it reflects a disturbing trend 
nonetheless. To the extent that judges are leaving the bench for more 
lucrative paying jobs then, yes, pay levels do pose a threat to 
retaining talented, experienced judges. Low pay levels also discourage 
some well-qualified candidates from seeking and accepting appointment 
to the federal bench. The strength of our Judiciary is largely 
determined by the quality of our judicial officers, so the 
unattractiveness of federal judicial pay is a concern.
    Pay erosion is also affecting diversity on the bench. If only the 
extremely wealthy can afford to accept an appointment, or only those 
who are appointed from within government service, we will lose 
diversity on the federal bench.
    The Framers of our Constitution saw judicial independence as linked 
to life tenure. Time has verified their wisdom. Federal judges have 
historically been scrupulous about adhering to the rule of law and 
excluding extraneous and inappropriate factors from their decision-
making. Chronically low pay levels threaten to create a Judiciary in 
which judges worry about what their next job will be and whether 
litigants will be in a position to affect their future careers, which 
would jeopardize judicial independence and public confidence in an 
independent Judiciary. This would be a Judiciary far different from 
that envisioned by the Framers and one with fewer institutional 
protections against inappropriate influences. I do not believe that it 
is desirable to test our constitutional system by paying judges 
inadequately.
    Question. In its 1995 Long Range Plan for the Federal Courts, the 
Judicial Conference recommended giving credit toward retirement 
benefits for years served as bankruptcy and magistrate judges when such 
judges are elevated to the Article III bench. Do you believe that 
bankruptcy and magistrate judges' current inability to receive 
retirement credits is a disincentive for qualified, experienced 
bankruptcy and magistrate judges to seek promotion to the District 
Court?
    Answer. It could possibly be a disincentive for bankruptcy judges 
and magistrate judges to seek Article III judgeships because the years 
they served in those positions would not be credited towards meeting 
Article III retirement eligibility. Article III judges must satisfy the 
``rule of 80,'' that is, pursuant to 28 U.S.C.  371(a), (b) and (c), 
an Article III judge may not retire from office or take senior status 
until the judge reaches age 65 with a minimum of 15 years of Article 
III service.
    Bankruptcy judges and magistrate judges are not required to satisfy 
the ``rule of 80'' provision. Therefore, depending on the age of the 
bankruptcy judge or magistrate judge, he/she may be able to retire 
earlier if he/she remains in that capacity. Under the Judicial 
Retirement System (JRS), a bankruptcy or magistrate judge can retire on 
an annuity after eight years of service, payable at age 65. For 
example, a bankruptcy judge or magistrate judge appointed at age 50 
will have vested in a JRS annuity at age 58 equal to 8/14 (57 percent) 
of the salary of the office (payable at age 65); and that same judge 
would receive a full salary JRS retirement at 65. If that same judge 
were elevated to an Article III judgeship at age 58, he or she would 
not be entitled to an Article III ``rule of 80'' retirement until age 
69 when the age and years of service total at least 80. If that judge 
were allowed to receive credit for his or her 8 years of bankruptcy 
judge or magistrate judge service, that judge would be entitled to 
``rule of 80'' retirement at age 65 instead of 69.
                                 ______
                                 
              Questions Submitted by Senator Sam Brownback
    Question. Your revised fiscal year 2008 budget submission does not 
request resources for additional staff. Do you feel that you currently 
have the appropriate number of staff to address your workload?
    Answer. No, the Judiciary does not have the appropriate number of 
staff to address current workload. The steady workload growth in recent 
years has not been matched with the staffing resources needed to keep 
up with that workload. Between fiscal years 2001 and 2006 the courts' 
aggregate caseload increased by 23 percent while staffing resources 
increased by only 1 percent.
    The Judiciary's staffing formulas indicate that an additional 2,000 
staff are required in order for clerks and probation offices to be 
staffed fully. However, because of the late enactment of appropriations 
and uncertainty about whether funding will be available in the 
subsequent year to pay newly hired staff, court managers have been 
reluctant to hire. This also contributes to the widening gap between 
workload and staffing resources. The Judiciary has sought to narrow the 
gap between staffing levels and workload through the implementation of 
automation and technology initiatives, improved business practices, and 
cost-containment efforts, but has not been able to close it entirely.
    The $20 million provided in fiscal year 2007 will enable the courts 
to hire about 200 new staff to meet workload demands. However, because 
full-year fiscal year 2007 funding was not made available to the courts 
until six months into the fiscal year, and given the lead time it takes 
to recruit and hire, all $20 million cannot be obligated during fiscal 
year 2007. We have therefore set aside in reserve the remaining $14.3 
million (the $20 million less $5.7 million for new staff in the 2007 
plan) so that funding will be available in fiscal year 2008 for courts 
to continue to fill these positions.
    The fact that the courts' workload has begun to stabilize provides 
the Judiciary an opportunity to use this funding to partially close the 
gap between current staffing levels and workload.
    Question. Given the reduced bankruptcy filing levels over the past 
18 months, why does the 2008 Budget Request not reflect a staffing 
reduction in bankruptcy courts?
    Answer.
Workload Per Case Is Increasing
    Although bankruptcy filings are down, by virtue of the law's 
design, case management under Bankruptcy Abuse Prevention and Consumer 
Protection Act (BAPCPA) of 2005 is more complex and time consuming. 
Court staff are needed to ensure that new requirements mandated by the 
law to weed out fraudulent debtors and improve the bankruptcy process 
are being met. Preliminary data from a sampling of courts indicates 
that per-case work has increased significantly under the new law. Such 
work not only reflects case management activity related to new 
requirements, such as means testing for Chapter 7 eligibility, but also 
to an increased number of motions, orders, and noticing requirements.
    Despite the drop in filings, bankruptcy court staff continue to 
make more than one million docket entries per month and provide quality 
control checks for one million additional entries generated 
electronically by attorneys. These figures reflect the results of an 
initial court sampling of data regarding workload. That data indicates 
that, under BAPCPA, the number of motions filed per case has increased 
by 59 percent; more specifically, motions for relief from stay has 
increased by 73 percent; court orders, by 35 percent, and Chapter 13 
cases, the most work intensive cases, by 50 percent.
    Pending more definitive information, regarding both filing 
projections as well as workload analyses, the Judiciary must proceed 
cautiously to ensure that it protects the needs of the bench, bar, and 
public. Downsizing of the magnitude that could be required in the 
bankruptcy clerks' offices could be expensive to conduct as well as 
disruptive to court services. Once separated, those staff (and their 
highly specialized electronic case management skills) would not be 
easily replaced to meet any future upturn in filings. The Judiciary 
would not only lose its personnel training investment, it would also 
incur huge severance pay requirements. In the mean time, the courts 
would not be in a position to address an upswing in filings, especially 
given the extra work required to carry out the mandates of the law.
Future Filing Trends Still Uncertain
    Eighteen months after implementation of the BAPCPA of 2005, experts 
still cannot agree on its future impact. Bankruptcy filings for March 
2007 were 74,000, the highest since the bankruptcy reform legislation 
went into effect in October 2005 although based on historical trends 
March is typically a high filing month.
    The Judiciary also recognizes that the root causes of bankruptcy--
job loss, business failure, medical bills, credit problems, and 
divorce--were not affected by the law and are expected to continue to 
be the primary drivers of caseload. Moreover, economic reports continue 
to advise that leading indicators of bankruptcy, such as personal debt, 
late credit card payments, and mortgage foreclosures, are on the rise.
    Question. What actions are you taking to align resources more 
closely with workload?
    Answer.
Work Measurement Begins Summer 2007
    To quantify workload changes under Bankruptcy Abuse Prevention and 
Consumer Protection Act of 2005 and align resources accordingly, the 
Judiciary will be conducting an extensive new work measurement process 
for the bankruptcy courts this summer. That measurement will be used to 
develop a new staffing formula for allocating bankruptcy resources in 
fiscal year 2009.
    Until that time, the situation will be monitored carefully and 
contingency plans developed for implementation beginning in fiscal year 
2008 if filings do not show a distinct upward trend by summer 2007.
Transition Planning In Progress
    For each of the past five years, the bankruptcy clerks program has 
been downsizing to reflect its increased reliance on electronic filing 
as well as budget realities. In the process, the program has shed 
nearly 900 full-time equivalent, on-board employees, about 17 percent 
of the workforce.
    From June through September 2007, various Judicial Conference 
committees will be considering proposals to continue the gradual 
reduction in the bankruptcy courts as warranted by filings and (pending 
the work measurement study) the Judiciary's best professional judgment 
as to workload. The process must be managed in a way so as to minimize 
impacts on bankruptcy court operations and staff.
    Question. We recently received a draft copy of the NAPA study that 
was directed in the fiscal year 2006 appropriations bill.
    What is the Judiciary's reaction to the findings and conclusions?
    Answer. The Administrative Office has also received a draft copy of 
the study and is in the process of preparing agency comments. These 
comments will be provided to NAPA for its consideration in finalizing 
the report.
    The Administrative Office is pleased with the report's finding that 
the Judiciary's budget formulation and execution activities reflect 
sound stewardship of federal funds and its recognition of improvements 
in the space area, including our relationship with GSA.
    Some of the areas addressed in the report (program based budgeting 
and long-range planning) are issues that the Judiciary has given 
considerable thought to in the past and the Judiciary welcomes the 
opportunity to have discussions about them again, taking into account 
the insights presented in the NAPA report.
    Question. What actions do you plan to take in the future in 
response to the study?
    Answer. Once we receive a final report, the Judicial Conference 
Committees will consider the recommendations specific to their areas of 
jurisdiction. Depending on when the report is received, this could take 
place either at the summer 2007 meetings or the following winter 
meetings. We expect a final report in June 2007. Ultimately the 
Judicial Conference will determine if and how the recommendations are 
adopted.
    Question. Please discuss your post-conviction supervision program.
    How do you determine the services and support supervisees require 
and receive, including education, job training, and treatment?
    Answer. In most cases, an offender's needs have been identified 
well before supervision begins, either at the pretrial or presentence 
stage of the Federal criminal justice system. The presentence report 
and the resulting sentencing document identify treatment, educational, 
employment, and other needs that will most likely have associated 
special conditions of the supervision term.
    Following an offender's placement on probation or release from an 
institution, the probation officer works with the offender to assess 
the offender's risks, needs and strengths to prepare an individualized 
comprehensive supervision plan. Not all offenders require the same 
level of supervision to reach this goal. It is the officer's job to 
distinguish among them and to implement supervision strategies that are 
appropriately matched with the offender's risks, needs and strengths.
    If substance abuse or mental health treatment conditions are 
ordered, the officer will either conduct an informed assessment or 
direct the person to undergo a clinical assessment performed by a 
professional treatment provider. If treatment is necessary, the officer 
refers the offender to a treatment program tailored to his needs. 
Treatment is part of the overall supervision objectives and strategies 
for the case. The officer monitors the offender's progress in treatment 
and collaborates with the treatment provider to further the offender's 
chances for success on supervision.
    If the offender is unemployed, the officer determines factors 
contributing to the situation. Often, officers will assist offenders in 
finding employment or vocational training programs. Officers maintain 
contact with employers and educators as necessary to support the 
offender in meeting his supervision objectives. Many districts have 
implemented formal employment programs in cooperation with other 
agencies, such as the Department of Labor, Bureau of Prisons, local 
one-stop centers, state employment agencies, and local social service 
agencies to assist offenders in securing and maintaining meaningful 
employment. Many probation offices hold job fairs in their communities 
especially geared toward ex-offenders.
    If, during the period of supervision, an officer identifies 
educational, vocational or treatment needs for which there is no court-
ordered special condition requiring the offender participation in the 
program(s), the officer will petition the court to modify the release 
conditions accordingly. A court-ordered special condition allows the 
officer to leverage sanctions if the offender does not comply with the 
condition. In many cases, the backing of the court will induce the 
offender to achieve the necessary skills and/or treatment necessary to 
succeed on supervision and beyond. All of the above interventions, in 
addition to individualized professional care and concern, contribute 
toward the goal of increasing the likelihood of success on supervision.
    Question. Do you have any data on education levels of people under 
supervision and do you ensure that supervisees receive a GED if needed?
    Answer. If education is identified as a need for an offender who 
never completed high school, the officer may identify obtainment of a 
GED as a supervision objective. If so, the officer assists the offender 
in enrolling in a local educational program. The officer continually 
monitors the offender's progress in this type of program, as well as in 
many others, intended to enhance the offender's success on supervision 
and beyond.
    The table below provides data on education levels of people under 
supervision. It reflects cases received for post-conviction supervision 
in fiscal year 2006, with education level reported.

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

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

                          SUBCOMMITTEE RECESS

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















  FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL 
                               YEAR 2008

                              ----------                              


                       WEDNESDAY, MARCH 28, 2007

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

                       DEPARTMENT OF THE TREASURY

                        Office of the Secretary

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

                 STATEMENT OF SENATOR RICHARD J. DURBIN

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

                   STATEMENT OF HENRY M. PAULSON, JR.

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

                           PREPARED STATEMENT

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

          COMMUNITY DEVELOPMENT FINANCIAL INSTITUTIONS PROGRAM

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

                   INFORMATION TECHNOLOGY MANAGEMENT

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

                        BANK SECRECY ACT DIRECT

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

                 TREASURY FOREIGN INTELLIGENCE NETWORK

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

                          TERRORIST FINANCING

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

               Prepared Statement of Senator Wayne Allard

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


              Prepared Statement of Senator Sam Brownback

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

                            TAX ENFORCEMENT

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

                              PART PROGRAM

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

             ASSISTANT SECRETARY FOR INTERNATIONAL AFFAIRS

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

                              PART PROGRAM

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

                          FINANCIAL REPORTING

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

                        IRAQ THREAT FINANCE CELL

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

                        Iraq Threat Finance Cell

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

                          FINANCIAL REPORTING

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

                              SUDAN POLICY

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

                           ECONOMY AND WAGES

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

                             HOUSING MARKET

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

                            FINANCIAL CREDIT

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

                          DIALOGUE WITH CHINA

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

                            PRIVATE CAPITAL

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

                            RISK MANAGEMENT

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

                      SARBANES-OXLEY REQUIREMENTS

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

                     ADDITIONAL COMMITTEE QUESTIONS

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

                 Executive Office of the President,
                           Office of Management and Budget,
                                 Washington, DC, February 27, 2007.
                             (house rules)
                   statement of administration policy
h.r. 556--national security foreign investment reform and strengthened 
                              transparency
                (rep. maloney (d) ny and 58 cosponsors)
    The Administration supports House passage of H.R. 556 and 
appreciates the efforts of the House Financial Services Committee to 
strengthen the Committee on Foreign Investment in the United States 
(CFIUS). The Administration regards the Nation's security as its top 
priority. In addition, the Administration views investment, including 
investment from overseas, as vital to continued economic growth, job 
creation, and building an ever-stronger America. Therefore, the 
Administration seeks to improve the CFIUS process in a manner that 
protects national security and ensures a strong U.S. economy and an 
open investment environment that will serve as an example and thereby 
support U.S. investment abroad.
    In light of the President's responsibility to ensure the Nation's 
security, and in the context of comity between the executive and 
legislative branches, we believe the President should retain 
substantial flexibility to determine CFIUS's membership and 
administrative procedures and to make adjustments when national 
security so requires. Accordingly, the Administration has concerns with 
some of the provisions of H.R. 556 and looks forward to working with 
Congress to address these concerns, to strengthen CFIUS, and to ensure 
the protection of America's homeland and the strength of our economy.
Establishment and Membership of CFIUS
    The President should retain the flexibility to determine and adjust 
the appropriate Executive Branch membership of CFIUS and their roles. 
H.R. 556 should not mandate that CFIUS have Vice Chairs, nor that CFIUS 
include members of the Executive Office of the President. Further, the 
President should retain the flexibility to determine roles and 
responsibilities of CFIUS and its members. For example, the 
Administration opposes any language in Section 6 that would call for 
the designation of a lead agency or agencies to represent other 
agencies or the Committee in negotiating, entering into, imposing, 
modifying, monitoring, or enforcing mitigation agreements.
Deliberations and Decision-Making of the Committee
    The Administration is concerned that the legislation imposes 
procedural requirements, such as roll call voting and motions, which 
are ill-suited for executive bodies such as CFIUS and are inconsistent 
with the vesting of the executive power in the President. Given the 
bill's reporting requirements, such procedures will deter the full and 
open interagency discussion that is required to consider CFIUS cases 
properly.
    The Administration fully shares Congress' goal of ensuring senior-
level accountability for CFIUS decisions. The Administration supports 
requiring the Secretary, Deputy Secretary, or an Under Secretary of the 
Treasury to sign CFIUS decisions at the conclusion of a second-stage 
(45-day) investigation, as H.R. 556 provides. With respect to cases for 
which CFIUS concludes its action at the end of the first-stage (30-day) 
investigation, the Administration supports the House Financial Services 
Committee's decision to authorize delegation of this authority. 
However, in view of the volume and variety of cases and to ensure that 
our most senior officials are able to focus on those cases that do 
raise national security concerns, this authority should be further 
delegable to other officials appointed by the President and confirmed 
by the U.S. Senate.
    The Administration believes that the current 30-day and 45-day time 
frames for first-stage and second-stage investigations provide CFIUS 
with sufficient time to examine transactions. The possibility of 
extensions may discourage foreign investment by generating uncertainty 
and delay for the parties to proposed transactions. The Administration 
therefore opposes allowing CFIUS to extend the second stage (45-day) 
investigation period. The Administration notes that the current CFIUS 
practice of encouraging parties to transactions to consult with CFIUS 
prior to filing provides CFIUS with additional time and flexibility to 
examine complex transactions.
    The Administration supports the role of the intelligence community 
as an independent advisor to CFIUS and appreciates the bill's inclusion 
of a provision that ensures that the Director of National Intelligence 
(DNI) is provided adequate time to complete the DNI's analysis of any 
threat to the national security of a covered transaction. However, 
language in H.R. 556 also appears to provide the DNI with the ability 
to force a second-stage (45-day) investigation if the DNI has 
identified particularly complex intelligence concerns and CFIUS was not 
able to satisfactorily mitigate the threat. Such a policy role would be 
inconsistent with the independent advisory role of the DNI envisioned 
in the legislation and supported by the Administration.
Notification and Reports to Congress
    The Administration supports enhanced communication with Congress on 
CFIUS matters to better facilitate Congress' performance of its 
functions. CFIUS should be required to notify Congress of transactions 
only after all deliberative action is concluded, as H.R. 556 provides. 
As discussed above, roll call voting, particularly if reported outside 
the Executive Branch, would deter the full and open interagency 
discussion that is required to consider CFIUS cases, and reporting on 
internal Executive Branch deliberations, including the positions of 
individual CFIUS members, should not be required.
Authorities of CFIUS
    The Administration believes current law and regulations give the 
President and CFIUS adequate authority to gather all information needed 
to conduct CFIUS investigations. The Administration is concerned that 
provisions of the bill that provide CFIUS with additional statutory 
authority to collect evidence and require the attendance and testimony 
of witnesses and the production of documents would make the CFIUS 
process more adversarial and less effective.
    The Administration believes its ability to protect national 
security would be enhanced by a statutory grant of authority to impose 
civil penalties for a breach of a mitigation agreement. This authority 
to seek civil penalties, which could be calibrated to the seriousness 
of the noncompliance, would be a useful and effective tool for 
enforcing those agreements.
Presidential Review and Decision
    The Administration supports requiring the President to make the 
final decision on a case only when CFIUS recommends that a transaction 
be blocked or when CFIUS fails to reach a consensus after a second-
stage investigation. Requiring Presidential action in a broader set of 
cases would undermine the President's ability to determine how best to 
exercise Executive Branch decision-making authority.
    The Administration looks forward to working with Congress on these 
important issues.
                        overseas attache program
    Question. Overseas attaches work in tandem with the Office of 
International Affairs and the Office of Terrorism and Financial 
Intelligence, as well as the relevant U.S. Embassies, to build 
relationships with foreign officials and to work with local U.S. 
industry, market and agency representatives.
    What are the main purposes of the overseas attache program?
    To what extent are they involved with your anti-terrorism program?
    How many attaches do you currently have around the world?
    You are in the process of expanding the program and we gave you 
additional funds in the recent 2007 CR to do it. How far do you intend 
to expand the program in 2007 and 2008?
    What qualifications are you seeking in candidates to fill these 
jobs?
    Answer. The attache program is essential for several priorities, 
including those related to:
  --Building Treasury's expertise on economic and financial sector 
        issues and fostering stronger substantive dialogues that can 
        advance U.S. Government objectives.
  --Identifying policy or regulatory barriers to U.S. firms and 
        exports, particularly in the area of financial services.
  --Strengthening cooperation with other countries to implement U.N. 
        resolutions and U.S. enforcement actions to prevent and punish 
        money laundering, terrorism and proliferation financing, and 
        other financial crimes.
  --Coordinating closely with other U.S. agencies and multilateral 
        donors (such as the IMF and World Bank) to advance economic 
        growth and development. This is particularly important in 
        countries with a large U.S. Government presence, such as Iraq 
        and Afghanistan.
    As of April 2007, Treasury has eight attaches in China, Japan, 
Southeast Asia (Singapore), Afghanistan, Iraq, Belgium, Brazil, and 
Egypt. We expect to place an attache in India in the coming months. 
Treasury is planning to open another nine attache posts during fiscal 
year 2007-fiscal year 2008, tentatively slated to include Abu Dhabi, 
Istanbul, Riyadh, Islamabad, Johannesburg, Mexico City, London, 
Jakarta, and Tel Aviv.
    To fill these positions, Treasury has been seeking professionals 
who can represent Treasury effectively within the U.S. Embassy and with 
senior officials of their counterpart countries, enhancing the 
effectiveness of Treasury's policy engagement. These tasks require a 
variety of substantive and interpersonal skills, including those 
related to macroeconomic analysis, financial sector development, and 
money laundering and the financing of terrorism. The precise nature of 
the substantive expertise will vary by country. For example, in Japan 
knowledge of macroeconomic and financial sector issues in a mature 
economy is critical. In contrast, experience with emerging markets and 
development issues is more important in attache posts such as Egypt and 
in Southeast Asia. In other posts, the principal focus will be on 
terrorist financing issues, putting a premium on familiarity with 
financial sector issues and U.S. Treasury authority to fight financial 
crimes.
            establishment of dynamic tax office at treasury
    Question. In last year's budget request, Treasury requested 
$513,000 to set up a Dynamic Analysis Division within the Office of Tax 
Policy.
    Are you making the same request in this year's budget?
    Can you tell us how such an office would work and what its purpose 
would be?
    Answer. The initial request to establish a Dynamic Analysis 
Division within the Office of Tax Policy was included in the 
President's 2007 budget request; however, due to the CR, the request 
was not enacted. A similar request is therefore included in this year's 
budget. If funded, Treasury would hire a director and several staff for 
the division. The purpose of the division, as the name suggests, would 
be to conduct dynamic analysis of tax proposals. Dynamic analysis 
incorporates a broad range of behavioral responses to tax changes and 
provides an estimate of how those tax changes affect aggregate labor 
supply, savings and national income in both the near term and the long 
run. This analysis would improve the policy making process by providing 
information to policy makers about the economic effects of tax 
proposals. Treasury already provides estimates of revenue and 
distributional effects of tax proposals, but does not normally provide 
estimates of the effects of tax proposals on national savings or 
output. Treasury's analysis will help inform and complement the type of 
dynamic analysis currently being done by the Joint Committee on 
Taxation and the Congressional Budget Office.
    In analyzing the revenue effect of potential tax policy changes, 
Treasury routinely considers how taxpayers might respond to the 
changes, but does not consider how the overall economy might be 
affected in its official scoring of tax proposals. Dynamic scoring of 
tax proposals would take dynamic analysis a step further by estimating 
how the change in economic activity translates into changes in tax 
receipts. Under the current proposal, Treasury would commit to 
conducting dynamic analysis of major tax policy changes, but not to 
dynamic scoring. Treasury plans to continue to rely on their 
traditional approach for ``official'' estimates of the revenue effect 
of the tax proposals, and to present dynamic analyses as supplemental 
information.
                  personally identifiable information
    Question. In the past year, there have been numerous incidents 
regarding the loss or theft of federal computers and disk drives at 
different agencies where the names and social security numbers of 
citizens may have been compromised. In one incident, VA reported the 
loss of a notebook computer that contained Personally Identifiable 
Information for 26 million veterans. Other incidents were reported by a 
number of federal departments.
    What is the Department doing to protect Personally Identifiable 
Information?
    Is the Department in compliance with the OMB recommendations on 
this? If not, what are its plans to become compliant and by when?
    Answer. The protection of sensitive personal and taxpayer 
information is of critical importance to the Department as is our 
ability to fulfill the Department's responsibilities to our citizens.
    The Department has an important obligation to exercise 
extraordinary diligence in handling Personally Identifiable Information 
entrusted to our care and is taking aggressive actions to avoid it 
being compromised. Towards protecting Personally Identifiable 
Information, approximately 90 percent of Treasury laptops, including 99 
percent of IRS laptops, have been encrypted (in accordance with FIPS 
140-2 encryption standards) including installation of an automatic full 
disk encryption solution. Additionally, some of the remaining 10 
percent of Treasury laptops have limited encryption already installed 
(e.g., specific folder encryption.) We are planning for a 99 percent+ 
completion rate by the end of June. We are also working to provide 
enhanced protection to other portable IT devices, specifically 
including Blackberries, which contain Personally Identifiable 
Information.
    Additionally, in response to recommendations of the President's 
Identity Theft Task Force and the Office of Management and Budget, 
Treasury is in the process of establishing a Personally Identifiable 
Information Risk Management Group (PIIRMG). The Department is currently 
identifying points of contact as well as membership consistent with 
those identified in the Task Force recommendations and anticipates the 
initial PIIRMG kick-off meeting in the coming weeks. The establishment 
of the PIIRMG is an important component of our risk management efforts 
in the area of Personally Identifiable Information, particularly as 
Treasury Bureaus establish the capability to assess any Personally 
Identifiable Information-related incident that may occur and make 
recommendations for corrective and risk-reduction action to the PIIRMG.
    Following OMB's recent memorandum titled ``Safeguarding Against and 
Responding to the Breach of Personally Identifiable Information,'' over 
the next 120 days Treasury will review and reduce its current holdings 
of PII reduce them to the minimum necessary for the proper performance 
of a documented agency function. Treasury will also, within 120 days, 
review its use of social security numbers (SSN) in agency systems and 
programs to identify instances in which collection or use is 
superfluous, as well as establish a plan in which it will eliminate the 
unnecessary collection and use of SSN within eighteen months.
                          information security
    Question. The Inspector General has noted that the Department needs 
to improve its information security program and practices to achieve 
compliance with the Federal Information Security Management Act and OMB 
requirements. The Act, as you know, was meant to bolster computer and 
network security within the Federal Government and affiliated parties 
(such as government contractors) by mandating yearly audits. The IG's 
2006 evaluation disclosed deficiencies that constitute substantial 
noncompliance with the Act.
    What steps are you taking to come into compliance with that Act?
    Answer. Providing adequate security for the Federal government's 
investment in information technology (IT) is a significant undertaking 
and the Department is working towards improving its posture in this 
area. Our on-going efforts include taking steps to refine systems 
inventory for completeness and consistency, issuing Treasury policy in 
support of FISMA requirements, and strengthening the process for 
security remediation efforts.
    In the area of inventory management, the Department has defined the 
inventory of major information systems (including national security 
systems) operated by or under the control of the Department, as 
originally required by the Paperwork Reduction Act of 1995. As an 
indication of our progress, for the first time, in the OIG's 2006 FISMA 
evaluation, it was noted that ``[a]ll agency systems were accounted for 
on the inventory.'' Furthermore, Treasury issued Department-wide 
guidance on major and minor systems to ensure a consistent Treasury-
wide approach in compiling system inventories.
    Treasury policy, in support of our FISMA compliance efforts, seeks 
to secure the information and information systems that support the 
operations and assets of Treasury, including those provided or managed 
by another agency, contractor, or other source on behalf of the 
Department. Clarifying guidance has been issued for contractor systems 
to ensure those systems are consistently and completely identified in 
the Department's systems inventory and that they comply with security 
requirements. Policy has also been issued to address acceptable system 
configuration requirements and to define our vulnerability management 
policy. Developing policy and ensuring compliance across the Department 
is an ongoing effort, but an area in which progress is being made.
    In order to strengthen Treasury's remediation efforts, and come 
into compliance with FISMA, the Department is developing a process for 
planning, implementing, evaluating, and documenting remedial action 
(Plan of Actions & Milestones, or POA&M) to address any deficiencies in 
the information security policies, procedures, and practices. In 2006, 
our POA&M process was judged to be effective, a significant improvement 
from 2005. Lastly, the Department continues to work to make progress in 
improving the quality of the certification and accreditation of its 
systems, testing of security controls and contingency plans, incident 
reporting, and employee training on systems security. The President's 
2008 budget request includes significant investments in information 
security, including $21 million for the IRS' Computer Security Incident 
Response Center and network infrastructure security.
    Question. Secretary Paulson, I understand that the United States is 
currently negotiating an OECD convention called the Large Aircraft 
Sector Understanding, which deals with the financing terms of aircraft, 
and that the negotiations are near conclusion. However, I have heard 
from U.S. industry that they do not believe their concerns have been 
addressed in the context of the negotiations. I am advised that the 
U.S. industry has prepared a comprehensive text that outlines its major 
concerns.
    Given that the health of the U.S. aerospace industry is critical to 
the economy, the national security and the technological base of the 
United States, I respectfully request that you meet with the industry 
group that prepared the report to discuss the negotiations, and that 
you and your team at Treasury carefully review the industry position 
before agreeing to critical provisions put forward by the EU, which 
could hinder the ability of American companies to compete.
    Answer. The U.S. Government negotiating team, led by Treasury, has 
been in continuous contact with industry throughout the negotiating 
process. That process has been underway for over two years. We will 
continue to consult intensively before reaching a final agreement. Over 
the past two months, the Deputy Secretary, Under Secretary, and 
Assistant Secretary have all met with industry representatives to 
gather their views.
    These consultations have occurred primarily through the Department 
of Commerce-led Aerospace Industry Trade Advisory Committee (ITAC) and 
the Aircraft Working Group (AWG--an international industry group for 
which Boeing serves as Vice Chairman). The AWG has met with OECD 
negotiators on a number of occasions, and has also provided formal 
written recommendations on the important competitive elements of an 
agreement. Treasury has followed appropriate procedures for reviewing 
the ITAC's recommendations, and the positions taken by the U.S. 
negotiators to date are in full accord with those recommendations.
    Treasury officials and substantive experts met several times with 
key industry representatives, including meetings as recently as the 
week of April 16th. In these meetings, the detailed industry-
recommended text was thoroughly examined point-by-point, and U.S. 
negotiators worked with this text in discussions with other negotiators 
at the OECD the week of April 23.
    I can assure you that the provisions of this new agreement will 
ensure that U.S. industry will remain fully competitive. We will 
support an agreement that provides a level playing field for our 
exporters. The agreement will also sharply limit the ability of foreign 
governments to provide subsidized financing for their aerospace 
industries' exports. By limiting these subsidies, we will also limit 
subsidies that are currently provided to foreign airlines and that 
disadvantage our domestic airline industry, which does not have access 
to such subsidies.
                                 ______
                                 
              Questions Submitted by Senator Sam Brownback
    Question. You've asked for some increases in your budget in the 
areas of Terrorism and Financial Intelligence and in the International 
economic policy area. Can you tell me a little bit about the Treasury's 
work in these areas and why these increases are important?
    Answer. The Terrorism and Financial Intelligence and International 
economic policy areas budget increases reflect the Department of the 
Treasury's expanding mission in these areas.
Terrorism and Financial Intelligence
    The Treasury, and the Office of Terrorism and Financial 
Intelligence, in particular, has requested additional resources to 
increase the implementation of strategies and employment of targeted 
financial measures to disrupt and dismantle the financial networks that 
support terrorism, WMD proliferation, and organized crime. Targeted 
financial measures developed since 9/11 to combat terrorist support 
networks can and should be used to disrupt and dismantle the networks 
that support other threats. These types of financial measures have 
proven effective, in part because they unleash market forces by 
highlighting the risks and encouraging prudent and responsible 
financial institutions to make the right decisions about the business 
in which they are engaged. Treasury uses designations strategically to 
disrupt specific sources, means, and mechanisms of terrorist financing, 
including radical ideologues, charities and other sources and conduits 
of terrorist financing and support.
    The fiscal year 2008 President's budget requests additional 
analysts and production officers for the Office of Intelligence and 
Analysis to support Treasury's ability to address emerging national 
security threats. This request will allow Treasury to establish a 
permanent intelligence production structure, an essential component to 
the timely and accurate production of intelligence information. In 
addition to this initiative, OIA is seeking additional funds and 
personnel to expand the Department's ability to coordinate on 
terrorist-financing and WMD proliferation matters, and to improve OIA's 
working relationships with foreign intelligence services.
    The Office of Terrorist Financing and Financial Crimes, the policy 
and outreach apparatus for TFI, develops and implements strategies, 
policies and initiatives to identify and address vulnerabilities in the 
United States and the international financial system and to disrupt and 
dismantle terrorist and WMD proliferation financial networks. 
Treasury's request would give the Office of Terrorist Financing and 
Financial Crimes (TFFC) additional resources to devote specific policy 
advisors to critical regions in the Western Hemisphere, Africa, and the 
Middle East-South Asia nexus. Countries in these regions continue to 
provide a financial base for terrorists. Additional advisors would 
allow TFFC to meet multiple strategic objectives, including enhancing 
the Treasury Department's ability to disrupt terrorist financial and 
support networks and building the capacity of foreign governments to 
combat terrorist financing. Without adequate full-time staff dedicated 
to these region-specific issues, U.S. strategic priorities and specific 
Treasury responsibilities cannot be addressed in a comprehensive or 
strategic manner.
    TFFC has also requested additional resources to increase our 
development of strategies toward rogue regimes and their corresponding 
networks. North Korea, Syria, and Iran pose a constant threat to U.S. 
national security, and Treasury is tasked with applying all appropriate 
financial measures towards pressuring these rogue regimes, isolating 
them from the international financial system, and disrupting their 
financial networks.
    Treasury's request would fund additional policy advisors to cover 
North Korea, Syria, and Iran and would allow the Treasury Department to 
leverage tactical successes to develop ongoing strategic approaches to 
bring additional financial pressures. These positions would become the 
focal point for interagency efforts to bring financial pressures to 
bear against these rogue regimes, enhancing Treasury's ability to meet 
its strategic objectives and U.S. strategic priorities. In addition to 
achieving sustained, focused pressure on Iranian, Syrian, and North 
Korean WMD proliferation finance, criminal and terrorist financing 
activities, Treasury would establish future strategies on emerging 
regimes of concern (e.g., Venezuela). These positions would also 
provide TFFC the ability to provide support and guidance to senior NSC 
officials dealing with the relevant issues. This initiative is 
consistent and in support of Executive Orders 13338 and 13382 and 
Section 311 of the USA PATRIOT Act.
    The Office of Foreign Assets Control (OFAC), an office within TFI, 
is responsible for administering and enforcing economic sanctions based 
on U.S. foreign policy and national security goals against targeted 
foreign countries, terrorists, international narcotics traffickers and 
those engaged in activities related to the proliferation of weapons of 
mass destruction. Treasury's request would also give OFAC additional 
resources to implement U.S. economic sanctions policy. OFAC is 
committed to combating terrorist networks and state sponsors of 
terrorism. New Executive Orders with respect to Sudan and Syria were 
issued in 2006, and the Administration is also extensively engaged with 
respect to Iran. Each new Executive Order and/or OFAC designation of 
terrorists and their financial networks brings with it increasing 
demands on OFAC's enforcement, licensing, compliance and administrative 
support components. Additional resources in these areas are requested 
to match the increased tempo of new Executive Orders and Treasury 
designations.
    In addition, the WMD sanctions program is a Presidential national 
security priority and these resources will be used to strengthen OFAC's 
ability to track, identify and designate financiers and other 
supporters of WMD proliferation. Publicizing the designations, and 
assigning resources to enable OFAC to engage in outreach to the private 
sector and with government agencies, will greatly assist the Treasury 
Department in effectively isolating financiers and facilitators of WMD 
proliferation from the United States and international commercial 
communities. This request will also provide OFAC with additional 
resources to generally expand its enforcement capacity in support of 
investigation and blocking activities, which are critical to the 
enforcement of sanctions.
International Affairs
    With the increasing importance of global economics and dynamics, 
the Department of the Treasury is increasing its international focus. 
First, the Executive Direction area is seeking additional positions and 
funding to effectively manage the U.S.-China Strategic Economic 
Dialogue (SED) and maximize the likelihood of progress on issues of 
concern to the United States such as the Chinese currency, energy and 
the environment, and intellectual property rights. The SED reflects the 
growing relationship between the economies of the United States and 
China, and is structured to provide a focused framework for addressing 
such issues of concern.
    Additionally, the Department of the Treasury, in its role as chair 
of the interagency Committee on Foreign Investment in the United States 
(CFIUS), has seen its responsibilities increase exponentially. CFIUS is 
responsible for monitoring and evaluating the impact of foreign 
investment in the United States, including for national security 
implications. In addition, CFIUS is the President's designee under 
Exon-Florio. In that capacity, CFIUS conducts in-depth national 
security investigations of transactions notified to CFIUS under Exon-
Florio. The 2008 request includes additional resources to match the 
growth in transactions submitted for CFIUS review.
    The increase in CFIUS activity is described below:
  --CFIUS investigated 113 transactions in 2006--a 74 percent increase 
        over the number of transactions for 2005 (65) and 85 percent 
        more than the annual average (61). This increase can be 
        attributed to a rise in cross-border merger and acquisition 
        activity, an increase in international investor awareness of 
        CFIUS and its role, and higher scrutiny of the security 
        concerns posed by acquisitions of U.S. businesses by foreign-
        owned companies.
  --The percentage of transactions that proceeded to a 45-day second-
        stage investigation also increased significantly last year, to 
        seven from two in 2005. Second-stage investigations require 
        significant involvement of very high-level officials and 
        commitment of staff resources.
  --CFIUS member agencies negotiate security agreements with the 
        parties to a transaction in order to mitigate national security 
        concerns raised by the transaction. In 2006 alone, 16 
        agreements were negotiated, which was 35 percent of all CFIUS-
        related agreements negotiated since 1997. Last year CFIUS also 
        prepared two reports on notified transactions recommending to 
        the President how the case should be resolved. This is the 
        largest number since 1990, when four such reports were sent. 
        Each mitigation agreement and report to the President requires 
        significant resources.
  --CFIUS anticipates an even greater number of transactions to be 
        filed in 2007 and plans to continue to conduct thorough reviews 
        in the context of an open investment policy. We have received 
        approximately 65 filings and negotiated five mitigation 
        agreements to date in 2007.
  --CFIUS has also increased its reporting to Congress, providing the 
        relevant committees with information pertaining to every case 
        once deliberative action has concluded. We also provide 
        periodic briefings to Congressional oversight committees on all 
        cases for which deliberative action has concluded.
    As you well know, the Department of the Treasury received funds in 
fiscal year 2007 to expand its overseas presence through the 
establishment of Treasury attaches in countries such as Iraq, China and 
Afghanistan. Funding is requested for the full fiscal year 2008 cost 
and FTE realization from this fiscal year 2007 initiative.
    The attache program is essential for several priorities, including 
those related to:
  --Building Treasury's expertise on economic and financial sector 
        issues and fostering stronger substantive dialogues that can 
        advance U.S. Government objectives.
  --Identifying policy or regulatory barriers to U.S. firms and 
        exports, particularly in the area of financial services.
  --Strengthening cooperation with other countries to implement U.N. 
        resolutions and United States enforcement actions to prevent 
        and punish money laundering, the financing of terrorism, and 
        other financial crimes.
  --Coordinating closely with other United States agencies and 
        multilateral institutions (such as the IMF and World Bank) to 
        advance economic growth and development. This is particularly 
        important with places with a large U.S. Government presence, 
        such as Iraq and Afghanistan.
    Question. Please explain how you plan to block U.S. commercial bank 
transactions connected to the government of Sudan?
    Answer. The United States has maintained comprehensive economic 
sanctions with respect to Sudan since 1997. Under Executive Order 13067 
of November 3, 1997, implemented through the Sudanese Sanctions 
Regulations, 31 C.F.R. Part 538, the United States government already 
requires U.S. persons to block all property and interests in property 
of the Government of Sudan. All major U.S. banks, including their 
foreign branches, and the U.S. offices of foreign banks, have programs 
in place to detect and block such transactions as they are processed. 
Treasury is working actively to enhance implementation and compliance 
to ensure that it is as responsive as possible.
    On October 13, 2006, the President issued Executive Order 13412 to 
implement the Darfur Peace and Accountability Act of 2006. E.O. 13412 
continues the countrywide blocking of the Government of Sudan's 
property and interests in property and prohibits all transactions by 
U.S. persons relating to Sudan's petroleum and petrochemical 
industries. E.O. 13412 also removes the regional government of Southern 
Sudan from the definition of Government of Sudan.
    In addition to these targeted sanctions, OFAC administers a 
targeted sanctions program against persons in connection with the 
conflict in Sudan's Darfur region. This program stems from Executive 
Order 13400 of April 26, 2006, in which the President ordered the 
blocking of four individuals listed in the Annex to the order, and of 
additional persons who meet the specified criteria set forth in the 
order.
    Question. Last year, the Department identified the following as the 
three most immediate challenges for TFI: (1) the need for additional 
resources to more aggressively pursue core objectives, (2) leveraging 
its authorities most effectively to deal with Iran and Syria, and (3) 
building the information technology systems necessary to effectively 
and efficiently carry out TFI's mission. Could you give us an update of 
where Treasury stands in meeting these challenges?
    Answer. Treasury has taken significant steps forward in addressing 
key national security threats, particularly terrorism and WMD 
proliferation, but there is still important work to be done on these 
and other emerging threats. The requested resources will improve 
Treasury's ability to expand its coverage of current national security 
threats and allow the Department to adapt to new emerging threats.
    The fiscal year 2008 President's budget requests additional 
analysts and production officers to support Treasury's ability to 
address emerging national security threats. In fiscal year 2005, when 
OIA was created, the Office focused on developing a process for 
exploiting current intelligence. In fiscal year 2006, OIA improved its 
strategic analytic capability and developed a research program, which 
was coordinated with IC partners. In the current fiscal year, OIA is 
concentrating on building breadth and depth to its analytic cadre, so 
that OIA can better address some of the national security threats that 
have developed in the past year. Still, to fulfill the intent of 
Congress and Treasury leadership when they created the Office, OIA must 
increase the systemic analysis of issues underlying key national 
security threats. This request will also allow Treasury to establish a 
permanent intelligence production structure, an essential component to 
the timely and accurate production of intelligence information. In 
addition to this initiative, OIA is seeking additional funds and 
personnel to expand the Department's ability to coordinate on 
terrorist-financing and WMD proliferation matters, and to improve OIA's 
working relationships with foreign intelligence services.
    The fiscal year 2008 President's budget requests additional 
resources to support the Office of Foreign Assets Control (OFAC), an 
office within TFI,which is responsible for administering and enforcing 
economic sanctions based on U.S. foreign policy and national security 
goals against targeted foreign countries, terrorists, international 
narcotics traffickers and those engaged in activities related to the 
proliferation of weapons of mass destruction. The fiscal year 2008 
request would give OFAC additional resources to implement U.S. economic 
sanctions policy combating terrorist networks and state sponsors of 
terrorism. New Executive Orders with respect to Sudan and Syria were 
issued in 2006, and the Administration is also extensively engaged with 
respect to Iran. Each new Executive Order and/or OFAC designation of 
terrorists and their financial networks brings with it increasing 
demands on OFAC's enforcement, licensing, compliance and administrative 
support components. Additional resources in these areas are requested 
to match the increased tempo of new Executive Orders and Treasury 
designations. In addition, resources are requested to strengthen OFAC's 
ability to track, identify and designate financiers and other 
supporters of WMD proliferation. The WMD sanctions program is a 
Presidential national security priority. Publicizing the designations, 
and assigning resources to work with the U.S. public will greatly 
assist the Treasury Department in effectively isolating financiers and 
other supporters of WMD proliferation.
    The Treasury Department has drawn upon its full range of 
authorities and influence to combat threats including WMD proliferation 
and terrorism. The strategies we have employed to combat the threats 
posed by Iran and Syria are good examples of the ways in which 
financial authorities are effective in dealing with state sponsors of 
terrorism.
Iran
            Formal Measures
    Treasury has acted both formally and informally to combat the 
threat emanating from Iran, which includes a threat to the 
international financial system. Iran's dangerous activities, including 
the sponsorship of terrorism and the pursuit of a nuclear weapons 
program, rely on access to financial networks and financial systems. 
Our efforts to attack the financial roots of these threats work to 
simultaneously protect our own financial institutions as well as the 
international financial system.
    First, it must be noted that the United States has a longstanding 
country sanctions program against Iran. These commercial and financial 
sanctions, which are administered by the Treasury's Office of Foreign 
Assets Control (OFAC), prohibit U.S. persons from engaging in a wide 
variety of trade and financial transactions with Iran or the Government 
of Iran. They prohibit most trade in goods and services between the 
United States and Iran, and any post-May 7, 1995, investments by U.S. 
persons in Iran. U.S. persons are also prohibited from facilitating 
transactions via third-country persons that they could not engage in 
themselves.
    Beyond these general country sanctions, we are relying more and 
more on ``targeted'' measures directed at specific individuals, key 
members of the government, front companies, and financial institutions. 
These measures are aimed at specific actors engaged in specific 
conduct. Some require financial institutions to freeze funds and close 
the accounts of designated actors, denying them access to the 
traditional financial system. At times, the action includes bans on 
travel or arms transfers, which further confine and isolate those 
engaged in illicit activities. To maximize the effect, we try to apply 
these measures in concert with others. Whenever possible, we act with a 
partner or a group of allied countries.
    The United States is using various types of targeted measures to 
combat Iran's pursuit of nuclear weapons and development of ballistic 
missiles, as well as its support for terrorism. First, while under our 
general Iran country sanctions program Iranian financial institutions 
are prohibited from directly accessing the U.S. financial system, they 
are permitted to do so indirectly through a third-country bank for 
authorized payments, including payments to another third-country bank. 
In September 2006, we cut off one of the largest Iranian state-owned 
banks, Bank Saderat, from any access, including this indirect, or ``u-
turn,'' access to the U.S. financial system. This bank, which has 25 
foreign branch offices, is used by the Government of Iran to transfer 
money to terrorist organizations. Iran has used Saderat to transfer 
money to Hizballah. Iran and Hizballah also use it to transfer money to 
E.U.-designated terrorist groups, such as Hamas, the PFLP-GC, and the 
Palestinian Islamic Jihad. Since 2001, for example, a Hizballah-
controlled organization received $50 million directly from Iran through 
Saderat.
    We have also acted against 19 entities and individuals supporting 
Iran's WMD and missile programs, including another Iranian bank, Bank 
Sepah, using Executive Order 13382. That Executive Order, signed by 
President Bush in June of 2005, authorizes the Treasury and State 
Departments to target key nodes of WMD and missile proliferation 
networks, including their suppliers and financiers, in the same way we 
target terrorists and their supporters. A designation under E.O. 13382 
effectively cuts the target entity or individual off from access to the 
U.S. financial and commercial systems and puts the international 
community on notice about the threat they pose to global security as a 
result of their activities. Specifically, such a designation freezes 
any assets that the target may have under U.S. jurisdiction and 
prohibits U.S. persons from doing business with it.
    Senior Treasury officials have traveled all over the world, sharing 
a U.S. list of Iran-related designations with foreign government 
counterparts and private sector representatives, and stressing the 
importance of ensuring that these proliferators are not able to access 
the international financial system. Our list of targeted proliferators 
is incorporated into the compliance systems at major financial 
institutions worldwide, who have little appetite for the business of 
proliferation firms and who also need to be mindful of U.S. measures 
given their ties to the U.S. financial system.
    The Treasury's designation of Iran's state-owned Bank Sepah under 
E.O. 13382 in January of this year is particularly significant because 
it makes it more difficult for the regime to hide behind its banks to 
support its proliferation activities. Like certain other Iranian banks 
and entities, Bank Sepah has engaged in a range of deceptive practices 
in an effort to avoid detection, including requesting that other 
financial institutions take its name off of transactions when 
processing them in the international financial system.
            Informal Measures
    Aside from these ``formal'' actions, the Treasury has engaged in 
unprecedented, high-level outreach to the international private sector, 
meeting with more than 40 banks worldwide to discuss the threat Iran 
poses to the international financial system and to their institutions. 
Secretary Paulson kicked off this effort last fall in Singapore, in 
discussions during the annual IMF/World Bank meetings, where he met 
with the executives from major banks throughout Europe, the Middle 
East, and Asia. Secretary Paulson, Deputy Secretary Kimmitt, Under 
Secretary for Terrorism and Financial Intelligence Stuart Levey, and 
Assistant Secretary for Terrorist Financing and Financial Crimes 
Patrick O'Brien have continued to engage with these institutions 
abroad, as well as in Washington and New York.
    Through this outreach, we have shared information about Iran's 
deceptive financial behavior and raised awareness about the high 
financial and reputational risk associated with doing business with 
Iran. Our use of targeted measures has aided this effort by allowing us 
to highlight specific threats. We share common interests and objectives 
with the financial community when it comes to dealing with threats. 
Financial institutions want to identify and avoid dangerous or risky 
customers who could harm their reputations and business. And we want to 
isolate those actors and prevent them from abusing the financial 
system.
    By partnering with the private sector, including by sharing 
information and concerns with financial institutions, we are 
increasingly seeing less of a tendency to work around sanctions.
    As evidence of Iran's deceptive practices has mounted, financial 
institutions and other companies worldwide have begun to reevaluate 
their business relationships with Tehran. Many leading financial 
institutions have either scaled back dramatically or even terminated 
their Iran-related business entirely. They have done so of their own 
accord, many concluding that they did not wish to be the banker for a 
regime that deliberately conceals the nature of its dangerous and 
illicit business. Many global financial institutions have indicated 
that they have limited their exposure to Iranian business. A number of 
them have cut off Iranian business in dollars, but have not yet done so 
in other currencies. It is unclear whether this is just a first step 
toward phasing out the business entirely. Regardless of the currency, 
the core risk with Iranian business--that you simply cannot be sure 
that the party with whom you are dealing is not connected to some form 
of illicit activity--remains the same. Scaling back dollar-business 
reduces, but does not eliminate, the risk.
    As further evidence of the change in tide, a number of foreign 
banks are refusing to issue new letters of credit to Iranian 
businesses. And in early 2006, the OECD raised the risk rating of Iran, 
reflecting this shift in perceptions and sending a message to those 
institutions that have not yet reconsidered their stance.
    Additionally, many other companies have scaled back on their 
investments or projects in Iran, concluding that the risks of expanding 
operations in the country are too great. Multinational corporations 
have held back from investing in Iran, including limiting investment in 
Iran's oil field development. These companies have done their risk 
analyses, and they have realized that the Iranian regime's behavior 
makes it impossible to know what lies ahead in terms of Iran's future 
and stability.
Syria
    As in Iran, we have taken a combination of steps to address Syria's 
problematic behavior and the threats posed by Syria. Under Executive 
Order 13338, Treasury is applying targeted financial sanctions that 
provide for the blocking of the assets of individuals and entities 
that, among other things, contribute to Syria's support of 
international terrorism, military or security presence in Lebanon, 
pursuit of weapons of mass destruction and missile programs, and 
undermining of U.S. and international efforts in Iraq. E.O. 13399 
provides for the blocking of individuals and entities who were involved 
in the assassination of the former Lebanese Prime Minister Rafik Hariri 
or certain other bombings or assassination attempts in Lebanon since 
October 1, 2004
    In addition, four Syrian entities are subject to an asset freeze 
under the WMD proliferation sanctions program that was established in 
June 2005. The Scientific Studies and Research Centre (SSRC) was named 
by the President in the annex of Executive Order 13382. SSRC is the 
Syrian government agency responsible for developing and producing non-
conventional weapons and the missiles to deliver them. While it has a 
civilian research function, SSRC's activities focus substantively on 
the acquisition of biological and chemical weapons. The three 
additional entities meet the criteria for designation under E.O. 13382 
because they are subordinates of SSRC.
    Second, we took action pursuant to the USA PATRIOT Act's Section 
311 to protect the U.S. financial system against the Commercial Bank of 
Syria (CBS). Criminals and terrorists have utilized CBS to facilitate 
or promote money laundering and terrorist financing, including the 
laundering of proceeds from the illicit sale of Iraqi oil and the 
channeling of funds to terrorists and terrorist financiers. In March 
2006, Treasury issued a final rule, pursuant to Section 311, 
designating CBS as a primary money laundering concern. This additional 
step required U.S. financial institutions to close correspondent bank 
accounts with CBS, which essentially halted U.S. business with CBS.
    As a result of these U.S. enforcement measures against Syria-based 
entities engaging in illicit financial activity, international 
financial institutions have reassessed their business relationships 
with Syria and a number of Syrian entities.
    Responding to the need for information technology systems, funding 
for Enterprise Content Management (ECM) will be used to implement a 
pilot enterprise-wide ECM project for the Department, initially meeting 
the critical and urgent business needs of the Office of Foreign Assets 
Contract (OFAC) and the Financial Crimes Enforcement Network (FinCEN). 
The project, which is under the oversight of the Department's Chief 
Information Officer, will be designed to meet Department-wide ECM 
requirements, thereby minimizing duplication of effort and 
infrastructure investments by capitalizing on Department and 
government-wide efforts.
    Treasury is also currently in the midst of a multi-year project to 
upgrade the Treasury Foreign Intelligence Network (TFIN), which is the 
Department's system authorized for both Top Secret and Sensitive 
Compartmented Information. Treasury has made significant progress in 
stabilizing the system and as a result, Treasury analysts are already 
using IT tools like Intellipedia and classified Instant Messaging to 
better cooperate with counterparts across the IC.
    Treasury's CIO is currently modernizing TFIN to enhance the 
analytical work flow and add additional analytic tools. In fiscal year 
2008, the Department has requested $3 million for operations and 
maintenance, to ensure the system is maintained and upgraded as 
necessary.
    Question. With the establishment of TFI, how are intelligence 
activities coordinated with other federal agencies and the Office of 
the Director of National Intelligence?
    Answer. The Department of the Treasury's analytic efforts are 
guided by its research and production plan, which was created to ensure 
that its analytic priorities were consistent with those of the DNI, the 
National Security Council (NSC), and the Treasury Department. This plan 
is also extensively coordinated throughout the IC. Because of this 
coordination and through other bilateral exchanges, opportunities for 
joint projects with IC partners have grown since OIA was created in 
2005.
  --In early 2006, Treasury and the Federal Bureau of Investigation 
        (FBI) worked in concert to preserve the assets of Toledo-based 
        NGO KindHearts, as the NGO and its officers faced allegations 
        of terrorism finance.
  --Treasury co-founded and co-leads, with the Department of Defense, 
        the Iraq Threat Finance Cell (ITFC) in Baghdad, Iraq. The 
        ITFC's mission is to enhance the collection, analysis, and 
        dissemination of intelligence to combat the financing of 
        terrorist and insurgent groups in Iraq. ITFC participating 
        agencies include other members of the IC, as well as FBI, 
        Secret Service, and IRS Criminal Investigations.
  --Treasury collaborated with other IC agencies to identify and map 
        Iranian Weapons of Mass Destruction (WMD) proliferation 
        networks, while supporting the targeting of WMD proliferation 
        entities for Treasury action.
    Question. What progress has been made on cross-border currency 
transactions, wire transfers, and effective oversight with other 
countries?
    Answer. Systems for the collection, storage, processing, analysis, 
and dissemination of cross-border electronic funds transfers are in 
place. Both the Australian and Canadian governments, through their 
financial intelligence units, have imposed cross-border electronic 
funds transfer reporting requirements on their financial services 
industries.
Canada
    The Financial Transactions and Reports Analysis Centre of Canada 
(FINTRAC) is Canada's financial intelligence unit.
    FINTRAC first required the reporting of cross-border electronic 
funds transfers (``EFT'' reporting) in June 2002. Initially, FINTRAC 
required only reports of international funds transfers made using 
certain SWIFT messages. Effective March 31, 2003, FINTRAC expanded the 
international EFT reporting requirement to cover all forms of 
international EFT regardless of system or message format. FINTRAC 
receives almost all of its international EFT reports electronically; 
FINTRAC's regulations permit for paper filing where the reporting 
institution can certify that they lack the capability to file 
electronically, but FINTRAC officials noted that this rarely happens.
    To facilitate the electronic filing of these reports, FINTRAC 
established a ``batch file transfer format'' that informs financial 
institutions of the appropriate report content and form. In turn, 
reporting institutions must implement their own systems for converting 
the institutions' non-SWIFT data to the proper format prior to 
submission. For non-SWIFT EFTs, FINTRAC has also developed an online 
form that is generally used by smaller institutions. For both SWIFT and 
Non-SWIFT messages, FINTRAC has established minimum mandatory data 
fields (17 fields for outgoing SWIFT messages; 8 fields for incoming 
SWIFT messages; 11 fields for both outgoing and incoming Non-SWIFT 
messages) that must be included in the report (again, FINTRAC dictates 
the format of the batch submission, but distinguishes between mandatory 
fields and those fields).\1\
---------------------------------------------------------------------------
    \1\ See http://www.fintrac.gc.ca/publications/guide/Guide8/
81_e.asp.
---------------------------------------------------------------------------
    More than 300,000 entities and persons are potentially subject to 
the EFT reporting requirement in Canada, but many do not conduct 
business that reaches the thresholds in the law and thus, need not 
report. In addition, not all types of regulated institutions are 
currently required to report. However, the Department of Finance has 
issued a public consultation paper recommending that Parliament amend 
existing law to require all regulated entities to report cross-border 
EFTs. As noted above, FINTRAC permits reporting institutions to report 
by batch file and by single report through either a web-based interface 
or client software distributed by FINTRAC. Currently 56 entities report 
via the batch process, with the others using the online reporting 
mechanism.
    In total, FINTRAC receives approximately 590,000 international EFT 
transaction records per month.
  --In 2003-04, FINTRAC received 2.7 million SWIFT EFT reports and 3.9 
        million Non-SWIFT EFT Reports.
  --In 2004-05, FINTRAC received 3 million SWIFT EFT reports and 4.1 
        million Non-SWIFT EFT Reports.
  --60 percent of all the FINTRAC reports are submitted by banks.
  --FINTRAC's international EFT data store contains approximately 15.6 
        million records.
Australia
    The Australian Transaction Reports and Analysis Centre (AUSTRAC) is 
the financial intelligence unit of the Australian government.
    AUSTRAC first required the reporting of cross-border electronic 
funds transfers (International Funds Transfer Instructions or ``IFTI'' 
reporting) in 1992.\2\ Generally, AUSTRAC requires the institutions 
``who are senders of IFTIs transmitted out of Australia; or who are 
receivers of IFTIs transmitted into Australia'' submit reports of those 
transactions.
---------------------------------------------------------------------------
    \2\ The IFTI reporting provisions are set out in section 3 and 
sections 17B to 17F of the FTR Act. The prescribed details in relation 
to IFTIs are contained in Regulation 11AA of the Financial Transaction 
Reports Regulations 1990 (FTR Regulations); see also AUSTRAC 
Information Circular No. 2, available at http://www.austrac.gov.au/
text/guidelines/circulars/pdfs/
AIC%2002%20%20International%20Funds%20Transfer%20Instructions.pdf.
---------------------------------------------------------------------------
    AUSTRAC accepts IFTI reports in one of two formats. First, AUSTRAC 
accepts reports containing properly formatted SWIFT instruction 
messages from those institutions that use the SWIFT system. Second, 
AUSTRAC established a batch file transfer format and requires the 
reporting institutions to implement their own systems for converting 
the institutions' non-SWIFT data to the proper format prior to 
submission. For both SWIFT and Non-SWIFT messages, AUSTRAC has 
established minimum mandatory data fields that must be included in the 
report.
    AUSTRAC permits reporting institutions to report by batch file and 
by single report through a web-based interface operated by AUSTRAC. 
This interface enables institutions to upload prepared files 
automatically, provides an interface for the manual upload of prepared 
batch files, and provides a form for extremely low volume reporting 
institutions to submit their data. In addition, AUSTRAC developed and 
distributes to financial institutions a Microsoft Excel macro that will 
convert certain electronic records to the prescribed data format for 
upload to the AUSTRAC systems. AUSTRAC officials told us that the 
largest four institutions in Australia account for approximately 80 
percent of the IFTI reporting, while a second tier of approximately 20 
institutions account for the majority of the remaining reports.
    In total, AUSTRAC receives approximately 9 to 10 million IFTI 
records per year.
  --In 2003-04, AUSTRAC received approximately 4 million inbound and 
        approximately 4.5 million outbound IFTI reports.
  --In 2004-05, AUSTRAC received 4.2 million inbound IFTI reports and 
        approximately 5.5 million outbound IFTI reports.
  --The most recent figures reveal that in the course of a year, 
        approximately 78 percent of the IFTI reports are in SWIFT 
        format and 22 percent in non-SWIFT format.
  --AUSTRAC's data store contains approximately 70 million records 
        dating from 1995 to present; 55 million of those are IFTI 
        reports.
    Question. I understand that the United States is near concluding 
negotiations on the ``Large Aircraft Sector Understanding,'' dealing 
with the financing terms of aircraft. I have been informed that the 
U.S. industry does not believe their concerns have been addressed in 
the context of the negotiations. They are troubled that agreeing to the 
provision put forward by the EU could hinder their ability to compete. 
Would you be willing to meet with the industry group to discuss their 
concerns?
    Answer. The United States Government negotiating team, led by 
Treasury, has been in continuous contact with industry throughout the 
negotiating process. That process has been underway for over two years. 
We will continue to consult intensively before reaching a final 
agreement. Over the past two months, the Deputy Secretary, Under 
Secretary, and Assistant Secretary have all met with industry 
representatives to gather their views.
    These consultations have occurred primarily through the Department 
of Commerce-led Aerospace Industry Trade Advisory Committee (ITAC) and 
the Aircraft Working Group (AWG--an international industry group for 
which Boeing serves as Vice Chairman). The AWG has met with OECD 
negotiators on a number of occasions, and has also provided formal 
written recommendations on the important competitive elements of an 
agreement. Treasury has followed appropriate procedures for reviewing 
the ITAC's recommendations, and the positions taken by the U.S. 
negotiators to date are in full accord with those recommendations.
    Treasury officials and substantive experts met several times with 
key industry representatives, including meetings as recently as the 
week of April 16th. In these meetings, the detailed industry-
recommended text was thoroughly examined point-by-point, and U.S. 
negotiators worked with this text in discussions with other negotiators 
at the OECD the week of April 23.
    I can assure you that the provisions of this new agreement will 
ensure that U.S. industry will remain fully competitive. We will not 
support any agreement that does not provide a completely level playing 
field for our exporters. The agreement will also sharply limit the 
ability of foreign governments to provide subsidized financing for 
their aerospace industries' exports. By limiting these subsidies, we 
will also limit subsidies that are currently provided to foreign 
airlines and that disadvantage our domestic airline industry, which 
does not have access to such subsidies.
    Question. Treasury's Office of Intelligence Analysis was 
established in fiscal year 2005. Since that time, how has it 
contributed to overall intelligence collection?
    Answer. The Treasury's Office of Intelligence Analysis (OIA) is 
primarily an analytic component. Through its membership in the 
Intelligence Community (IC), OIA has also been instrumental in driving 
collection on financial issues in the intelligence requirements 
process. At the national level, OIA created and filled a dedicated 
collection requirements officer position. This individual ensures that 
Treasury equities in financial, economic, enforcement, and other areas, 
are reflected in national intelligence priorities and collection 
requirements. At the working level, OIA analysts actively provide 
feedback and direction on disseminated intelligence reports to ensure 
that information relevant to Treasury's mission is collected. OIA 
analysts regularly engage with counterparts in collecting offices 
across the IC.
    Treasury also is the program office for the Terrorist Financing 
Tracking Program (TFTP). Using its authorities, Treasury has access to 
certain very limited and targeted data streams that provide information 
about the financial activities of known terrorists.
    Additionally, Treasury co-founded and co-leads, with the Department 
of Defense, the Iraq Threat Finance Cell (ITFC) in Baghdad, Iraq. The 
ITFC's mission is to enhance the collection, analysis, and 
dissemination of intelligence to combat the financing of terrorist and 
insurgent groups in Iraq. ITFC participating agencies include other 
members of the IC, as well as FBI, Secret Service, and IRS Criminal 
Investigations.
    Question. What key ways is your Department proposing to employ to 
close the ``tax gap?'' You stated in a Finance Committee hearing that 
this is not a pot of gold. How big is the gap and what will it cost to 
close it?
    Answer. The tax gap is the difference between the amount of tax 
imposed on taxpayers for a given year and the amount that is paid 
voluntarily and timely. The tax gap represents, in dollar terms, the 
annual amount of noncompliance with our tax laws. Based in part on the 
results of a National Research Program (NRP) analysis of approximately 
46,000 individual tax returns for Tax Year 2001, the IRS has estimated 
that the gross tax gap for Tax Year 2001 was $345 billion. After 
collections and late payments, the net tax gap for that year is 
estimated to be $290 billion. Although the IRS will never be able to 
audit its way out of the tax gap, considerable progress has been made 
in improving compliance as indicated by growth in enforcement revenues 
in recent years.
    In September 2006, the Treasury Department released a document 
titled ``A Comprehensive Strategy for Reducing the Tax Gap.'' The 
strategy builds upon the demonstrated experience and current efforts of 
the Treasury Department and IRS to improve compliance. See http://
www.treasury.gov/press/releases/reports/otptaxgapstrategy%20final.pdf 
for a copy of this report. This strategy includes detailed legislative 
proposals, along with new initiatives to reduce opportunities for 
evasion, a commitment to research, continual improvements in 
technology, enhanced enforcement programs and taxpayer service 
programs, increased outreach and education and enhanced coordination 
and partnering with stakeholders.
    The tax compliance strategy is reflected in the President's fiscal 
year 2008 budget request which includes sixteen legislative proposals 
to begin to address the tax gap with minimum impact on taxpayers. These 
proposals include requiring basis reporting on sales of securities; 
information reporting on merchant payment card reimbursements; 
increased information reporting for certain government payments for 
property and services; and implementing standards to clarify when 
employee leasing companies can be held liable for their clients' 
Federal Employment taxes.
    In addition, the fiscal year 2008 budget request provides:
  --$205 million to expand enforcement activities, a majority of which 
        will go to improve compliance among small business and self-
        employed (SB/SE) individual taxpayers. It will also fund 
        implementation of the legislative proposals described above.
  --$20 million to enhance taxpayer service, including expansion of 
        volunteer tax assistance and research to determine the effect 
        of service on taxpayer compliance.
  --$41 million for research that will update estimates of reporting 
        compliance. Unlike the past, the IRS will conduct an annual 
        study of compliance among 1040 filers that will provide fresh 
        compliance data each year, and by combining samples over 
        several years will provide a regular update to the larger 
        sample size needed to keep the IRS' targeting systems and 
        compliance estimates up to date.
  --$143 million for information technology that includes upgrades for 
        critical infrastructure to prevent business operation 
        disruptions and upgrades of IT security.
    The IRS and Treasury Department will continue to work with OMB on 
future funding needs to support the implementation of its tax gap 
strategy.
    Question. If we simplified our tax code with, for example, a flat 
income tax, what effect would there be on revenue receipts and revenue 
collection?
    Answer. There are at least three potential effects on receipts from 
substituting a flat income tax for our current income tax. First, 
initial receipts under a flat tax could differ from those under the 
current income tax due to estimation error. There is some flat tax rate 
that initially would bring in the same amount of revenue as our current 
income tax. Depending on how much the flat tax base differs from the 
tax base of the current income tax, however, there may be more or less 
significant error in estimating the revenue-neutral flat tax rate. This 
error could be positive or negative. Second, a greatly simplified 
income tax could reduce the so-called ``tax gap.'' Taxpayers who fail 
to understand the highly complex provisions of the current tax code are 
unlikely to be compliant with those provisions. While this 
noncompliance could result in overpayment or underpayment of taxes, 
there is strong belief that, on net, it results in underpayment. The 
complexity of our current tax code also is thought to provide 
opportunities for some taxpayers to intentionally underpay their taxes. 
Hence, a dramatically simplified income tax could result in a higher 
level of tax compliance, contributing to revenue collections. Third, 
under a truly flat income tax--that is, a tax with a single tax rate--
revenues likely would grow more slowly than under our current income 
tax. As real incomes increase, our current progressive income tax taxes 
the higher real incomes at higher effective tax rates, resulting in tax 
receipt growth that exceeds income growth. Under a true flat tax, tax 
receipt growth would be more likely to equal, or nearly equal, income 
growth.

                          SUBCOMMITTEE RECESS

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

















  FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL 
                               YEAR 2008

                              ----------                              


                       WEDNESDAY, APRIL 11, 2007

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

                    OFFICE OF MANAGEMENT AND BUDGET

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

                 STATEMENT OF SENATOR RICHARD J. DURBIN

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

                OFFICE OF MANAGEMENT AND BUDGET REQUEST

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

                           PRESIDENT'S BUDGET

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

                 OPENING STATEMENT OF ROBERT J. PORTMAN

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

                           PREPARED STATEMENT

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

                                STAFFING

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

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

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

                             CONSOLIDATION

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

                            BALANCED BUDGET

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

                         MEDICARE AND MEDICAID

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

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

                         ADMINISTERING EARMARKS

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

                                EARMARKS

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

              OFFICE OF INFORMATION AND REGULATORY AFFAIRS

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

                            SOCIAL SECURITY

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

                            WAR SUPPLEMENTAL

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

                            MEDICARE PART D

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

                            WAR SUPPLEMENTAL

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

                           PROGRAM EVALUATION

    You've had an opportunity to show up before me a couple of 
times, I think, already this year, Director Portman, and I have 
complimented you on your efforts on implementing the 
legislation we passed from the Government Performance and 
Results Act (GPRA). In fact, as the various agencies show up in 
front of us, I look at your scorecard and ask about the 
programs that are rated ineffective, and ask them about those 
programs that are rated as ``results not demonstrated.''
    I think it helps add to budget transparency, at least as 
far as I'm concerned, when we ask these questions. Sometimes 
it's legitimate reasons, perhaps, that they're terminating the 
program, and they just started in the process, and it's 
understandable. They've recognized the problem, so they're 
getting rid of it.
    And then, in other instances, they just seem very 
defensive, and so, we kind of pick up on that, too.
    Do you feel that this has added to the transparency in the 
budgeting process?
    Mr. Portman. I do, I feel strongly about it, and I know 
you've made a decision to leave the Senate, I hope you will 
pass along your GPRA and your scorecard interest to some of 
your colleagues, because it's an important part of the 
transparency that leads us to better Government.
    I talked earlier with the chairman and other members who 
are here about the website, that I know you're very familiar 
with--ExpectMore.gov--and the fact that we now have 1,000 
programs up that are subject to this scorecard, and we're 
looking at 96 percent of Federal spending now, which is an 
amazing resource, and so I thank you for raising it with the 
agencies. I do think it adds to the transparency. I think, as 
you say, sometimes there's a good reason for not scoring well 
on the scorecard, getting a red rather than a yellow or a 
green. Sometimes there's not. And one thing that we do is try 
to determine not just, whether they have met the standards--
which we lay out, by the way, we ask the Agency, ``What are 
your goals?'' And then we judge them based on their goals. And 
that's all transparent.
    As we develop the proposed funding level for the budget, we 
look at whether it's an appropriate governmental activity. In 
some cases the program could get all greens, but it isn't an 
appropriate Federal governmental expense or activity.
    In other cases, you could have a lower score, but it's such 
an important program that we want to re-double our efforts to 
make sure it's working well for your constituents.
    Senator Allard. I found it fascinating to look down through 
that ExpectMore.gov and I asked my question, well, what 
agencies are not on there? And, I notice there's nothing on 
OMB. Do you apply the assessment that you give to the----
    Mr. Portman. That surprises me, actually.
    Senator Allard [continuing]. Other agencies to yourself, 
and do you have measurable goals and objectives?
    Mr. Portman. The ExpectMore.gov website includes PART 
analyses of programs. OMB does not have programs, which the 
chairman noted at the outset, so we don't have programs that 
are up there, but we do apply the President's management agenda 
to ourselves, which you can find on results.gov.
    Senator Allard. But, you do spend taxpayer dollars.
    Mr. Portman. We do. And we apply all five categories of the 
President's management agenda to ourselves.
    Senator Allard. But they're not public?
    Mr. Shea. Yes, they're public.
    Senator Allard. Okay, so can we get a report from OMB?
    Mr. Shea. We grade ourselves on the scorecard----
    Mr. Portman. All right, I'm going to ask the Associate 
Director for Management, Robert Shea, to answer your question, 
if that's all right.
    Mr. Chairman, is that okay if I have Mr. Shea----
    Mr. Shea. Yes, sir. OMB is assessed on the President's 
management agenda scorecard each quarter. So, we're assessed on 
our personnel management, financial management, information 
technology (IT) management, competitive sourcing, and 
performance management. We do have annual goals that collect 
data on and use to manage the agency. We don't manage programs, 
so we haven't assessed ourselves with the program assessment 
rating tool.
    Senator Allard. So, how--if you were under that rating 
tool--how would you grade yourselves?
    Mr. Shea. We'd have to do that assessment first.
    Senator Allard. Okay.
    Mr. Shea. And, we could show you how we're performing 
against our goals, and using the President's management agenda, 
how well we're managed.
    Senator Allard. Well, Director Portman is liable to show up 
before me again. Will you have an answer when I ask that 
question?
    Mr. Shea. Yeah, we can give you a much detailed report on 
the quality of our management.
    [The information follows:]
    
    
    
    Senator Allard. Well, I think that--we want to make sure 
that everybody applies under that. Are there other programs 
that we are not evaluating that perhaps we should?
    Mr. Portman. The PART we're using to assess all programs 
over time--we've assessed 96 percent and we're making progress 
assessing the rest.
    Senator Allard. Okay, well, if you happen to pick up on any 
that we're not assessing, I'd like to know why, if you would, 
please. Maybe the subcommittee would be interested in that, as 
well. I will be anxious to get your own evaluation back on 
this, Director. Thank you.
    Mr. Portman. One of the things I'm doing as Director is 
ensuring that we are meeting what we ask other agencies to do. 
And, I can tell you it's sometimes difficult, and, you know, we 
are going for the green like everyone else is. So, it's 
something we do drive through the agency, just as other agency 
heads, too. Even though we do not have programs, we assess 
ourselves based on those five categories.
    Senator Allard. I think it's helpful for other agencies to 
know you're doing the same, you know, everybody's living under 
the same rules, and what you expect of others, you're willing 
to live under, too.
    Mr. Portman. Right. I agree.
    Senator Allard. I think that helps add credibility, and I 
just ask that question in a positive vein, by the way.
    And, also, Mr. Chairman, that concludes my questions, I'd 
just ask that my introductory remarks be made part of the 
record.
    Senator Durbin. Without objection.
    [The statement follows:]

               Prepared Statement of Senator Wayne Allard

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

                     ADDITIONAL COMMITTEE QUESTIONS

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

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

    Question. What is the percentage of OMB employees who will be 
eligible for retirement over the next five years?
    Answer. As of 2012, 21 percent of OMB's current employees will be 
eligible for retirement.
                     enterprise services initiative
    Question. Within the Executive Office of the President (EOP), there 
is an initiative known as the Enterprise Services Initiative. This 
involves EOP agencies, including yours, transferring their space rental 
costs and some other costs to the Office of Administration to be paid 
by that office.
    Why is this a good idea?
    Answer. The intent of the Enterprise Services Initiative is to gain 
administrative efficiencies by having only one single manager and payer 
for common services that cut across the EOP, thereby making more 
efficient use of the OA financial staff, component financial managers, 
and representatives from supporting servicing agencies. Specifically, 
the net result will consolidate over 28 relatively small service 
agreement accounts into six service agreement accounts with a 
corresponding significant reduction in the processing of over 180 
payment transactions between multiple staffs. Further, agencies outside 
the Executive Office of the President will have a single point of 
contact in coordinating and negotiating service agreements vice having 
to work individually with each of the separate EOP components included 
in the fiscal year 2008 Enterprise Services Initiative.
    Question. What are the benefits?
    Answer. Specifically regarding the consolidation of space rent, 
most EOP components have already successfully consolidated space rent 
costs in the OA appropriation. Completing this consolidation initiative 
for OMB and ONDCP will provide consistency in managing rent across the 
EOP while facilitating the oversight of office space allocation. 
Currently, managing space rent allocation and corresponding rent costs 
between OA, ONDCP and OMB is complex, especially in light of the 
ongoing EEOB modernization program entailing frequent office moves 
within the EOP complex. (Note: OMB rent was included in the Enterprise 
Services initiative in fiscal year 2005 but was subsequently returned 
to OMB's appropriation in fiscal year 2006.)
    Question. How much of your budget would be transferred to the 
Office of Administration?
    Answer. OMB's fiscal year 2008 budget request proposes to move 
$7.903 million to the Office of Administration as part of the 
Enterprise Services Initiative.
    Question. The Office of Administration budget includes about $12 
million for a Capital Investment Plan. Does OMB benefit from those 
funds?
    Answer. Yes, OMB benefits. The Capital Investment Plan is used for 
system lifecycle replacements for OMB's desktop computers, printers, 
and laptop replacements. Additionally, these funds support the 
Executive Office of the President's network infrastructure upgrades. 
This includes e-mail upgrades, HSPD-12 implementation, network and 
server regular upgrades, network storage upgrades, enterprise software 
licenses, and server ``virtualization.'' These are improvements made to 
the systems supporting the entire EOP, as such OMB is a beneficiary.
    Question. Do you receive funds from that source for IT projects?
    Answer. No, the Office of Management and Budget does not receive 
funds from the Office of Administration's Capital Investment Plan.
              privacy and civil liberties oversight board
    Question. The Privacy and Civil Liberties Oversight Board was 
established by the Intelligence Reform and Terrorism Prevention Act of 
2004. It consists of five members appointed by and serving at the 
pleasure of the President. The Board advises the President and other 
senior executive branch officials to ensure that concerns with respect 
to privacy and civil liberties are appropriately considered in the 
implementation of all laws, regulations, and executive branch policies 
related to efforts to protect the Nation against terrorism. This 
includes advising on whether adequate guidelines, supervision, and 
oversight exist to protect these important legal rights of all 
Americans.
    What is the current 2007 budget for the Privacy Board and what is 
the request for 2008?
    Answer. For fiscal year 2007, the Privacy and Civil Liberties 
Oversight Board (PCLOB) budget is $1.5 million. As for fiscal year 
2008, funding for PCLOB is funded within the White House Office program 
as are other offices within this program.
    Question. In which account in the Executive Office of the President 
is the Board funded?
    Answer. The Privacy and Civil Liberties Oversight Board is funded 
within the White House Office program.
    Question. Why shouldn't this Board be funded through its own 
account?
    Answer. The Privacy and Civil Liberties Oversight Board operates 
similarly to other offices within the White House Office program where 
staff and supporting infrastructures are routinely shared and networked 
within the White House as they provide direct support to the office of 
the President. Accordingly, it would be impractical and add additional 
administrative costs to segregate and track responsibilities between 
the Board and other offices operating within the White House Office 
program.
    Question. How many staff members does the Board have?
    Answer. The 5 member, part-time board, as appointed by the 
President, is in place with the exception of one member who recently 
resigned. Additionally, there are 3 staff members supporting the Board.
    Question. Many civil libertarians and others believe that this 
Board lacks the independence it needs to do its job and believe that it 
should be removed from the Executive Branch and be independent.
    What are the Administration's views on this?
    Answer. As the Administration has recently explained in its 
Statement of Administration Policy (SAP) on S. 4, Improving America's 
Security Act of 2007, ``The Board's present structure is in full accord 
with not only the spirit but also the letter of the 9/11 Commission's 
recommendation.'' In addition, the SAP explained that the Board ``has 
integrated itself into the Administration's policy formulation and 
implementation processes and has moved to integrate its operations with 
those of the many other privacy and civil liberties offices that exist 
within the Executive Branch.'' Therefore, the Administration ``supports 
the work and structure of the existing Privacy and Civil Liberties 
Oversight Board.'' To change the structure of the Board, as S. 4 
proposed to do, ``would thrust unwarranted disruption onto a structure 
that is operating effectively to fulfill its statutory mission.''
    In addition, the Board recently issued its first annual report to 
Congress in which it detailed its stand-up activities and advisory and 
oversight initiatives. The report further outlines the Board's plans 
for the year ahead and demonstrates its commitment to fulfilling its 
statutory responsibilities. As explained in the report, ``By empowering 
the Board with broad access to records, the Intelligence Reform and 
Terrorism Prevention Act of 2004 has created a Board that can offer a 
distinctly independent perspective to the President, along with 
oversight of executive agencies.''
                 program assessment rating tool (part)
    Question. Can you tell the Committee how you can ensure the 
objectivity of PART so that it is not influenced by political 
considerations?
    Answer. The Program Assessment Rating Tool (PART) is designed to 
provide credible, objective assessments of program performance to 
inform resource decisions and actions to improve program effectiveness. 
The PART asks basic questions about program design, management, and 
execution and requires evidence to document affirmative answers. The 
explanation for each question and the supporting evidence are made 
available to the public at www.ExpectMore.gov, making them subject to 
public scrutiny. The PART is a comprehensive assessment of a program 
that draws from available data; reports from the Government 
Accountability Office and Inspectors General are common sources of 
evidence for PART answers.
    In addition, the process for completing the PART--a collaborative 
one where agency and OMB staffs cooperate to review the program--also 
helps ensure the assessment is fair. A key aspect of this collaboration 
is identifying appropriate performance measures for the program that 
focus on the outcomes that are important to the American people. Each 
year there is a centralized review of all PARTs to ensure they are 
being completed consistent with the guidance and to review the quality 
of performance measures. Finally, agencies have the opportunity to 
appeal any disagreements to high level interagency panel of deputy 
secretaries.
    While these controls are meant to ensure PART questions are 
answered objectively, users of the instrument can and should make their 
own judgments by assessing the evidence on which answers to PART 
questions are based, all of which is available at www.ExpectMore.gov.
    Question. If a program has a low PART score, does that 
automatically mean that its budget will be cut?
    Answer. Program performance, as assessed with the PART, is an 
important factor in budget decisions, but it is not the only factor. We 
should work to invest taxpayers' dollars into programs that produce the 
greatest results, but we also need to meet all the nation's priorities, 
including improving the performance of key programs. A good PART rating 
does not guarantee a specific level of funding. A program may be 
effective, but if it has completed its mission, if it is unnecessarily 
duplicative of other programs, or if there are higher priorities, its 
funding may be reduced. Likewise, an Ineffective or Results Not 
Demonstrated (RND) rating does not guarantee decreased funding. An 
program rated Results Not Demonstrated may receive additional funding 
to address its deficiencies and improve its performance.
    PART is a factor, though rarely the only factor, in determining a 
program's funding.
    Question. How is a program's PART score determined? What is the 
process?
    Answer. With the PART assessment, agencies and OMB answer 
approximately 25 common-sense questions about each program's 
performance and management. These include:
  --Is the program's purpose clear and is it well designed to achieve 
        its objectives?
  --Does the program have clear, outcome-oriented goals?
  --Is the program well managed?
  --Does the program achieve its goals?
    The answers to specific questions in the PART translate into 
section scores which are weighted to generate an overall score. Because 
reporting a single weighted numerical rating could suggest false 
precision, or draw attention away from the very areas most in need of 
improvement, numerical scores are combined and translated into 
qualitative ratings: Effective, Moderately Effective, Adequate and 
Ineffective. Regardless of overall score, programs that do not have 
acceptable performance measures or have not yet collected performance 
data generally receive a rating of ``Results Not Demonstrated.''
    The Results Not Demonstrated rating suggests that not enough 
information and data are available to make an informed determination 
about whether a program is achieving results. On the other hand, a 
program earns an Ineffective rating when there is clear evidence that 
is not achieving its intended outcomes. For instance, there may be data 
showing the program has failed to meet its goals and has external 
evaluations documenting its ineffectiveness.
    Ineffective programs have been unable to achieve results due to a 
lack of clarity regarding the program's purpose or goals, poor 
management, or some other significant weakness.
    Once each assessment is completed, the agency and OMB develop a 
program improvement plan so we can follow up and improve the program's 
performance.
    Assessing and improving how programs are working is a key part of 
OMB's statutory mission. Our conclusions about program performance and 
management are based on the Program Assessment Rating Tool (PART), a 
diagnostic tool that helps us make budget decisions, but also drive 
program improvements.
    Question. GAO has recommended extending the Program Assessment 
Rating Tool to tax expenditures, many of which are just programs run 
through the tax side. What are your plans for moving forward to develop 
a framework and set a schedule for conducting performance reviews of 
tax expenditures?
    Answer. The PART has been used to assess tax expenditures, like the 
New Market Tax Credit and the Earned Income Tax Credit. Although there 
are no plans to examine tax expenditures with the PART this year, we 
will look for opportunities to apply this assessment to other tax 
expenditures in the future.
    Question. I would ask that for the record you provide examples of 
programs in the fiscal year 2008 budget that: (1) received additional 
funding due to strong PART scores; (2) received additional funding to 
correct deficiencies, as measured by PART; and (3) received less 
funding due to poor PART scores.
    Answer. While PART and other performance information are an 
important factor in developing the President's Budget, these proposals 
are not based just on the overall PART rating. Instead, resource 
allocations consider specific aspects of program performance that 
suggest how taxpayer dollars could be most effectively invested.
    Refugee Transitional and Medical Services (rated Effective) in the 
Department of Health and Human Services is recommended for additional 
funding in the fiscal year 2008 President's Budget for additional 
caseload support. A PART review conducted by HHS and OMB found that the 
program is focused on achieving meaningful performance outcome goals, 
works well with its partners, including State Refugee Coordinators, 
voluntary agencies, and ethnic organization partners; and has 
demonstrated improved efficiencies since fiscal year 2000. In addition, 
the program is working with grantees to improve data collection and 
monitoring.
    The fiscal year 2008 President's Budget recommends an increase in 
funding for the National Parks Service Facility Maintenance (rated 
Adequate) so that it can continue improvement the quality of park 
facilities. The condition of park facilities has not been at acceptable 
levels, but the Parks Service now has a comprehensive inventory and is 
working systematically to improve its facilities and monitor results 
using a Facility Condition Index.
    The fiscal year 2008 President's Budget proposes to eliminate the 
Supplemental Education Opportunity Grants (rated Results Not 
Demonstrated) in the Department of Education. Program funds are 
distributed using a formula that benefits more established institutions 
and results in proportionally less funding going to institutions that 
educate the largest proportion of low income students. In addition, a 
higher proportion of program funds support administrative costs, as 
compared to Pell Grants. The savings from this termination and other 
student aid reforms are directed to better-targeted programs, such as 
Pell Grants.
                        e-government initiative
    Question. For the past several years, you have had an initiative 
that you call e- government, or ``egov''. This is an attempt to make 
government more efficient through the increased use of information 
technology to perform some of the basic functions of government.
    Can you give us a status report on the e-gov initiative? How much 
progress has been made?
    Answer. Marking the 4th anniversary of the E-Government Act of 
2002, OMB recently released a report highlighting the progress and 
future goals of the Administration to make government more effective 
and citizen-centered through improved utilization and management of 
information technology. The report identifies the successes and 
aggressive goals set by agencies under the President's Management 
Agenda (PMA) E-Government Initiative to improve information resources 
management, enhance customer service, and for the first time, measure 
the impact, utilization, and effectiveness of programs on the users of 
these services.
    Also, in February 2007, OMB submitted to Congress the second annual 
``Report to Congress on the Benefits of the E-Government Initiatives''. 
The report outlines the purpose of the E-Government and Line of 
Business Initiatives and highlights the benefits agencies receive from 
the initiatives to which they provide funding contributions. The report 
is available at www.egov.gov.
    Five years ago, OMB and agencies launched the Presidential E-Gov 
Initiatives for improved government services. Operated and supported by 
agencies, these Presidential initiatives are providing high-quality and 
well-managed solutions throughout the Federal government. In 2005, the 
Lines of Business (LoB) task forces were initiated with the intention 
of identifying common solutions and methodologies to increase 
operational efficiencies, improve services and decrease duplication. 
During fiscal year 2006, agencies successfully completed major 
development milestones and are showing greater adoption and use of 
these services from citizens, businesses and government agencies.
    In the past few years, we have worked with agency managing partners 
of the E-Gov initiatives to specifically identify clear and measurable 
goals to achieve the maximum use and benefit. The metrics with 
descriptions and type to address adoption/participation, customer 
satisfaction and usage are now available on our website, http://
www.egov.gov.
    Highlights include:
  --Government to Citizen Portfolio.--To date, GovBenefits.gov receives 
        more than 301,875 visits per month by citizens and provides 
        more than 118,579 referrals per month to agency benefits 
        programs. In the 2006 tax filing season, over 3.9 million 
        citizens filed taxes online for free using IRS Free File.
  --Government to Business Portfolio.--As of August 2006, the Expanding 
        Electronic Tax Products for Businesses initiative made 
        electronic forms available for business to electronically file 
        Employment Taxes, Corporate Income Taxes, Employer 
        Identification Number and Wage Reporting, with these 9 percent 
        of corporate income tax forms were filed electronically.
  --Government to Government Portfolio.--Since 2006, all 26 grants 
        making agencies use Grants.gov to post the over 1,000 grant 
        programs they make, with an overall customer satisfaction of 56 
        percent.
  --Internal Efficiency and Effective (IEE) Portfolio.--Federal job 
        seekers have continued to use USAJobs.gov to look for 
        employment opportunities and create resumes online, with an 
        overall customer satisfaction of 77 percent.
  --Lines of Business (LoB) Efforts.--Federal agencies continue to work 
        on implementations in the areas of Financial Management and 
        Human Resources. The other LoBs; Health, Case Management, 
        Grants Management, Cyber Security, Infrastructure, Budget 
        Formulation and Execution and Geospatial, continue to 
        facilitate collaboration amongst agencies.
    Question. What are the main functions of government that lend 
themselves to an e-gov approach?
    Answer. E-Government uses policy and technology to ensure security 
and privacy of data within the Federal government while working to 
improve government efficiency and effectiveness supporting the delivery 
of citizen-centric services. With the increasing use of technology 
throughout all aspects of the public and private sectors, the ``E-Gov 
approach'' is applicable government-wide. For example:
  --Grant Management.--There are many agencies in the government that 
        perform this functionality. Working as a group the grant making 
        agencies can save money by investing in technology solutions 
        together and foster interoperability by using joint standards.
  --Geospatial.--There are many emerging technologies in this area. 
        Agencies can work together to evaluate and select technologies 
        that are best suited for the federal government, rather than 
        independently doing evaluations duplicating the process and 
        cost to the federal government.
    Question. What is OMB's role in the e-government initiative?
    Answer. OMB works with agencies and the CIO Council to establish 
strategic direction and performs ongoing oversight to assist agencies 
in achieving results through government-wide solutions including the E-
Gov initiatives and the Federal Enterprise Architecture (FEA). This 
oversight includes ensuring the E-Government initiatives follow their 
agencies' capital planning and investment control (CPIC) processes and 
adhere to all applicable policies and law, including privacy, security, 
and earned value management. Also, OMB has provided leadership in the 
area of governance processes to assist agencies in working 
collaboratively.
    Question. How much money is budgeted for e-gov initiatives in 
fiscal year 2008?
    Answer. In fiscal year 2008, agencies will contribute $150 million 
towards E-Gov initiatives.
    Question. Do you have any new e-gov initiatives planned for the 
coming year?
    Answer. Currently, there are no new E-Gov initiatives planned, 
however, as an opportunity/need arises we will certainly consider the 
addition.
                         information technology
    Question. The Management Watch List and the High Risk List are 
tools used by OMB to help agency officials monitor agency Information 
Technology (IT) planning, as well as improve project performance. These 
lists are updated quarterly to ensure that agencies are effectively 
managing their IT investments and improving the ability of the Federal 
government to deliver information and services to the public.
    First, tell us specifically what the Management Watch List is and 
how it is used.
    Answer. The President's fiscal year 2008 budget reported 263 major 
investments representing about $10 billion on the ``Management Watch 
List.'' Investments on the ``Management Watch List'' need overall 
improvement in capital planning and investment activities--including, 
but not limited to: performance measurement, earned value management or 
system security. Before the start of the fiscal year, agencies were 
directed to remediate the shortfalls identified prior to expending 
additional funds. The agencies work to remediate the weaknesses and 
monitor the progress of the IT investment. If an investment is still on 
the ``Management Watch List,'' agencies must describe their plans to 
manage or mitigate risk before undertaking or continuing activities 
related to that investment, and the investment is placed on the High 
Risk list.
    Question. How does it differ from the High Risk List?
    Answer. The Management Watch List (MWL) is based on planning 
documentation presented in the exhibit 300 (or ``business case''). The 
High Risk List is based on agency execution of IT projects. The 
Management Watch List is for the upcoming fiscal year while the High 
Risk is based on the current fiscal year. Therefore, items on the High 
Risk List are not necessarily based on past performance--rather, they 
are projects requiring additional monitoring due to the size and 
complexity of the project, or the nature of the risk for the project. 
Conversely, items on the Management Watch List appear to require 
additional planning and/or implementation of controls based on 
documentation available. Finally, the Management Watch List is based on 
IT investments while the High Risk List is based on IT projects.
    Question. What are the criteria that are used to decide whether to 
put an IT project on one of these lists?
    Answer. Investments are placed on the Management Watch List if 
their investment justification needs improvement in various stages of 
the capital planning and investment control process, including, but not 
limited to areas such as: project management, performance measurement, 
earned value management or system security.
    A project is placed on the high risk if it meets the following 
criteria per OMB memo, M05-03, ``Improving Information Technology (IT) 
Project Planning and Execution,'' http://www.whitehouse.gov/omb/
memoranda/fy2005/m05-23.pdf. High risk projects as defined in OMB 
Circular A-11 include those requiring special attention from oversight 
authorities and the highest levels of agency management because--
  --the agency has not consistently demonstrated the ability to manage 
        complex projects;
  --of the exceptionally high development, operating, or maintenance 
        costs, either in absolute terms or as a percentage of the 
        agency's total IT portfolio;
  --it is being undertaken to correct recognized deficiencies in the 
        adequate performance of an essential mission program or 
        function of the agency, a component of the agency, or another 
        organization; or
  --delay or failure would introduce for the first time unacceptable or 
        inadequate performance or failure of an essential mission 
        function of the agency, a component of the agency, or another 
        organization.''
    Question. Is the number of projects on these lists increasing each 
year?
    Answer. The number of projects for the High Risk List and the 
number of investments on the Management Watch List are dynamic.
    The High Risk List OMB published in April 2007, includes 549 
projects determined to be high risk due to different factors, such as 
the complexity, risk, or the level of importance. The President's 
budget reported in February identified 477 projects on the High Risk 
List. The increase on the High Risk List is attributable to increased 
management oversight reported by agencies.
    The number of investments on the Management Watch List varies. 
While an investment might be initially placed on the Management Watch 
List, agencies have an opportunity to remediate these planning 
documents prior to the fiscal year. When the President released his 
fiscal year 2007 budget, there were 263 investments initially placed on 
the Management Watch List; however, by the end of the fiscal year 2006 
there were just 84. When the President released his fiscal year 2008 
budget there were 346 investments placed on the Management Watch List. 
However, agencies are able to continue to remediate these deficiencies 
and as of March 31, 2007, there are 183 investments on the Management 
Watch List. OMB continues to work with agencies to remediate the 
deficiencies in the remaining investments.
    Question. Does OMB have the resources to adequately follow up on 
the Management Watch List projects? If not, what plans, if any, do you 
have to seek assistance from others (e.g. IG offices and other 
oversight bodies) in tracking the resolution of projects with weak 
business cases?
    Answer. Yes, OMB has the resources to adequately follow up on the 
investments on the Management Watch List. Additionally, OMB works with 
the President's Council on Integrity and Efficiency (PCIE), as well as 
agency Inspector Generals (IGs), to assist with independent 
verification and validation for areas of concern. OMB also works in 
partnership with agencies and GAO to address deficiencies in several 
high-risk programs.
    The so-called exhibit 300s are essentially business cases that OMB 
requires agencies to develop to justify funding requests for their 
major IT projects.
    Question. In a review conducted about a year ago, GAO found that 
agencies' exhibit 300s were not always reliable or accurate. What 
actions have OMB and agencies taken since that time to address this 
issue?
    Answer. OMB and agencies took a number of actions to address this 
issue. OMB made significant changes to both the guidance and the actual 
exhibits 53 and 300 for agencies' fiscal year 2008 IT Budget request. 
The changes were intended to improve the quality and accuracy of the 
data. OMB met with agencies to discuss the changes to the exhibits and 
answer questions from the agencies. As part of this year's budget 
review, OMB also increased its requests for the underlying 
documentation referenced in the exhibit 300. At OMB's request, the PCIE 
and Executive Council on Integrity & Efficiency (ECIE) also conducted 
an assessment to ascertain the reliability of agencies' Exhibit 300s. 
This review was completed in March, 2007. OMB will continue to work 
with the PCIE and ECIE on areas identified for improvement. Finally, 
OMB continues to work with the agencies and the CIO Council to help 
improve agency employee understanding of their IRM responsibilities 
including the planning for information technology projects.
                           regulatory policy
    Question. On January 18, President Bush issued amendments to 
Executive Order 12866, which further centralize regulatory power in the 
Office of Information and Regulatory Affairs (OIRA) in OMB and shift it 
away from the federal agencies given this power by legislative 
enactments.
    Three aspects of the amendments seem troubling: (1) the 
identification of ``market failure'' as the first principle in 
promulgating regulations, (2) the designation of a presidential 
appointee as the Regulatory Policy Officer in each agency covered by 
the Executive Order, and (3) the requirement that significant guidance 
documents undergo nearly the same OIRA review process required of 
significant regulations.
    Why were these changes made in the Executive Order?
    Answer. The primary purpose for the issuance of Executive Order 
(EO) 13422 was to amend EO 12866 in order to establish an interagency 
review process for significant guidance documents, which would serve as 
a complement to OMB's issuance of the Final Bulletin on Agency Good 
Guidance Practices (the Bulletin). The Bulletin and EO 13422 are aimed 
at ensuring that significant agency guidance documents are developed 
through procedures that ensure quality, transparency, public 
participation, coordination, and accountability. As EO 12866 was being 
amended to establish the interagency review process for significant 
guidance documents, this provided an opportunity to make additional 
(non-guidance) amendments to EO 12866 that reflect good-government 
practices.
    The review process for guidance documents is quite different from 
that of regulations. First, pursuant to EO 12866, OIRA reviews an 
agency's significant regulations. Pursuant to EO 12866, as amended, 
however, agencies will provide advance notice of significant guidance 
documents to OIRA and OIRA will notify the agency if additional 
consultation will be necessary before the issuance of the significant 
guidance document; OIRA will not review all significant guidance 
documents. Second, under EO 12866, an agency must prepare a formal 
cost-benefit analysis for an economically significant regulation. By 
contrast, under EO 12866, as amended, while agencies must make basic 
estimates to determine if a guidance document is economically 
significant, there is no requirement for the agency to prepare a formal 
cost-benefit analysis. Accordingly, guidance documents will not undergo 
the same review process as do regulations.
    EO 12866, as amended, provides that agencies must identify in 
writing the specific market failure or other specific problem that they 
intend to address. As an initial matter, the reference to market 
failure is not a new concept; it was referenced in the ``Statement of 
Regulatory Philosophy and Principles'' in the first section of EO 12866 
as it was issued by President Clinton in 1993. It was also discussed 
extensively in other OMB documents issued under President Clinton (in 
then-OIRA Administrator Katzen's 1996 ``Memorandum re: Economic 
Analysis of Federal Regulations Under Executive Order No. 12866'') and 
President Bush (in the 2003 proposed and final versions of OMB Circular 
A-4 for Regulatory Analysis). EO12866, as amended, includes reference 
to the classic examples of market failure including externality 
(environmental problems being the classic example), market power, and 
inadequate or asymmetric information. Second, EO 12866, as amended, 
does not make the identification of a market failure the only basis on 
which a Federal agency can justify regulatory action. The revised 
section also encourages agencies to identify any ``other significant 
problem that it intends to address.'' Finally, this revision does not 
impose a new requirement on rulemaking agencies as agencies should 
already have been identifying in writing the precise nature of the 
problem that the agency is seeking to remedy through regulatory action 
to demonstrate to the public, Congress, and the courts that the agency 
has exercised its regulatory authority in a reasonable and well-
considered manner.
    EO 12866, as amended, provides that each agency head shall 
designate one of the agency's Presidential Appointees to be its 
Regulatory Policy Officer and advise OMB of such designation. However, 
many of the Regulatory Policy Officers had already been Presidential 
appointees (and most of these Presidential appointees held Senate-
confirmed positions) prior to the issuance of EO 13422. The chief 
advantage of having a Presidential appointee serve as the Regulatory 
Policy Officer is that it ensures accountability with respect to this 
role.
    Question. Have you estimated the number of guidance documents OMB 
will be expected to review in fiscal year 2008?
    Answer. Under EO 12866, as amended, after agencies provide advance 
notice of significant guidance documents to OIRA, OIRA will notify the 
agency if additional consultation will be necessary before the issuance 
of the significant guidance document. As EO 13422 was issued in January 
of 2007, OMB does not yet have much experience in its implementation, 
and OMB has not determined how many significant guidance documents it 
will review in fiscal year 2008. The number of significant guidance 
documents selected by OIRA for additional consultation will likely vary 
from year to year, depending on a variety of factors, one of them being 
the types and number of significant guidance documents that agencies 
develop from one year to the next.
    Question. How many additional staff, with what sets of skills, will 
be needed to accomplish these reviews? Were the revised regulatory 
review requirements considered in formulation of OMB's budget request 
for fiscal year 2008? If not, why not?
    Answer. It is not expected that additional staff will be necessary 
as it is OMB's plan to utilize OIRA s existing staff in the 
implementation of EO 12866, as amended, and the Bulletin. OIRA staff 
currently review draft rules pursuant to EO 12866, draft information 
collections pursuant to the Paperwork Reduction Act, and some drafts of 
guidance documents. These same staff will review significant guidance 
documents selected for review by OIRA pursuant to EO 12866, as amended. 
The submitted budget request documents do not contain requests for 
additional funding because it is expected that EO 12866, as amended, 
and the Bulletin can be implemented with existing resources.
        outsourcing--``competitive sourcing'' omb circular a-76
    Question. Recently, OMB Associate Administrator Matthew Blum was 
reported to have said that the Administration would soon publish new 
guidance relating to the public-private competitions that federal 
agencies conduct. (Government Executive article, dated 4/4/07)
    Can you tell me more about what you will be proposing and why?
    Answer. On April 13, 2007, OMB issued a memorandum to the 
President's Management Council providing guidance to help agencies 
substantiate that savings are achieved and performance is improved 
through public-private competition. The guidance includes a requirement 
for all PMA agencies to develop plans for the independent validation of 
a reasonable sampling of competitions. The guidance is available at 
http://www.whitehouse.gov/omb/procurement/comp_src/
cs_validating_results.pdf.
    Question. Do you expect this guidance to result in more federal 
employee jobs being privatized?
    Answer. No. The purpose of the guidance is to ensure agencies and 
taxpayers receive the expected benefits from competition. OMB hopes 
these efforts will further strengthen accountability for results--
irrespective of who the selected provider is--and reinforce public 
trust and confidence in the competitive sourcing initiative.
    Question. Currently, federal employees do not have the same rights 
that contractors possess to appeal contracting-out decisions to GAO and 
the Court of Federal Appeals. A senior procurement official whose job 
is not among those being considered for contracting-out can appeal on 
behalf of affected employees in very narrow circumstances. In order for 
there to be any confidence in the integrity of the ``competitive 
sourcing'' process, it is understood that both sides should have the 
same appeal rights.
    What approach would the Administration prefer the Congress to take 
to rectify this imbalance: giving appeal rights to federal employees 
actually being reviewed for privatization or taking away appeal rights 
from contractors, so that there can be a level playing field?
    Answer. OMB believes protest rights are more balanced than 
described above. For example, contractor employees, like federal 
employees, do not have an independent right to protest to the GAO. 
Although the law limits the representative for agency protests to the 
agency tender official (ATO), the law also requires the ATO to notify 
Congress whenever the ATO fails to pursue a protest to the GAO on 
grounds requested by a majority of the employees engaged in the 
performance of the competed function. There is no similar reporting 
requirement for companies that do not pursue protests requested by 
their employees.
     are political activities being encouraged at federal agencies?
    Question. Recent reports have discussed potential improprieties by 
the GSA Administrator and the activities of the top aide to political 
advisor Karl Rove. That aide and the GSA Administrator apparently met 
with GSA political appointees about the 2006 election results and 
Republican goals for 2008.
    To what extent are the White House and OMB engaged with the 
political appointees at federal agencies about election outcomes?
    Answer. OMB regularly circulates Hatch Act guidance to its 
employees. First, OMB includes Hatch Act information in its annual 
mandatory ethics training for employees. OMB senior staff receive live 
ethics training each year, in compliance with Office of Government 
Ethics regulations; other OMB staff receive live ethics training every 
third year and paper ethics training in the ensuing years. All training 
sessions, whether live or paper, include Hatch Act guidance. Secondly, 
OMB circulates specific Hatch Act guidance to all employees every two 
years, which coincides with the federal election cycle. OMB last 
circulated its specific Hatch Act guidance on September 25, 2006.
privacy and security of personal information role of omb in government 
                         computer data breaches
    Question. Personal data security breaches are being reported with 
increasing regularity. These breaches occur not only because of illegal 
or fraudulent attacks by computer hackers, but often because of 
careless business practices, such as lost or stolen laptop computers, 
or the inadvertent posting of personal data on public websites.
    Federal agencies are not immune from this unsettling problem. In 
May 2006, 26.5 million veterans and their spouses were in danger of 
identity theft because a Veterans Affairs data analyst took home a 
laptop computer containing personal data which was later stolen in a 
burglary. Other incidents of potentially compromised data in 2006 
involved the Departments of Agriculture, Commerce, Defense, Energy, 
State, and Transportation, the Federal Trade Commission, the Internal 
Revenue Service, the Government Accountability Office, the National 
Institutes of Health, and the Department of the Navy.
    Director Portman, it appears some steps have been taken to address 
this disturbing problem of data breaches involving personal and 
sensitive information in government computers, but are they the right 
ones?
    Answer. Yes, and we are continuing our efforts in this area. As 
recommended by the President's Identity Theft Task Force in their 
interim recommendations issued by Clay Johnson on September 20, 2007 
titled, ``Recommendations for Identity Theft Related Data Breach 
Notification'' (www.whitehouse.gov/omb/memoranda/fy2006/
task_force_theft_memo.pdf), agencies use a risk-based approach when 
analyzing and responding to data breaches of sensitive information.
    Question. Are we doing enough?
    Answer. Although there is continued progress toward the 
establishment of appropriate safeguards, most Federal agencies are 
still at risk for improper access and disclosure of personally 
identifiable information and other sensitive information, as described 
by the IGs evaluations completed in October 2006. There is continued 
need for agencies to identify and properly categorize sensitive 
information; refine organizational policy, and implement comprehensive 
solutions to protect sensitive information being transported or stored 
offsite, or remotely accessed.
    Question. Can we achieve ``zero tolerance'' in this arena? What 
tools and resources would it take?
    Answer. A significant factor in data breaches is human error, which 
results from failure to successfully implement security and privacy 
policies. ``Zero tolerance'' would only be possible when agencies focus 
beyond compliance and manage the risk through the use of an integrated 
and comprehensive privacy and security awareness training of all 
personnel, responsibility-specific training when appropriate, and 
successful implementation of privacy and security policies. However, we 
cannot guarantee these incidents will not happen, but rather the 
agencies will have the ability to properly respond to minimize the risk 
of our citizen's data.
    Question. In addition to the directives on encryption, access, 
timely reporting, and management response issued last year, what other 
initiatives is OMB considering to help resolve this problem or mitigate 
the risk?
    Answer. OMB is focused on implementing existing law and policies, 
and following the recommendations identified in the report submitted to 
the President by the Identity Theft Task Force on April 23, 2007.
    Question. Are you contemplating issuing any further directives that 
compel agencies to enhance IT inventory controls, including the 
creation of comprehensive databases for all departmental property?
    Answer. We rely on the information agencies provide in the annual 
report on security under the Federal Information Security Management 
Act (FISMA) and the assessment by the agencies' Inspectors General for 
the quality of agency system inventories. Additionally, the E-
Government Act requires agencies to report on their privacy program, 
and agencies report to us on the number of completed privacy impact 
assessments (PIAs) and system of records notices (SORNs).
    Question. Are there special or unique challenges that Federal 
departments and agencies face when it comes to tackling this problem?
    Answer. The public and private sectors are faced with similar 
security and privacy issues, and would benefit by exchanging lessons 
learned and best practices. Because Federal agencies provide the public 
services requiring we maintain significant amounts of information 
concerning individuals, we have a special duty to protect that 
information from loss and misuse.
    Question. Are the funding amounts agencies are requesting 
sufficient?
    Answer. The budget submitted by the President requests the 
appropriate funding amount to address the Administration's initiatives 
for security and privacy.
    Question. How do you know whether agencies are complying with your 
July directive to timely report within one hour? Are there any 
consequences for delays or failures to report?
    Answer. We have seen an increase in the amount of reports submitted 
through US CERT, which would suggest increased compliance with the 
directive. Individual agencies are responsible for establishing 
consequences for failure to follow agency policies. However, it is 
important to recognize reporting in and of itself is not a failure, but 
rather, a necessary procedure to help agencies respond to incidents in 
a timely and effective manner, and protect citizens to the maximum 
extent possible when a situation does arise.
    Question. Did all agencies meet the August 7, 2006 deadline for 
encryption requirement as directed in OMB's Memorandum issued last 
June? If so, how do you know? If not, why not?
    Answer. Memorandum 06-16 presented four recommended actions for 
agencies to implement to provide better protection for information 
accessed remotely--one of which is to encrypt all data on mobile 
computers/devices which carry agency data unless the data is determined 
to be non-sensitive, in writing, by the agency's Deputy Secretary or 
designee--to be implemented through the existing framework provided 
within current law and policy. As of October 2006, most agencies were 
still in process of implementation. The public results of the 
Inspectors General assessment of Departments' and Agencies' status in 
meeting the recommendations of OMB memo 06-16, as of October 2006, are 
published on Internet at www.ignet.gov/pande/faec/summarypiireport.pdf. 
We have been working with the PCIE IT Committee to formulate an 
additional evaluation to measure agency progress.
    Question. Should OMB play a stronger role in checking on agency 
compliance with your directives to date?
    Answer. OMB provides the appropriate amount of oversight to the 
federal agencies; however, it is the responsibility of the agencies to 
manage the risk of their services and data in accordance with existing 
laws and policies.
    Question. Should we heighten employee accountability standards? Is 
there a need to expand training?
    Answer. Agencies provide employees with clearly defined policies 
addressing expected rules of behavior and accountability for failure to 
follow those rules, reinforced with training to ensure employees 
understand the standards and practices for which they will be held 
accountable. To help agencies administer effective training programs, 
the Information Systems Security Line of Business (ISS LoB) identified 
three agency training programs to serve as a common baseline for other 
agencies to use.
    Question. Are there any legislative reforms that would be 
beneficial?
    Answer. Legislative reform is not necessary at this time. We are 
focused on moving agencies towards better implementation of existing 
laws and policies and managing their risk levels--so that we can move 
``beyond compliance'' to achieve improved security and privacy outcomes 
for our citizens to ensure trust in our services.
privacy and security for information systems: omb directives on budget 
                                requests
    Question. Privacy and security of data are important elements of 
planning, acquisition, and development of Federal information 
technology systems. The E-Government Act of 2002 and the Federal 
Information Security Management Act (FISMA) provide significant privacy 
and security responsibilities for federal information technology system 
operators.
    Seven years ago, OMB issued instructions to agencies on how to 
integrate security into the funding for information technology 
(``Incorporating and Funding Security in Information Systems 
Investments,'' Memorandum M-00-07, issued 2/28/00 and incorporated in 
OMB Circular A-11 on budget preparation policy).
    Under OMB's guidance requirements, agencies are required to: (1) 
Integrate security into and fund it over the lifecycle of each system 
undergoing development, modernization, or enhancement; and (2) Ensure 
that steady-state system operations meet existing security requirements 
before new funds are spent on system development, modernization, or 
enhancement.
    Last July, OMB's Administrator of E-Government and Information 
Technology reminded agencies of the requirement to incorporate and fund 
security and privacy requirements within their IT investments as part 
of the fiscal year 2008 budget process. Agencies were specifically 
directed to provide additional detail on resources they devote to 
fixing security weaknesses. Furthermore, agencies with significant 
isolated or widespread weaknesses identified by the agency Inspector 
general or GAO were directed to identify the specific funds they were 
requesting to correct the security weaknesses.
    Did all agencies comply with the directive on incorporating 
security funding in submitting their fiscal year 2008 budget requests?
    Answer. Yes. All agencies submit an Exhibit 53 identifying the 
percentage of the agency's IT spending used for security. In addition, 
the Exhibit 300 submitted as part of the budget submission includes 
details on IT security spending.
    Question. How can we be assured that all agencies across the 
federal government are adhering to this directive?
    Answer. As part of the budget process, agency CIOs and IGs, as well 
as OMB, review agency Exhibit 53s and Exhibit 300's.These documents 
show agencies are planning for, and incorporating, security spending 
over the course of the investment lifecycle.
    Question. What did OMB's review of the agency submissions show? Did 
all agencies identify the funding needs to address system security 
vulnerabilities as expected?
    Answer. We review agency budget requests to ensure agencies 
identify the costs for securing their investments. When agencies submit 
budget requests without information about the costs for securing their 
investments, the Investments are placed on the Management Watch List. 
We also analyze agency FISMA reports and other information to help 
determine whether agency budget requests are justified.
    Question. Can you cite some examples of budget submissions for 
fiscal year 2008 in which a federal agency identified specific funding 
requirements to address privacy and security vulnerabilities?
    Answer. All agency budget submissions identify the costs for 
securing their investments to address privacy and security 
vulnerabilities.
    Question. Has OMB ever substantially reduced or denied an agency's 
request for funding to address security weaknesses?
    Answer. Agencies identify the costs for securing their investments 
as part of their budget request, and we use this information when 
determining whether agency requests are justified.
    Question. Do you believe all agencies have adequate resources to 
address this problem of information security? Why or why not?
    Answer. We believe that agencies have adequate resources to address 
information security. They request the funding they need in their 
annual budget submission, based on their assessment of security control 
needs and remediation of weaknesses. To determine this amount, we rely 
on agencies to use their plan of action and milestone process, capitol 
planning, and the associated information to prioritize and determine 
the adequate amount of resources to request in order to mitigate any 
weaknesses that exist.
    Question. What checks are in place to assess agency systems 
acquisition projects to ensure that security is an integral part? Are 
there any consequences for non-compliance, or for proceeding to spend 
new funds despite not meeting existing security requirements?
    Answer. The Federal Acquisition Council published a Federal 
Acquisition Register clause outlining the requirement for agency 
acquisitions to follow the requirements of federal security policies. 
FAR clause 52.239-1(b) includes a broad reference to programs, 
including security, which includes FISMA. Compliance with this clause 
is enforced through the FAR process. On April 25, 2007, OMB issued a 
memorandum regarding the Federal Acquisition Certification for Program 
and Project Managers. This memorandum establishes a structured 
development for program and project managers that will improve the 
partnership and collective stewardship of taxpayer dollars.
    Question. What role does OMB play in reviewing IT spending plans to 
ensure that the security and privacy components are appropriately 
addressed?
    Answer. Besides oversight from reviewing Exhibit 300s and Exhibit 
53s, and other budget documents, OMB works with agencies throughout the 
year to assist in their project planning and implementation.
    Question. Has OMB (or any agency head that you are aware of) ever 
halted a systems procurement due to the failure to include IT security 
funding in the project?
    Answer. OMB views this activity as an internal agency procurement 
matter, and therefore, we would not necessarily know of any specific 
projects that have been halted. However, information related to 
procurement and security is submitted to OMB through the budget process 
in Exhibit 300 planning documentation, and it is considered as we 
review agency budget requests. It is important to also note agencies 
apply a methodology called ``Earned Value Management'' to regularly 
assess whether IT project implementation is on schedule, and within 
cost and performance expectations. When projects deviate significantly 
from established expectations, agencies have to determine whether the 
project should be halted, adjusted, and/or terminated.
                                 ______
                                 
              Questions Submitted by Senator Sam Brownback
    Question. Mr. Portman, I have introduced a bill that would 
establish a ``Commission on the Accountability and Review of Federal 
Agencies.''--CARFA.
    CARFA would: (1) evaluate executive agencies and their programs; 
and (2) submit to Congress a plan recommending agencies and programs 
that should be realigned or eliminated.
    Are you supportive of this bill?
    Answer. Yes. The Administration is strongly supportive of 
legislation that would enhance scrutiny and improve performance of 
programs.
    Question. Do you believe that it would eliminate wasteful 
government spending and improve government agencies' performance?
    Answer. Yes.
    Question. Could you help me analyze taxpayers' savings that this 
legislation could realize by reducing government waste?
    Answer. I cannot now give an accurate estimate of the amount of 
waste, fraud, and abuse that inflicts government today. The President's 
Council on Integrity and Efficiency reported $9 billion in potential 
savings that could result from recommendations Inspectors General made 
in fiscal year 2006. While eliminating government waste is a priority 
of the Administration, even more can be gained by making programs more 
effective and efficient. We are using the PART process to identify and 
pursue opportunities for agencies to get the taxpayers more for their 
money and eliminate unnecessary duplication of services. Based on 
agency and OMB assessments of program performance, we can say that 
proposed fiscal year 2008 spending on programs rated Ineffective or 
Results not Demonstrated exceeded $140 billion.
    Question. What is the current level of uncredited contributions to 
Social Security by undocumented persons working in this country?
    Answer. The Social Security Administration (SSA) does not know how 
much undocumented workers are contributing to Social Security. 
Uncredited contributions to Social Security are captured in the 
Earnings Suspense File. Employers report wages to SSA, and SSA uses the 
SSN to record the employees' earnings histories. The Earnings Suspense 
File captures all wage reports where SSA cannot verify the name and SSN 
of the worker against SSA s records. If SSA later resolves the 
mismatch, SSA removes the item from the suspense file and credits the 
wages to that person's record.
    There are many reasons that a name and SSN may not match Social 
Security's records, including typographical errors and name changes. A 
mismatch may also occur is if a worker is using an SSN obtained 
fraudulently, and their name does not match the SSN in SSA s records.
    SSA has no way of estimating the percentage of the Earnings 
Suspense File that represents work done by undocumented workers using 
fraudulent SSNs. The primary challenge in producing such an estimate is 
that SSA does not have a basis for estimating how many of the 
undocumented workers currently in the United States are paying payroll 
taxes.
    Question. What would be the affect on Social Security if illegal 
aliens were to gain legal status?
    Answer. The effect on the Social Security Trust Funds would depend 
on the number of undocumented immigrants receiving an adjustment in 
their status, and whether they were paying payroll taxes prior to that 
time. Under current law, individuals illegally present are not eligible 
to receive Social Security benefits. The effect on Social Security 
would also depend on how work completed prior to receiving legal status 
is treated for benefit eligibility and benefit calculation purposes.
    The 2007 Social Security Trustees Report provides some illustrative 
figures regarding the effect of immigration on the Social Security 
program. The Trustees Report intermediate assumptions assume that net 
immigration will total 900,000 people per year. When net immigration is 
increased to 1.3 million a year, the long-range outlook improves. The 
75-year actuarial balance as a percentage of taxable payroll would 
improve from -1.95 under intermediate assumptions to -1.70 under the 
higher immigration scenario. In general, increasing the number of net 
immigrants by 100,000 would increase the 75-year actuarial balance by 
.07 percent of taxable payroll.
    Question. You express concern about the level of mandatory spending 
in the budget, how do you propose to reduce this?
    Answer. While the near-term outlook in the President's 2008 budget 
of smaller deficits and a surplus starting in 2012 is encouraging, the 
current structure of the Federal Government's major entitlement 
programs will place a growing and unsustainable burden on the budget in 
the long-term. Currently, spending on Medicare, Medicaid, and Social 
Security is approximately eight percent of the Nation's GDP. With the 
first of the baby boom generation becoming eligible for Social Security 
in 2008, Social Security spending will accelerate. Three years later, 
the problem will become more pronounced as these individuals become 
eligible for Medicare, under which program costs rise even faster due 
to health care inflation. By 2050, spending on these three entitlement 
programs is projected to be more than 15 percent of GDP, or more than 
twice as large as spending on all other programs combined, excluding 
interest on the public debt.
    The President's budget proposes a number of reforms in mandatory 
programs, particularly in Medicare, resulting in savings of $66 billion 
over five years and growing to $252 billion over 10 years. These 
proposals will not solve the Government's long-term fiscal challenges, 
but they are an important and meaningful step, producing a significant 
improvement over the long term. Under the President's budget policies, 
the deficit in 2050 is projected to be 4.7 percent of GDP. In contrast, 
if the Congress fails to adopt the President's mandatory proposals and 
permits current law to remain in force, the deficit in 2050 is 
projected to be 7.5 percent of GDP.
    Question. Director Portman, in your testimony you have requested 
$410 million for enhanced income tax enforcement, how much increased 
tax revenue would this yield?
    Answer. The budget proposes to improve the effectiveness of the 
IRS' activities with a $410 million package of new initiatives to 
enhance enforcement and taxpayer service and to improve the IRS' 
technology. Budget scoring rules do not permit CBO and OMB to ``score'' 
the estimated revenue increase from IRS enforcement efforts. The IRS 
collects $51 billion per year (2007 estimate) in direct enforcement 
revenue, and its enforcement program helps maintain the more than $2 
trillion in taxes voluntarily paid each year. The budget's proposed 
funding levels for the IRS will help maintain the base revenue, and the 
proposed enforcement initiative should boost revenue further.
    Based on historical realization rates, the IRS estimates there is a 
4:1 return on expanded enforcement activities once new staff is fully 
trained. During 2008, the proposed enforcement initiatives are 
estimated to yield more than $300 million in new enforcement revenue, 
and once new staff are trained and become more experienced, the 
enforcement revenue impact of the work they complete each year is 
estimated to increase to approximately $700 million. However, this 
Return on Investment (ROI) estimate is likely understated because it 
does not reflect the indirect impact enhanced enforcement has on 
deterring non-compliance. Research suggests this indirect impact is at 
least three times as large as the direct impact on revenue.
    Question. Competitive sourcing is an integral part of the 
President's Management Agenda, as such, what is the expected benefit of 
this concept?
    Answer. The reasoned and strategic application of competition is 
helping agencies achieve greater efficiencies and better performance. 
By making commercial services that support programs more efficient, 
agencies have more resources to spend directly on their missions. 
Competition motivates agencies to become more efficient through the 
development of improved performance standards, the adoption of new 
technologies, workforce realignments, the consolidation of operations, 
and lower contract support costs. Projected savings are significant for 
the small percentage of the workforce competed. In fiscal year 2006, 
for example, agencies competed only 0.4 percent of the entire civilian 
workforce. Yet these competitions are expected to generate savings of 
$1.3 billion over the next 5-10 years. Competitions completed since 
2003 are expected to produce almost $7 billion in savings for taxpayers 
over the next 5-10 years. This means taxpayers will receive a return of 
about $31 for every dollar spent on competition. Annualized expected 
savings are around $1 billion.
    Question. What is precluding the full application of competitive 
sourcing?
    Answer. Despite impressive results, a number of legislative 
provisions limit agencies from taking full advantage of competition 
where it makes sense. Some restrictions prohibit agencies from 
competing certain activities or conducting competitions at certain 
organizations while others limit agency resources for competition or 
marginalize the consideration of quality, forcing agencies to choose 
between the government and the private sector solely based on lowest 
cost.
    Many legislative restrictions appear to be rooted in concerns that 
competitive sourcing will be used to weaken the workforce. In fact, 
agencies have carefully tailored their use of competition and given 
federal employees a full and fair opportunity to demonstrate their 
value to the taxpayer. Federal employees have fared well, receiving 87 
percent of the work competed in fiscal year 2006 and 83 percent of the 
work competed between fiscal years 2003-2006. OMB would welcome the 
opportunity to work with members of Congress to eliminate statutory 
restrictions so that competition may be used, where appropriate, to 
improve government operations and deliver the best results for the 
American taxpayer.
    Question. How much has the deficit declined the past two years and 
do you expect it to decline again this year?
    Answer. The size of the deficit and the debt is best assessed in 
relation to the economy as a whole, as measured by GDP. In his 2005 
budget, the President set a goal to cut the deficit in half by 2009 
from its projected peak in 2004. The President achieved his goal in 
2006, three years ahead of schedule. The deficit in 2006 was 1.9 
percent of GDP, or $248 billion. This was a reduction from the actual 
2004 deficit of 1.7 percent of GDP, or $165 billion. The 2006 deficit 
was below the 40-year historical average of 2.4 percent of GDP, and was 
smaller than the deficit as a percent of GDP in 18 of the previous 25 
years.
    In the 2008 budget, we project the deficit to decline even further 
for 2007 to 1.8 percent of GDP, or $244 billion. OMB will update these 
projections in the Mid-Session Review.
    Question. Would you recommend that the President veto the 
supplemental over the level of additional funding in the bill?
    Answer. The President vetoed this bill on May 2 based on the 
inclusion of an artificial deadline for troop withdrawal from Iraq, and 
the addition of billions of dollars in unrelated spending.
    Question. Last year OMB had its lowest staffing levels in over 30 
years, how are you able to complete the important work you do under 
such tight budget constraints?
    Answer. We have reduced staff levels over the past 6 years and 
attempted to be more productive with these lower staff levels. OMB has 
an extraordinarily dedicated and talented team of career professionals. 
OMB is consistently rated as the best or one of the best places to work 
in the federal government. We strive to recruit, train and retain the 
best staff we can at OMB. While the request for fiscal year 2008 is a 
disciplined budget, we believe it provides the resources necessary for 
OMB to maintain a staff of 489 and fully meet its mission.
                                 ______
                                 
              Questions Submitted by Senator Wayne Allard
    Question. What are OMB's scores on the management scorecard?
    Answer. OMB's current progress score for Human Capital, Competitive 
Sourcing, Financial Performance, and Budget and Performance Integration 
is green. While our progress score for E-Gov is red, we are taking 
steps to improve that score. OMB is currently yellow in status on Human 
Capital, but red in status on Competitive Sourcing, Financial 
Performance, E-Gov, and Budget and Performance Integration.
    All current and past scores for all agencies on the President's 
Management Agenda can be found at results.gov.
    Question. Why hasn't OMB undergone a PART review?
    Answer. Early in the development of the PART, the Administration 
made a decision to focus our evaluation efforts on programs that most 
directly impact the government's services to the American people. We 
excluded from the PART process policy functions (e.g., Office of the 
Secretary), central administrative functions that are not associated 
with specific programs, and programs and activities with a limited 
impact. The central administrative functions are evaluated using the 
President's Management Agenda scorecard.
    OMB has not been assessed with the PART primarily because it serves 
in a policy role. This does not mean OMB has escaped oversight or 
scrutiny. In fact, OMB management has been held to the same standards 
as every other major agency with the President's Management Agenda 
Scorecard. That scorecard assesses the quality of OMB's personnel, 
financial, information technology, procurement, and performance 
management. Each quarter, OMB's progress and status on each of these 
initiatives is made available on Results.gov.

                          SUBCOMMITTEE RECESS

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
























  FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL 
                               YEAR 2008

                              ----------                              


                         WEDNESDAY, MAY 2, 2007

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

                          DISTRICT OF COLUMBIA

                                 Courts

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

                 STATEMENT OF SENATOR RICHARD J. DURBIN

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

                              INTRODUCTION

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

                           BUDGET PRIORITIES

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

                     THE PRESIDENT'S RECOMMENDATION

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

                               CONCLUSION

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

                           PREPARED STATEMENT

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

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

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

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

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

                      OPERATING BUDGET PRIORITIES

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

                          FAMILY COURT UPDATE

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

                       CAPITAL BUDGET PRIORITIES

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

                               CONCLUSION

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

                           PREPARED STATEMENT

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

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

                           PREPARED STATEMENT

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

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

                        FAVORABLE SURVEY RESULTS

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

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

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

                           PREPARED STATEMENT

    I would be happy to answer any questions the subcommittee 
may have. Thank you.
    Senator Durbin. Thank you.
    [The statement follows:]
                 Prepared Statement of Avis E. Buchanan
    Good afternoon Mr. Chairman and members of the Subcommittee. My 
name is Avis E. Buchanan, and I am the Director of the Public Defender 
Service for the District of Columbia (PDS). I come before you today to 
provide testimony in support of PDS's fiscal year 2008 budget request. 
We thank Subcommittee members for their support of our programs in 
previous years.
    With fiscal year 2006, the Public Defender Service added another 
year of providing excellent defense representation to people in the 
District of Columbia. Since 1970, when PDS was established as a model 
public defender serving in the newly created District of Columbia 
Superior Court, PDS has developed and maintained a reputation as the 
best public defender office in the country--local or federal. PDS has 
become the national standard bearer and the benchmark by which other 
public defense organizations often measure themselves in a number of 
practice and administrative areas.
    In fiscal year 2008, PDS plans to work with the District of 
Columbia Court of Appeals to reduce the court's backlog of criminal 
appeals, continue to support PDS's human capital improvement plans, and 
continue to better assess its baseline costs.
    PDS's fiscal year 2008 budget request supports PDS's human capital 
improvement plans by seeking a budget that keeps pace with inflationary 
increases and yet allows for PDS to build modestly on its human capital 
plans. PDS requests $32,710,000, a ``flat'' budget as compared with the 
President's fiscal year 2007 request,\1\ to permit the office to 
maintain fiscal year 2007 salary levels and most costs associated with 
inflation. PDS's fiscal year 2006 budget was slightly lower than the 
level of the President's fiscal year 2005 budget request; with this 
essentially ``flat'' fiscal year 2006 budget, PDS focused on increasing 
and improving its internal efficiencies and maintained stable staffing 
levels.
---------------------------------------------------------------------------
    \1\ The President's fiscal year 2007 budget request would have 
provided $32,710,000 for PDS. In February 2007, Congress funded PDS for 
the remainder of fiscal year 2007 at the level of $30,898,000, plus 50 
percent of the Cost of Living Allowance, for an effective fiscal year 
2007 budget of $31,103,000.
---------------------------------------------------------------------------
                               background
    In 1997, Congress enacted the National Capital Revitalization and 
Self-Government Improvement Act of 1997 (the Revitalization Act),\2\ 
which relieved the District of Columbia of certain ``state-level'' 
financial responsibilities and restructured a number of criminal 
justice functions, including representation for indigent individuals. 
The Revitalization Act instituted a process by which PDS submitted its 
budget to Congress and received its appropriation as an administrative 
transfer of federal funds through the Court Services and Offender 
Supervision Agency (CSOSA) appropriation. The President's fiscal year 
2008 budget requests that PDS receive a direct appropriation from the 
Congress. In accordance with its enabling act, PDS remains a fully 
independent organization and does not fall under the administrative, 
program, or budget authority of CSOSA. Rather, due to the 
constitutional mandate it serves, PDS necessarily maintains a separate 
and distinct mission from the missions of CSOSA and the Executive 
Branch.
---------------------------------------------------------------------------
    \2\ Pub. L. No. 105-33, Title X (1997).
---------------------------------------------------------------------------
    In the District of Columbia, PDS and the local District of Columbia 
courts share the responsibility for providing constitutionally mandated 
defense representation to people who cannot pay for their own attorney. 
Under the District of Columbia's Criminal Justice Act (CJA),\3\ the 
District of Columbia courts appoint PDS generally to the more serious, 
complex, resource-intensive, and time-consuming criminal cases. The 
courts assign the remaining, less serious cases and most of the 
misdemeanor and traffic cases to a panel of approximately 350 pre-
screened private attorneys (``CJA attorneys'').\4\ Approximately 110 
PDS staff lawyers are appointed to represent: the majority of people 
facing the most serious felony charges; a substantial number of 
individuals litigating criminal appeals; a significant number of the 
children facing serious delinquency charges; nearly 100 percent of 
people facing parole revocation; and the majority of people in the 
mental health system who are facing involuntary civil commitment.
---------------------------------------------------------------------------
    \3\ D.C. Code 11-2601 et seq. (2001 Ed).
    \4\ An additional 75 CJA attorneys handle juvenile matters.
---------------------------------------------------------------------------
    While much of our work is devoted to ensuring that no person is 
ever wrongfully convicted of a crime, we also provide legal 
representation to recovering substance abusers participating in the 
highly successful Drug Court treatment program, and to children in the 
delinquency system who have learning disabilities and require special 
educational accommodations under the Individuals with Disabilities in 
Education Act.\5\
---------------------------------------------------------------------------
    \5\ 20 U.S.C.  1400, et seq.
---------------------------------------------------------------------------
    The Public Defender Service, unique among local public defender 
offices in that it is federally funded, has always been committed to 
its mission of providing and promoting constitutionally mandated legal 
representation to adults and children facing a loss of liberty in the 
District of Columbia who cannot afford a lawyer, and PDS has had 
numerous significant accomplishments in pursuit of that mission. In 
addition, PDS has developed innovative approaches to representation, 
from instituting measures to address the problems of incarcerated 
clients who are returning to the community to creating a one-of-a-kind 
electronic case tracking system. Other public defender offices across 
the country have sought counsel from PDS as they have patterned their 
approach to their work after ours.
    As part of its statutory mission to promote quality criminal 
defense representation in the District of Columbia as a whole, PDS 
continues to provide training for other District of Columbia defense 
attorneys and investigators who represent those who cannot afford an 
attorney, and to provide support to the District of Columbia courts.
                        fiscal year 2008 request
    The Public Defender Service's fiscal year 2008 budget request is 
for funding at the same level as that contained in the President's 
fiscal year 2007 request, or $32,710,000. PDS's actual apportionment 
under the full year fiscal year 2007 Continuing Resolution is five 
percent lower at $31,103,000. PDS's fiscal year 2008 request requires 
that PDS absorb normal and customary business cost increases and new 
costs not previously identified as part of base level funding. This 
will be the second time within four years that PDS has requested to 
manage to an essentially flat budget: in fiscal year 2006, PDS proposed 
retaining a budget level of $29,535,000 that was slightly lower than 
the fiscal year 2005 enacted level of $29,594,000, net of rescissions. 
While managing in fiscal year 2008 to a budget level that is flat with 
the President's fiscal year 2007 budget will present a challenge for 
PDS, PDS believes it can accomplish this without adversely impacting 
the constitutionally mandated legal services it provides to individuals 
in the District of Columbia.
                         pds's immediate needs
    PDS faces two major challenges over the next several years that 
require planning and flexibility:
  --Escalating Baseline Costs.--PDS has been assessing and evaluating 
        the true cost of its base funding since the passage of the 
        Revitalization Act. In fiscal year 2008, PDS will have to 
        absorb several items beyond its control that have not been 
        previously included in PDS's base. For example, it has been 
        determined that, starting in fiscal year 2008, as a federally 
        funded entity, PDS must comply with the Federal Employees' 
        Compensation Act (FECA).\6\ The law requires that the 
        Department of Labor (DOL) submit a bill to each federal entity 
        for the program liability that will occur in future years. PDS 
        has received notice from DOL that PDS's FECA liability payment 
        for fiscal year 2008 will be $130,000. Another cost beyond 
        PDS's control is the cost of transcription services. Recordings 
        must be reduced to transcripts for use in court proceedings. As 
        law enforcement and the government rely increasingly on 
        digitally recorded evidence, PDS's transcription costs will 
        soar. PDS saw the first indications of this change in a recent 
        case in which the transcription costs were $15,000. This change 
        is estimated to increase PDS's transcription costs by $100,000 
        annually by fiscal year 2008. A final example is the cost of 
        mileage reimbursements. PDS is constitutionally required to 
        investigate cases and meet with clients. Pre-trial case work 
        requires investigators to travel many miles around the D.C. 
        metropolitan area locating and speaking with witnesses, and 
        meeting clients often requires trips to prison facilities 
        throughout the mid-Atlantic region. The rate of reimbursement 
        for mileage is not within PDS's control and is likely to be 
        substantially higher in fiscal year 2008 than the current rate.
---------------------------------------------------------------------------
    \6\ 5 U.S.C.  8147 (1993).
---------------------------------------------------------------------------
  --Appellate Workload.--PDS is under unusual pressure from the 
        District of Columbia Court of Appeals to expand its Appellate 
        Division staff to help the Court meet its performance goal of 
        reducing the time required to resolve cases. PDS has responded 
        by hiring three new appellate attorneys (two of whom will be 
        brought on board toward the end of this fiscal year), but is 
        constrained by space limitations to respond further. This 
        solution cannot be sustained over the long term, and PDS has no 
        reasonable expectation that this workload pressure will abate.
    Despite these challenges, PDS believes it can manage to a 
restricted budget in fiscal year 2008. PDS plans to manage hire lag so 
that vacancies will not jeopardize client representation, but will 
generate savings in salary to help offset the usual labor cost 
increases expected in fiscal year 2008 and the increases in non-
discretionary fixed costs (e.g., rent, litigation costs). By 
incorporating a longer hiring lag, by keeping about 10 positions 
unfilled, and by controlling costs, PDS will manage to the requested 
$32,710,000 that matches the fiscal year 2007 budget request.
    Any reduction in funds from the President's fiscal year 2008 budget 
request for PDS however, will directly impact services. PDS's budget 
line items are fixed, with little flexibility on the part of PDS to 
decrease spending. In PDS's fiscal year 2008 budget request, 77 percent 
is allocated to personnel and related benefit costs ($25,295,000 out of 
$32,710,000). Of the $7,415,000 budgeted for non-personnel budget 
costs, approximately 95 percent consists of fixed costs (e.g., rent, 
utilities, payroll and financial services, equipment maintenance and 
licensing, litigation costs). PDS has no capital expenditures and 
spends relatively little on training and conferences, outside travel, 
and library materials. Reductions in litigation expenditures impact the 
quality of the representation provided. Reductions in the already small 
non-lawyer professional staff impact PDS's ability to manage the 
organization efficiently and effectively. PDS cannot, as many agencies 
can, detail individuals from other divisions to fill the gap. 
Reductions in front line staff (e.g., lawyers, investigators) lower the 
number of cases PDS can manage and simply shift the burden for 
supplying these constitutionally mandated services to the court's 
Criminal Justice Act budget. Of the approximately 110 lawyers at PDS, 
only six do not handle any individual cases. All supervisors, most 
division chiefs, and even some of the executive staff handle cases 
along with their supervisory and administrative responsibilities.
    As detailed below in the accomplishments section, PDS plays a 
critical role in ensuring that all persons in the District of Columbia 
criminal courts receive due process. Failure to provide this 
fundamental right undermines the public's confidence in the criminal 
justice system and leads to wrongful convictions. While PDS's budget is 
a fraction of the cost of the entire criminal justice system in the 
District of Columbia, the high quality of PDS's performance is 
recognized by all the participants in the criminal justice system. The 
District of Columbia Court of Appeals and the Superior Court for the 
District of Columbia not only recognize this performance; \7\ they rely 
on it in countless serious cases. Diminishing PDS's capacity to provide 
representation to those who cannot afford counsel would diminish 
justice in the District of Columbia.
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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.
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    \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.''
---------------------------------------------------------------------------
    \15\ The difficulty PDS anticipated in surveying this group was 
confirmed by the fact that more than 50 percent of the surveys were 
deemed undeliverable to the clients' last known addresses.
---------------------------------------------------------------------------
    The eleven questions contained in the CJA bar survey related to the 
bar's assessment of PDS's effectiveness and to the quality and extent 
of PDS's support of the CJA attorneys. The survey responses reflected 
the value that the CJA bar places on the training PDS provides, and 
they identified areas where PDS can better serve those attorneys.
    Over 90 percent of the responding CJA attorneys generally agreed 
that PDS achieves its mission of providing and promoting quality 
representation to clients, protecting society's interest in the fair 
administration of justice, and providing helpful and relevant training 
to CJA attorneys. The survey revealed a definite interest among CJA bar 
members in having PDS use its website or other communication methods 
more frequently to provide regular updates on recent changes in 
criminal law and procedure.
    PDS's other performance measures include determining the rate at 
which clients are released pending their trial or hearing dates. 
Release is a goal of virtually every PDS client, and having a client in 
that status improves the staff's ability to prepare the case and 
represent the client overall. For fiscal year 2006, PDS had a target of 
having clients released in 65 percent of cases. PDS obtained clients' 
release in 62 percent of the cases.
    In addition, PDS measures the rate at which attorneys have their 
first substantive visits with their clients after appointment. PDS's 
expectation is that an attorney will meet with a newly assigned client 
as soon as possible. Building trust is key to developing a good 
attorney-client relationship, and meeting with a client right away is a 
fundamental step toward establishing that trust and creating a positive 
impression. Early meetings also assist the attorney with investigation, 
as leads get ``colder'' with time. While certain legitimate 
circumstances may interfere with an attorney's ability to see a client 
as soon as is preferable (e.g., the attorney may be in trial), PDS has 
nonetheless set a two-day standard for this to occur. For fiscal year 
2006, PDS had a target of having these initial meetings in 75 percent 
of the cases. PDS surpassed that target, achieving initial meetings 
within two days in 89 percent of the cases.
                               conclusion
    I would like to thank the members of the Subcommittee for your time 
and attention to these matters. I would be happy to answer any 
questions the Subcommittee members may have.

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

                           PREPARED STATEMENT

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

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

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




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

                              Attachment C




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

                      D.C. COURTS CAPITAL REQUEST

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

                              FAMILY COURT

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

                     ADDITIONAL COMMITTEE QUESTIONS

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

                          SUBCOMMITTEE RECESS

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
























  FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL 
                               YEAR 2008

                              ----------                              


                         THURSDAY, MAY 9, 2007

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

                       DEPARTMENT OF THE TREASURY

                        Internal Revenue Service

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

                 STATEMENT OF SENATOR RICHARD J. DURBIN

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

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

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

           ORAL STATEMENT OF ACTING COMMISSIONER KEVIN BROWN

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

                           PREPARED STATEMENT

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

    Senator Durbin. Mr. George.

                      STATEMENT OF RUSSELL GEORGE

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

                           PREPARED STATEMENT

    Mr. Chairman, members of the subcommittee, I hope my 
discussion of some of the fiscal year 2008 budget and 2007 tax 
filing season issues will assist you in your consideration of 
the IRS's appropriations. I would be happy to answer questions 
at the appropriate time.
    Senator Durbin. Thanks, Mr. George.
    [The statement follows:]
                Prepared Statement of J. Russell George
    Chairman Durbin, Ranking Member Brownback, and Members of the 
Subcommittee, I thank you for the opportunity to testify today. My 
comments will focus on the Internal Revenue Service's (IRS or Service) 
fiscal year 2008 budget, the 2007 Filing Season, and, at your request, 
the Treasury Inspector General for Tax Administration's (TIGTA) fiscal 
year 2008 budget request. The IRS administers America's tax laws and 
collects approximately 95 percent of the revenues that fund the Federal 
Government. It is therefore important to identify the resources 
required to support the IRS' role as steward of the Nation's tax 
administration system.
          overview of the irs' fiscal year 2008 budget request
    The major component of the Department of the Treasury, IRS has 
primary responsibility for administering the Federal tax system. Since 
this is a self-assessment system, almost everything the Service does is 
in some way related to fostering voluntary compliance with tax laws. It 
provides taxpayer service programs that help millions of taxpayers to 
understand and meet their tax obligations. The IRS' resources also 
provide for enforcement programs aimed at deterring taxpayers who are 
inclined to evade their responsibilities, and vigorously pursuing those 
who violate tax laws.
    The IRS must strive to enforce the tax laws fairly and efficiently 
while balancing service and education to promote voluntary compliance 
and reduce taxpayer burden. To accomplish these efforts, the proposed 
fiscal year 2008 IRS budget requests resources of approximately $11.4 
billion. Included in this amount are approximately $11.1 billion in 
direct appropriations, $133.5 million from reimbursable programs, and 
$180 million from user fees. The direct appropriation is approximately 
a $657 million increase, or 6.3 percent, over the budget provided by 
the fiscal year 2007 Continuing Resolution. Highlights of the increase 
include: $131 million for taxpayer service initiatives; $440 million 
for enforcement initiatives; $282 million for the IRS' Business Systems 
Modernization program; and $60 million for critical Information 
Technology (IT) infrastructure upgrades (included in the enforcement 
and taxpayer service totals above).
    The fiscal year 2008 budget also includes funding to implement the 
Department of the Treasury's (Department) tax gap strategy. In 
September 2006, the Department published a comprehensive plan to 
improve tax compliance. Additionally, delivery of IRS programs demands 
a secure and modernized infrastructure capable of fairly, effectively, 
and efficiently collecting taxes while minimizing taxpayer burden. The 
fiscal year 2008 budget request supports the Service's five-year 
strategic plan and the Department's compliance improvement strategy. 
The IRS' strategic plan goals are to improve taxpayer service, enhance 
enforcement of the tax law, and modernize the Service through its 
people, processes and technology.
                        improve taxpayer service
    The fiscal year 2008 budget increases funding for taxpayer service 
by $131 million. This includes $56 million for new service initiatives 
and $75 million for cost increases. IRS employees represent the face of 
the Federal Government to more American citizens than most other 
government agencies. The request includes $20 million to enhance 
taxpayer service through expanded volunteer income tax assistance, 
increased funding for research, and implementing new technology to 
improve taxpayer service.
    TIGTA is concerned about the taxpayer service initiative to expand 
the IRS' volunteer return preparation. The IRS is requesting an 
additional $5 million and 46 Full Time Equivalents (FTE) \1\ to expand 
the VITA Program. According to the IRS, this will help ``expand the 
IRS' volunteer return preparation, outreach and education, and asset 
building services to low-income, elderly, limited English proficient, 
and disabled taxpayers.'' \2\
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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.
---------------------------------------------------------------------------
    \3\ The population of VITA sites is not fixed, and VITA sites open 
and close throughout the filing season. Therefore, TIGTA could not 
determine a total population of VITA sites and could not select a 
statistical sample from which to project results. The filing season is 
the period from January through mid-April when most individual income 
tax returns are filed.
---------------------------------------------------------------------------
    The fiscal year 2008 IRS budget request also includes $10 million 
to implement the Taxpayer Assistance Blueprint (TAB). The TAB 
initiative provides additional resources for new research on the needs 
of taxpayers in order to better understand the role of taxpayer service 
on compliance. The research will focus on meeting taxpayer needs by 
providing the right channel of communication; providing a better 
understanding of taxpayer burden; understanding taxpayer needs through 
the errors they make; and evaluating the impact of service on overall 
levels of voluntary compliance.
    In July 2005, Congress issued a conference report requesting that 
the IRS develop a five-year plan for taxpayer service activities.\4\ In 
November 2005, the IRS was asked to provide the report to the House and 
Senate by April 14, 2006.\5\ The Senate committee report stated that 
the plan should outline the services the IRS should provide to improve 
service to taxpayers; detail how the IRS plans to meet the service 
needs on a geographic basis; and, address how the IRS would improve 
taxpayer service based on reliable data. The plan was to be developed 
with the IRS Oversight Board \6\ and the National Taxpayer Advocate.
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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\
---------------------------------------------------------------------------
    \10\ Taxpayer Service Is Improving, but Challenges Continue in 
Meeting Expectations (TIGTA Reference Number 2006-40-052, dated 
February 2006).
---------------------------------------------------------------------------
    Use of IRS.gov is up with over 133 million visits to the Web site, 
while the Taxpayer Assistance Centers (TACs) have received 2.2 million 
walk-in contacts, approximately 3 percent more than this time last 
year. TIGTA made anonymous visits to TACs to determine if taxpayers are 
receiving quality service, including correct answers to their 
questions. The assistor level of service in the IRS' toll-free 
operations was higher than was planned, as the IRS answered 14.6 
million calls. The IRS also completed 17.5 million automated calls; a 
decrease of 5.4 percent from last year's 18.5 million.
Telephone Excise Tax Refunds
    A concern so far this filing season has been the IRS' telephone 
excise tax refund program. The IRS estimated that between 151 million 
and 189 million people would seek this one-time refund, including many 
without a filing requirement. Taxpayers may claim either a standard 
refund amount or an itemized refund for the actual excise tax they paid 
on their telephone bills. By using the standard amounts individuals do 
not have to assemble 41 months of telephone bills to determine the 
amount of their refund. Requesting one of the standard amounts requires 
the completion of only one additional line on the tax return.
    The standard amounts developed by the IRS have proved to be very 
effective. Through the week ending April 21, 2007, IRS records indicate 
that 99.5 percent of telephone excise tax refund claims were filed for 
standard amounts. However, over 28.5 percent of the total number of 
individual tax returns filed contained no claim for a telephone excise 
tax refund, which indicates that many taxpayers may not be aware of 
their opportunity to claim this refund. TIGTA is continuing to monitor 
the steps the IRS is taking to address this issue.\11\
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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.
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \17\ See IRS News Release, IRS Updates Tax Gap Estimates, (Feb. 14, 
2006) (accompanying charts).
---------------------------------------------------------------------------
    After enactment of the IRS Restructuring and Reform Act of 1998, 
the IRS developed a function known as Taxpayer Education and 
Communications, or ``TEC.'' TEC was the IRS's outreach arm to small 
businesses to try to educate them about the complexity of their tax 
obligations. For 2002, TEC was named the Small Business 
Administration's agency of the year for what the SBA called its 
outstanding progress in creating an effective education and compliance 
assistance program for small business and self-employed taxpayers.\18\ 
Yet in the name of achieving ``efficiencies,'' TEC was ``realigned'' in 
February 2005 through a merger with other outreach functions and 
redesignated as ``Stakeholder Liaison.'' Prior to the realignment, TEC 
had 536 employees. After the realignment, Stakeholder Liaison staffing 
included 219 employees.\19\
---------------------------------------------------------------------------
    \18\ See Closing the Tax Gap and the Impact on Small Business, 
Hearing Before the House Comm. on Small Business, 109th Cong. (Apr. 27, 
2005) (testimony of John Satagaj, President and General Counsel, Small 
Business Legislative Council).
    \19\ IRS Small Business/Self Employed Division response to Taxpayer 
Advocate Service Information Request (Sept. 5, 2006).
---------------------------------------------------------------------------
    In my view, the reduction in TEC staffing will reduce tax 
compliance on the part of small businesses, result in more IRS audits 
of small businesses, and make more small businessmen and women feel 
like the government is playing ``gotcha'' with them by enacting complex 
requirements and then failing to help them understand how to comply.
IRS Telephone Assistors Are Answering a Reduced Percentage of Calls and 
        Taking Longer to Do It
    In 2003, the IRS answered 87 percent of all calls. This percentage 
dropped to 84 percent in 2006 and to 82 percent through March of this 
year's filing season. The average time it took the IRS to answer calls 
increased from 3.1 minutes in 2006 to 4.4 minutes so far this filing 
season.\20\ While the level of service on IRS phone lines is 
substantially better today than it was in the 1990s, we are moving in 
the wrong direction.
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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\
---------------------------------------------------------------------------
    \21\ See S. Rep. No. 105-174, at 39-40 (1998).
    \22\ The IRS Restructuring and Reform Act of 1998 directed the IRS 
to set a goal of having 80 percent of all returns filed electronically 
by 2007. See Internal Revenue Service Restructuring and Reform Act, 
Pub. L. No. 105-206,  2001(a)(2), 112 Stat. 685 (1998). Although the 
IRS was not able to achieve this goal, we believe Congress should 
reiterate its commitment to seeing the IRS increase the e-filing rate 
as quickly as possible.
---------------------------------------------------------------------------
    In my view, the IRS should place a basic, fill-in template on its 
website and allow any taxpayer who wants to self-prepare his or her 
return to do so and file it directly with the IRS for free.\23\
---------------------------------------------------------------------------
    \23\ See National Taxpayer Advocate 2004 Annual Report to Congress 
471-477 (Key Legislative Recommendation: Free Electronic Filing for All 
Taxpayers).
---------------------------------------------------------------------------
    Some representatives of the software industry have taken the 
position that such a template would place the IRS in the position of 
improperly competing with private industry or, worse, create a conflict 
of interest between the IRS's role of tax preparer and tax auditor.
    This is nonsense. Since the inception of the tax system, there have 
always been two categories of taxpayers--those who are comfortable 
enough with the rules to self-prepare their returns and those who turn 
to paid professionals for assistance. In the paper-filing world, the 
IRS has always made its forms and instructions universally available 
without charge to all taxpayers, and those taxpayers who require help 
have always been free to seek the assistance of paid preparers.
    Imagine that, shortly after the income tax was enacted, a large 
group of bricks-and-mortar tax preparers had launched a lobbying 
campaign to try to persuade Congress to prohibit the IRS from making 
forms and instructions available to the public on the ground that the 
availability of these materials improperly placed the government in the 
position of competing with private industry. Or on the ground that it 
created a conflict between the government's role as preparer and 
auditor. Congress almost certainly would have rejected such arguments 
as ludicrous. Yet those are exactly the same conceptual arguments being 
raised today by those who contend that the government's provision of a 
basic web-based, fill-in form to all taxpayers would undercut the 
private sector.
    The answer to these arguments in today's electronic environment 
should be the same answer that Congress would have provided 80 years 
ago in a paper environment. For those taxpayers who are comfortable 
preparing their returns without assistance, the government will provide 
the means to do so without charge. For those taxpayers who do not find 
a basic template sufficient and would prefer to avail themselves of the 
additional benefits of a sophisticated software program, they are free 
to purchase one.
    A brief personal anecdote. Although I prepared tax returns 
professionally for 27 years before I became the National Taxpayer 
Advocate and don't need assistance from others to prepare my return, my 
government salary places me above the income cap to qualify to use Free 
File products. To prepare my return electronically last month, I 
therefore purchased tax preparation software. When I completed 
preparing my return, the software program informed me that, to file 
electronically, I would have to pay an additional fee. Although I 
deeply believe that e-filing is best for both taxpayers and the IRS for 
a host of reasons, I resented the notion that I would have to pay 
separate fees to prepare my return and to file it, so I printed out my 
return and mailed it in.
    I am hardly alone. IRS data shows that about 40 million returns are 
prepared using software yet are mailed in rather than submitted 
electronically.\24\ This is a shame, because the practice delays the 
length of time for processing refunds, it requires the IRS to devote 
additional resources to entering the data manually when it receives the 
return, and it creates a risk of transcription error.
---------------------------------------------------------------------------
    \24\ IRS Tax Year 2004 Taxpayer Usage Study (Aug. 26, 2005).
---------------------------------------------------------------------------
    There is no reason why taxpayers should be required to pay 
transaction fees in order to file their returns electronically. A free 
template and free direct filing mechanism would go a long way toward 
addressing this problem and would result in a greater number of 
taxpayers filing their returns electronically. When taxpayers elect to 
use commercial software but print out their returns for mailing, the 
IRS should require software developers to convert data to 2D bar codes, 
so that all tax information can be scanned into IRS systems.\25\ Both 
taxpayers and the government would stand to benefit from these 
improvements.
---------------------------------------------------------------------------
    \25\ More than 20 states currently use 2D bar-coding for personal 
income tax forms. See Federation of Tax Administrators compiled data 
http://www.taxadmin.org/fta/edi/ecsnaps.html.

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

               INTERNAL REVENUE SERVICE RECRUITMENT TOOLS

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

                    VOLUNTEER INCOME TAX ASSISTANCE

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

                         FELONY FAILURE TO FILE

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

                         LEGISLATIVE PROPOSALS

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

                         PREPARATION OF RETURNS

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

                   STATEMENT OF SENATOR WAYNE ALLARD

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

               Prepared Statement of Senator Wayne Allard

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

                         CONSERVATION EASEMENTS

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

                          QUALIFIED APPRAISERS

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

                        PRIVATE DEBT COLLECTION

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

            OBSERVATIONS OF GOVERNMENT ACCOUNTABILITY OFFICE

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

                        PRIVATE DEBT COLLECTION

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

                     COMPARISON OF IRS TO PCA COSTS

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

                         CONSERVATION EASEMENTS

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

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

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

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

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

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

                    INFORMATION SHARING WITH THE SSA

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

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

                        PRIVATE DEBT COLLECTION

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

                   PROTECTION OF PERSONAL INFORMATION

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

                       ESTATE AND GIFT ATTORNEYS

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

                           ID THEFT AND TAXES

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

                     RELIEF FROM ID THEFT EXPENSES

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

                   ELECTRONIC FRAUD DETECTION SYSTEM

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

                   TECHNOLOGY IMPROVEMENTS AT THE IRS

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

         COLLECTION NOTICES FOR DELINQUENT DEBT OF $100 OR LESS

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

                     ADDITIONAL COMMITTEE QUESTIONS

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

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

    How do you respond to concerns that migrating to self-assisted 
center may be laying the groundwork for an expanded effort to move 
persons away from face-to-face interactive contact and toward telephone 
and Internet access?
    Answer. The Taxpayer Assistance Blueprint (TAB) recommendations are 
grounded in extensive research regarding taxpayer needs, preferences, 
and behaviors. TAB research indicates that taxpayers generally prefer 
self-assisted services, such as those found on the IRS Web site, most 
often for transactional tasks like obtaining a form or making a refund 
inquiry. Taxpayers prefer assisted services, such as those available 
through telephones or Taxpayer Assistance Centers (TACs), most often 
for complex interactive tasks like responding to a notice. Telephone 
lines and the IRS website account for approximately 85 percent of all 
channel contacts for the common service tasks surveyed. The TAB 
recommendation is to differentiate transactional and interactive 
service tasks within the TAC and satisfy them with effective, but 
different resources.
    Question. Wouldn't a plan to scale back the number of TACs or 
replace them with self-help centers be an unwise cutback in customer 
service and a step backwards in achieving the goal of increasing 
compliance and shrinking the tax gap?
    Answer. Rather than ``self-help'' centers, TACs would become 
portals where skilled and expensive staff resources would be applied to 
complex service issues and transactional tasks would be satisfied by 
effective, but less costly, web or phone applications. This 
differentiated approach conforms to growing private and public sector 
practices, responds to taxpayer defined value, addresses service 
performance in areas such as wait and service times and first contact 
issue resolution, increases service efficiencies, and has a potential 
positive impact on compliance.
    The IRS plans to implement a limited deployment of the Facilitated 
Self-assistance Model at 15 locations in 2007 that will allow us to 
assess the effectiveness of this service delivery model. Adequate 
staffing, space, and technological infrastructure were considered in 
selecting these initial 15 locations. Demographic and geographic 
diversity were also analyzed to ensure adequate sampling for research 
and data gathering.
                        private debt collection
    Question. Is the private tax debt collection initiative generating 
greater returns at a lower total cost than the alternative of providing 
the IRS the additional resources it would need to collect the same tax 
debt on its own?
    Answer. Overall, the IRS's Return on Investment (ROI) is about 4 to 
1. ROI resulting from IRS enforcement programs ranges from $3 to $14 
for every additional $1 invested, depending on the type of enforcement 
activity. For example, labor-intensive activities such as the 
Collection Field Function have lower ROIs, and automated activities 
such as Automated Underreporter have high ROIs.
    We are performing a cost effectiveness study as recommended by GAO 
and in cooperation with the Taxpayer Advocate Service (TAS) in order to 
evaluate the program's impact on the collection of delinquent taxes and 
to serve as a comparison for program alternatives. We will issue the 
report from this study to GAO in August 2008. We project that the 
Private Debt Collection (PDC) ROI will range from 3.2:1 to 3.6:1 in 
fiscal year 2007 and from 4.0:1 to 4.3:1 in fiscal year 2008.
    Question. If the initiative were eliminated, what steps could the 
IRS take to collect the tax debt that the private collection agencies 
were pursuing under their contracts and would sufficient resources be 
available to allow the IRS to take any (or all) of these steps?
    Answer. If the program were eliminated, the IRS would continue to 
apply available resources to the highest priority work. Since these 
cases have already been through lower cost methods of collections at 
the IRS, they would remain unworked. The IRS would need a significant 
influx of resources over a number of years to be able to work enough 
inventory to get to these lower priority cases currently eligible for 
PCA placement. The President's Fiscal Year 2008 Budget request does not 
include funds to hire IRS workers to replace Private Collection Agency 
(PCA) employees should the Congress eliminate the program.
    Question. What is the cost to the IRS of managing the initiative 
and processing cases that the private collection agencies cannot 
handle?
    Answer. The projected fiscal year 2008 cost for administration of 
the PDC program is $7.35 million. We project that PDC will breakeven in 
April of 2008, including all start up costs. Of the $7.35 million, 
$5.84 million is for managing the initiative and consists of costs for 
the Referral Unit, Oversight Unit, Project Office, and Project Office 
contractors. The remaining $1.51 million is for IT costs.
    The PCAs are not assigned cases that meet criteria outside of their 
authority. These cases have already been through lower cost methods of 
collections at the IRS, and would remain unworked and uncollected if 
not assigned to the PCAs. However, there may be instances where the 
taxpayers make a decision about their account that causes the return of 
the case to the IRS (e.g., Offer in Compromise, Innocent Spouse status, 
Insolvency, Disaster relief) and the IRS works on a case originally 
assigned to a PCA. In these instances, the returned PCA cases are 
processed according to IRM procedures in the appropriate function of 
the IRS. There are other situations where the IRS Referral Unit (RU) 
must work an account because the taxpayer opted out of working with the 
PCA or entered into an installment agreement that was beyond the PCA's 
authority to monitor. As of the end of April 2007, 37,689 cases were 
assigned to the PCAs and approximately 220 (0.6 percent) requested to 
opt out of the program or entered into an installment agreement beyond 
PCA authority. Given the small number of these requests, no additional 
costs are required beyond what has already been budgeted for the RU.
                           electronic filing
    Question. Section 2001 of the Internal Revenue Service 
Restructuring and Reform Act of 1998 (Public Law105-206), specifies 
that it is the policy of Congress that paperless filing should be the 
preferred and most convenient means of filing Federal tax and 
information returns, it should be the goal of the Internal Revenue 
Service to have at least 80 percent of all such returns filed 
electronically by the year 2007, and the Internal Revenue Service 
should cooperate with and encourage the private sector by encouraging 
competition to increase electronic filing of such returns.
    It is now 2007. What are the experiences with e-filing?
    Answer. Based on the July 2006 results of our market research study 
called Findings From the 2006 Taxpayer Satisfaction Study for 1040 e-
file conducted by Russell Research:
  --Practitioner e-file is the term used for taxpayers who e-file their 
        tax returns electronically through an IRS-authorized Electronic 
        Return Originator. Online filing is the term used for taxpayers 
        who e-file their returns online via their home computers either 
        by using an online company or with software through a third 
        party transmitter. Practitioner e-file and Online filing with 
        software are maintaining high levels of satisfaction (82 
        percent and 83 percent respectively), but online filing with an 
        online company is trending downward (from 83 percent to 74 
        percent).
  --Three of the products (Practitioner e-file, online filing with an 
        online company, online filing with software) continue to have a 
        high number of user suggested improvements (simplify it and 
        lower the costs).
  --Non-user interest in practitioner e-file, the online filing 
        products and Free File showed little year-to-year change, but 
        long-term trend data indicates a hardening of non-user 
        resistance to products and suggests that future usage gains may 
        come in small increments.
  --Non-users who were most resistant to adoption had generally 
        negative impressions of the products in terms of their being 
        better than other filing methods, being private and secure, 
        being easy to use and being accurate.
  --A gap analysis of attitudes toward e-file in general continues to 
        show that lack of belief in e-file is clearly playing a role in 
        its non-adoption among non-triers and even lapsed users. These 
        segments do not accept e-file's benefits of accuracy, privacy/
        security or ease of use, and these are the attributes of a tax 
        filing method that they value most.
  --Another persistent barrier to the adoption of e-file is that not 
        all practitioners offer or advocate the use of e-file at the 
        same rate.
    The Free File program is a free federal tax preparation and 
electronic filing program for eligible taxpayers developed through a 
partnership between the Internal Revenue Service and the Free File 
Alliance LLC--a group of private sector tax software companies. Free 
File is an online option available through the irs.gov website. Based 
on the July 2006 results of our Free File research study called Report 
of Findings From the 2006 Free File Cognitive and Behavioral Research 
conducted by Russell Research:
  --Overall, users seem satisfied with Free File, with high intent to 
        re-use (94 percent) and recommend (97 percent), high ratings of 
        overall ease of use (94 percent) and low suggested improvements 
        (30 percent).
  --Free File's convenience appeals to them most with cost being the 
        secondary driver.
  --Other Free File program diagnostics results tell us that the site 
        is generally easy to navigate (96 percent), that users have 
        confidence in the security of their tax information (96 
        percent), and that it's easy to select a company at the site 
        (94 percent) with high intent to use the same company next year 
        (91 percent).
    Question. What percentage of taxpayers in this filing season are 
submitting returns electronically?
    Answer. Per IRS's Research, Analysis, and Statistics (RAS) Weekly 
Tracking Report for individual income tax returns for the week ending 
May 4, 2007, of the 127.3 million total individual returns filed, 
electronic filing (e-file) represented 76.7 million returns (60 
percent) and paper represented 50.6 million returns (40 percent). Of 
the 76.7 million electronically filed returns, 54.7 million (71 
percent) were e-filed by practitioners and 22.0 million (29 percent) 
were e-filed online. Of the approximately 95 million taxpayers who are 
eligible to use the Free File program in the 2007 filing season, 3.8 
million actually used it. Numerous studies show taxpayers select a tax 
preparation ``channel'' (e.g. self-prepared, paid prepared, etc.) based 
on personal preferences and won't change. The current e-file rate of 60 
percent is 3 percentage points higher than last year, at this point in 
time. The relative proportion of e-file returns is expected to drop to 
58 percent by the end of the year as more returns with extensions are 
filed on paper.
    Question. What efforts can be taken to increase the level of 
electronic filing?
    Answer. The IRS's e-Strategy for Growth outlines plans to reduce 
taxpayer burden and continuously grow the e-file program. Key 
strategies include:
  --Make electronic filing, payment and communication so simple, 
        inexpensive, and trusted that taxpayers will prefer them to 
        calling and mailing.
  --Substantially increase taxpayer access to electronic filing, 
        payment, and communication products and services.
  --Aggressively protect transaction integrity and internal processing 
        accuracy.
  --Deliver the highest quality products and services as promised.
  --Partner with states and other governmental entities to maximize 
        opportunities to reduce burden for our common-customer base.
  --Encourage private-sector innovation and competition.
    Question. What are the impediments that have hindered attaining the 
goal set nine years ago?
    Answer. In their 2005 annual report to Congress, the Electronic Tax 
Administration Advisory Committee has identified three major barriers 
to increasing electronic filing:
  --Electronic filing must be faster, easier, and more accurate than 
        paper filing and the initial experience must be positive.
  --Electronic payments must be faster, easier, and more foolproof than 
        paying by paper check and the first experience needs to be 
        positive.
  --Electronic services offered by the IRS must be faster, easier, and 
        more efficient than paper, telephone or fax-based 
        communications.
             mandatory e-filing by charitable organizations
    Question. The IRS recently implemented measures requiring that 
certain tax-exempt organizations electronically file their annual 
returns, and many nonprofits recommend amending federal laws to require 
mandatory e-filing of all charitable organizations that annually file 
with the IRS. In particular, the Panel on the Nonprofit Sector, an 
independent group of nonprofit leaders convened at the encouragement of 
the Senate Finance Committee to make recommendations to Congress, 
recommended that tax laws be amended to enable the IRS to move forward 
with mandatory e-filing for all charitable organizations and that 
funding be authorized to support implementation of the initiative, and 
encourage more complete filings by nonprofits and better oversight by 
the IRS. Organizations now required to file their returns 
electronically have needed to adjust from attaching documents to their 
returns to completing sections on the electronic returns.
    What challenges has the IRS experienced in implementing e-filing, 
particularly from organizations accustomed to attaching documents to 
their returns?
    What would the IRS need to do to implement broader e-filing 
requirements?
    Would the funding levels proposed by the President for fiscal year 
2008 permit the IRS to adequately serve groups now required to e-file 
and to move toward more extensive e-filing if approved by Congress?
    Answer. The IRS worked closely with stakeholders and filers to 
communicate the business rules with regard to attachments in advance of 
the implementation of e-filing. Recognizing that our filer community 
often chooses to include ``unrequested'' information about their 
organization and program services, we worked with the software 
development community to ensure the creation of ``General Explanation'' 
pages that allow filers to include additional information that they 
believe is important. Moreover, the IRS has broadened the kinds of 
items that can be attached to e-filed returns to include such things as 
revised Organizing Documents and Articles of Dissolution.
    The primary limitation on proposing a broader e-filing mandate is 
statutory. Section 6011(e) of the tax code provides that IRS can 
require e-filing only if the taxpayer is required to file at least 250 
returns during the year. (This mandated threshold is for charitable 
organizations. Corporate taxpayers and partnership taxpayers have a 
different mandate.) The budget contains a proposal that all 
corporations and partnerships required to file Schedule M-3 would be 
required to file their income tax returns electronically. In the case 
of large taxpayers not required to file Schedule M-3 (such as exempt 
organizations), the Budget contains a provision to expand the 
regulatory authority to require electronic filing beyond the current 
250-return minimum. That provision would reduce the legal barriers (the 
250-return rule) that prevent enhanced e-filing.
    The President's fiscal year 2008 budget request provides adequate 
funding for the IRS to serve groups now required to e-file. In 
addition, the budget requests funding for developing and deploying the 
capability for the modernized electronic filing application to accept 
and process a subset of the 1040 family of forms. The funding would 
also allow a significant advancement toward establishing the capability 
to accept and process all 1040-related forms in multiple phases as the 
IRS works to retire the legacy e-file system. The IRS's modernized 
electronic filing application has been designed and built to be 
scalable for additional volumes resulting from increased e-filings due 
to new and/or changed mandatory thresholds.
                     business systems modernization
    Question. During fiscal year 2006, the IRS developed a new IT 
Modernization Vision and Strategy for the Business Systems 
Modernization (BSM) program along with a 5-year plan to guide IT 
investment decisions through 2011. While this presents a positive first 
step towards defining the agency's future plans for the modernization 
program, it does not fully address GAO's recommendation to develop a 
long-term vision and strategy for completing BSM.
    When does IRS anticipate completing this strategy, including 
establishing time frames for consolidating and retiring legacy systems?
    Answer. Building a credible and comprehensive long-term vision and 
strategy to modernize the information technology of the largest and 
most complex tax administration system in the world is an iterative 
process that we are developing, institutionalizing and maturing over 
time in lockstep with our business partners. Our goals as part of our 
Modernization Vision & Strategy (MV&S) effort are to provide the 
vision, creativity, and a repeatable process to rationalize our 
investments in a way that we are now aligning with OMB's 
recommendations for Segment Architecture (Domain Architecture). In 
fiscal year 2005, our first year of this effort, we accomplished many 
foundational activities, and selected an integrated set of IT 
investments using sound investment processes across the primary tax 
administration domains (submission processing, manage taxpayers 
accounts, customer service, reporting compliance, filing and payment 
compliance, and criminal investigation).
    During this past year, fiscal year 2006, the IRS improved and built 
additional capabilities to institutionalize the MV&S investment 
processes. We applied lessons learned to improve our development of 
technical solution concepts, added additional layers of functional and 
technical integration and sharpened our cost-estimation processes. In 
addition to covering the domains of tax administration, we added in a 
domain for IT security as well as a domain to cover our Internal 
Management Systems (to include our financial, human resource, and asset 
management applications). In parallel, we have been maturing our IT 
governance structure, and we have brought our governance committees 
into the MV&S process to oversee and approve the strategies, project 
proposals and prioritize at the domain level.
    This year we are expanding the depth and breadth of our MV&S 
processes. A new functional area domain is being added to cover the 
provision of IT infrastructure products and services. In addition, we 
plan to complete a comprehensive architecture and strategy for one of 
the primary tax administration domains. This process will entail a 
comprehensive analysis of current processes and systems, target 
processes and systems over the next five years, transition strategies 
to achieve the targets and performance measures to be achieved. This 
initiative will address plans for consolidating and retiring legacy 
systems within that domain which you asked about in your question 
above. We then plan to complete the comprehensive architecture work for 
the remaining domains during fiscal year 2008.
    It takes time and is very challenging to develop, communicate, and 
achieve organizational commitment to a vision and strategy for 
modernization that (1) addresses consolidation, transformation and 
retirement of hundreds of interrelated legacy systems; (2) incorporates 
modernized capabilities from new systems; and, (3) allows IRS to 
continue to provide systems for end-to-end tax administration that 
incorporate each years' new tax laws and policy. Previously the IRS has 
focused its IT modernization plans on dealing with the replacement of 
just key systems (e.g., CADE replacing the master files, the 
implementation of modernized e-file to both replace the legacy e-file 
system and handle additional forms types). The MV&S is about building 
the proper modernization plan for all of the IRS's IT, dealing with the 
more than 450 systems that support tax administration. The long-term 
goal is not to replace most of these systems, but, through concepts 
such as service-oriented architecture (SOA), to transform and 
streamline our IT environment over time while still being able to 
address new business needs that are identified through the MV&S 
process. Doing this right entails changes in a management paradigm that 
requires significant involvement from hundreds of people across the 
organization, entails embracing architectural and engineering concepts 
that have never been introduced in the past, and given the 
complexities, entails the use of an incremental approach. In addition, 
we must build and institutionalize capabilities within the IRS to make 
sound investment choices along the way so we can use our resources 
prudently. The good news is that the first two years of embarking on 
this effort have forged a much better working relationship between the 
business units of the IRS and MITS.
    Even as we formalize and drive these plans ever deeper across the 
domains, one must realize that the plans must also be flexible to 
support significant change. Business requirements, tax laws and tax 
administration policy can change radically over time. One example would 
be in submissions processing and, in particular, e-file. We have a 
roadmap for implementing Modernized e-file (MeF) that has the IRS 
implementing MeF for all major form types by 2014. However, if the IRS 
is directed to implement a direct-file option for individual filers, it 
will significantly change the implementation approach and direction for 
MeF. Whether direct filing with the IRS should be done is a policy 
issue, but a decision such as that would have major impacts on our 
modernization strategy.
    Lastly, your question addresses timeframes for consolidating and 
retiring legacy systems. These comprehensive architecture and 
strategies that we are developing for each domain will address timing.
    I understand that the latest release of the Customer Account Data 
Engine (CADE), the system that is intended to replace the antiquated 
Master File processing system, was put into production in March, about 
two months later than planned.
    Question. What was the impact of the delay on 2007 filing season 
processing?
    Answer. Prior to CADE's deployment, we executed what is known as 
our Technical Backout Plan in which we automatically routed and timely 
processed tax returns for CADE-eligible accounts in the legacy master-
file cycle. Since CADE is not a customer facing system, this recovery 
maneuver is not evident to the taxpayer, so this action does not 
increase processing time and the taxpayer received the same service 
this year that they have received in past years under the legacy 
master-file cycle. That said, unfortunately, there were approximately 
20 million CADE-eligible taxpayers this year who could have received 
their refunds a few days earlier based on CADE-reduced cycle times had 
CADE been in production at the time they submitted their returns. There 
are no other effects to the taxpayer.
    Question. What, if any, impact has the delayed release had on the 
planned functionality of CADE and on future releases of CADE?
    Answer. The delay in delivering CADE Release 2.2 is having an 
effect on Release 3. While we have not completely finalized the changes 
in scope for the two sub-releases in Release 3, we are scaling back 
some of the functionality.
    The priorities for Release 3 will be to maintain the functionality 
to enable the capabilities to be delivered in conjunction with Account 
Management Services (AMS), update CADE with any necessary filing season 
changes, address some technical upgrades and design issues that have 
been uncovered as we have run CADE in operation, and add functionality 
that will enable CADE to process additional tax returns (in particular, 
we will be adding capabilities for CADE to process returns with Math 
Errors and Disaster Area Designations).
    While there will undoubtedly be less functionality increase in CADE 
Release 3 than originally planned, we believe that these steps we are 
taking to address the issues on CADE performance will enable us to 
``catch up'' over the next few years, so we do not anticipate changing 
our planned retirement date of the individual master file in 2012.
    Question. How does this year's delay, and possible delays in future 
releases of CADE affect other systems, including the Accounts 
Management System?
    Answer. Based on our Technical Backout capability in CADE, this 
year's delay did not have any effect on other systems.
    As your question notes, possible delays in future releases of CADE 
can affect other systems, most notably Account Management Services 
(AMS). We view maintaining alignment between the CADE and AMS programs 
a central challenge and source of risk for the BSM Program going 
forward. Development of these two major modernization initiatives 
requires a level of coordination and cooperative execution that is 
higher than the IRS has required so far in our modernization efforts. 
We recognized this challenge in our initial planning for the AMS 
program and have taken a number of steps to put in place the 
organizational structure, resources and approaches needed to assure 
that CADE and AMS are successfully delivered as a coherent set of 
capabilities.
    For the Release 3 sub-releases of CADE (those that will be released 
in calendar year 2007), we have taken steps to ensure that 
functionality in CADE required for proper functioning of AMS is of high 
priority and will be delivered in those sub-releases. In particular, 
CADE is slated to deliver functionality that will support online 
address change in Releases 3.1 and functionality to support basic 
notices generation in Release 3.2. We do not anticipate any significant 
issues in delivering this functionality as part of these releases.
                             irs workforce
    Question. According to IRS data, while the number of employees at 
the IRS has decreased by almost 20,000 since 1995, the number of 
managers who supervise these employees has increased over this same 
period. During the period between 2000 and 2005, the number of 
frontline bargaining unit employees, decreased by 4,756, a decrease of 
5.1 percent. During that same time, the number of managers and 
management officials increased from 12,514 to 12,684, an increase of 
170.
    Why does the IRS need more managers today than it needed six years 
ago when it now has 4,700 fewer front-line employees?
    How many enforcement dollars and impact could 170 managers generate 
if they were assigned inventories?
    Has the IRS considered returning any managers to front-line work?
    Answer. A review of IRS staffing for January of each year shows 
that while there was an increase in the number of managers and 
management officials between 2001 and 2002, since 2002 the number of 
employees in this category has steadily decreased. An updated snapshot 
of the IRS staffing shows a 5.4 percent decrease in the number of 
managers/management officials from January 2001 to January 2006. The 
current alignment of managers and employees has provided the 
appropriate focus to allow for increased enforcement revenues of nearly 
40 percent from $33.8 billion in 2001 to $47.3 billion in 2005. Audits 
of high-income taxpayers--those earning $100,000 or more--topped 
221,000 in fiscal year 2005, the highest number in the past 10 years. 
Total audits of all taxpayers topped 1.2 million last year--a 20 
percent jump from the prior year.
            narrowing the ``tax gap'' and misclassification
    Question. I am concerned about the misclassification of workers in 
certain industries as independent contractors. Many of these workers 
should be correctly classified as employees and income reported on W-2 
forms, not 1099 forms. This misclassification leads to the 
underreporting of self-employment taxes, which the IRS estimates 
accounts for $148 billion per year and 43 percent of the gross tax gap. 
Last year, the Senate Appropriations Committee, in S. Rept. 109-293, 
strongly urged the IRS to provide increased tax enforcement in 
industries where misclassification of employees is widespread. In 1984, 
the IRS reported that at least 15 percent of employers misclassified 
about 3.4 million workers as independent contractors with higher rates 
in several industries including construction.
    Is it your sense that the practice of misclassifying workers as 
independent contractors has increased since then?
    Answer. While we have not conducted a recent study, the Government 
Accountability Office (GAO) looked at this issue in its 2006 report, 
GAO-06-656, entitled, Employment Arrangements--Improved Outreach Could 
Help Ensure Proper Worker Classification. In this report, the GAO 
stated the number of independent contractors increased from 6.7 percent 
to 7.4 percent of the workforce from 1995 to 2005, and the number of 
independent contractors in the contingent workforce population rose 
from 8.3 to 10.3 million. The report also states that many workers are 
misclassified as independent contractors; however, no updated data was 
provided. Additionally, we have seen an increase in misclassification 
through our examination process and increased filings of Form SS-8, 
Determination of Worker Status for Purposes of Federal Employment Taxes 
and Income Tax Withholding. If the taxpayer accurately reports income 
received, whether as employee or an independent contractor, there is 
little consequence for the Social Security trust funds. The tax rates 
on wages and salaries, on the one hand, and self-employment income, on 
the other hand, are virtually identical. For self-employment taxes, 
however, work-related expenses incurred by the worker are deductible 
whereas similar expenses are not deductible by an employee.
    Question. Has the IRS prepared an updated estimate?
    Answer. We have not prepared an updated estimate. We are in the 
process of considering the possibility of undertaking the necessary 
research.
    Question. What enforcement resources are being devoted now or are 
planned in fiscal year 2008 to address this issue?
    Answer. The IRS office with primary responsibility for employment 
tax noncompliance devoted 9 percent of its fiscal year 2007 workplan to 
worker misclassification and plans to increase examinations of 
misclassification issues to 34 percent of its overall audit plan in 
fiscal year 2008.
    Question. You have described the 16 legislative proposals and 4 
administrative proposals for closing the tax gap. Is this issue a 
component of those? If not, why not?
    Answer. This issue was not included in these 16 legislative 
proposals or the 4 administrative proposals. However, the 
Administration's fiscal year 2007 revenue proposals did address the 
issue. In addition to 5 tax gap proposals, it provided for the Treasury 
Department to study the standards used to distinguish between employees 
and independent contractors for purposes of withholding and paying 
Federal employment taxes.
    Question. Where does addressing this problem fit within your 
strategy for narrowing the tax gap?
    Answer. In conjunction with the Treasury Department's tax gap 
strategy issued in September 2006, the IRS is developing a 
comprehensive strategy to address employment tax issues. This strategy 
will include the issue of misclassification of workers as independent 
contractors. However, the prohibition on general guidance on 
classification issues contained in section 530 of the Revenue Act of 
1978 limits the Treasury's ability to provide guidance in this area.
                   safe harbor and misclassification
    Question. Under Section 530 of the Revenue Act of 1978, the ``safe 
harbor'' provision, employers who ``reasonably'' misclassify their 
workers as independent contractors are protected against any liability 
for employment tax purposes. This includes any employer who can show 
that more than 25 percent of his industry classifies workers as 
independent contractors.
    I understand that once an employer is covered by the safe harbor 
provision, the IRS cannot pursue the employer for unpaid employment 
taxes even in the future as long as the situation has not changed in 
their industry, even if they are actually misclassifying.
    What is the impact of the ``safe harbor provision'' including the 
number of employers who qualify, the particular industries, the number 
of workers that represents, and the loss of revenue to the Federal 
treasury in the form of past and future liability?
    Answer. While we are unable to quantify the exact impact of the 
``safe harbor provision,'' we know that employers that claim safe 
harbor provisions of Section 530 represent a subset of all worker 
misclassification. Section 530 applies not only to past years but also 
future years as long as the taxpayer continues to report the income to 
the workers as required and treat the workers consistently as 
independent contractors. Increasing noncompliance in an industry has 
the effect of increasing the possibility that most taxpayers in the 
industry will qualify for the safe harbor provision. GAO conducted the 
last study in this area in 1989. In this study they reviewed a sample 
of IRS worker reclassification examinations and determined that 40 
percent of the tax could not be assessed due to the safe harbor 
provision.
           recruitment and retention: student loan repayment
    Question. One of the biggest challenges facing Federal agencies is 
attracting and retaining well-qualified, high-performing employees. 
Student loan repayments are a valuable management tool to help agencies 
recruit highly qualified candidates into Federal service and keep 
talented employees in the Federal workforce.
    Federal law (5 U.S.C.  5379) provides agencies with discretion to 
establish and tailor a student loan repayment programs. Recently, OPM 
issued its annual report on the use of the tool across the Federal 
government last year. With each passing year, the use of this program 
continues to grow dramatically.
    In fiscal year 2006, 34 Federal agencies provided 5,755 employees 
with a total of nearly $36 million in student loan repayment benefits. 
This represents a 31 percent increase over fiscal year 2005 in the 
number of employees receiving student loan repayment benefits and a 28 
percent increase in agencies' overall financial investment in this 
valuable incentive. When compared to fiscal year 2002, agencies 
invested more than 11 times as much funding on student loan repayments 
in fiscal year 2006.
    How many IRS employees are currently benefiting from the student 
loan repayment program?
    What portion of the IRS' fiscal year 2008 budget proposal would be 
devoted to initiatives such as those suggested by Columbia Law School 
Dean David Schizer in his op-ed published in the New York Times on 
April 16, 2007? Are you willing to give serious consideration to his 
recommendations and provide a written evaluation to the subcommittee on 
the feasibility and cost of implementing these suggestions? By what 
date could that assessment be accomplished?
    Answer. While the IRS has not yet implemented a Student Loan 
Repayment Program, we have found thus far that the lack thereof has not 
hindered our ability to attract well qualified, highly motivated 
employees through the use of various student employment programs. In 
fiscal year 2006, 93 percent of these student program hires were to 
front-line positions.
    The Office of Chief Counsel, which hires the majority of the 
attorneys in the IRS, revamped its recruitment program a couple of 
years ago by conducting on-campus interviews at law schools throughout 
the country and increasing its visibility by having executives visit 
top schools. As a result, it has been very successful in recruiting law 
students for entry-level and summer-internship positions. This past 
year Counsel hired 36 entry-level attorneys and 25 summer legal 
interns. Over 3,000 law students and recent graduates applied for these 
positions. The applicants were highly qualified--over 70 percent of 
those hired last fall were in the top 30 percent of their class.
                  nonprofit election-related activity
    Question. 501(c)(3) organizations are permitted to engage in voter 
education and outreach activities, but are strictly prohibited from 
promoting or opposing any candidate for federal office. I understand 
that during the 2004 presidential campaign season, the IRS examined 
more than 100 charities and churches, questioning whether they had 
engaged in prohibited, partisan political activities. As a result of 
the investigations, the IRS sought to ensure that the nonprofit 
community engaged in legitimate election-related activities. Concerns 
have been expressed that the timing of the IRS's investigation 
discouraged legitimate voter education and registration efforts. There 
were also allegations that the investigations were provoked by 
politically motivated complaints.
    How does the IRS evaluate whether a complaint is legitimate or 
motivated by partisan politics?
    Is it possible for the IRS to expedite investigations to ensure 
they do not have a chilling effect on legitimate election-related 
activities?
    Looking ahead to the 2008 elections, what additional resources will 
the IRS need to ensure that charitable organizations understand and 
comply with restrictions on election-related activities?
    Answer. In both the 2004 and 2006 Political Activity Compliance 
Initiatives (PACI), the IRS endeavored to intercede quickly in 
instances of alleged prohibited political activity and to educate the 
organizations to prevent potential future violations. As we noted in 
our report on the 2004 initiative, the PACI Referral Committee, 
comprised of three career civil servant employees with extensive Exempt 
Organization tax law experience, determined whether the information the 
IRS received as part of a complaint supported a reasonable belief that 
the organization may have violated the political campaign prohibition 
of section 501(c)(3) and, therefore, warranted further IRS action. 
While these procedures are designed to weed out those complaints that 
are not legitimate, oftentimes it is only after examination that the 
validity of the complaint can be determined with certainty. We also 
note that a complaint from a partisan source may nonetheless be valid.
    The 2006 PACI included expedited timeframes for classification and 
case assignment. Because of the sensitivity of these cases and their 
highly factual nature, as well as procedural prerequisites (e.g., the 
church tax inquiry procedures), and in some cases the lack of 
cooperation from the taxpayer, it is not always possible to ensure the 
swift completion of these examinations.
    On June 1, 2007, the IRS released two documents to help tax-exempt 
organizations avoid prohibited political campaign intervention 
activities that can result in the loss of their tax-exempt status. 
Revenue Ruling 2007-41 sets out 21 factual situations involving tax-
exempt organizations, including churches, and various activities that 
may or may not constitute prohibited political intervention. Second, 
the IRS released its Report on the Political Activity Compliance 
Initiative for the 2006 election cycle. The 2006 report details the 
types and numbers of allegations, which are roughly equivalent to those 
found in the 2004 cycle.
    In terms of funding, we believe the Administration's fiscal year 
2008 budget request for the IRS, which includes a $15 million increase 
for Tax-Exempt Entity Compliance, will allow us to effectively serve 
the public, including in the area of prohibited political activity, and 
we respectfully request your support for it.
                  implementation of new nonprofit laws
    Question. The Pension Protection Act of 2006, enacted last August, 
included what has been called the most sweeping legislation affecting 
tax-exempt laws since 1969. The IRS has already issued some guidance 
reflecting changes in the law; however, several aspects require 
additional guidance. Increased outreach and education will also be 
necessary to ensure that charities, many of which rely on voluntary 
staff and do not have tax professionals, are aware of the changes.
    What additional resources will be required to develop and issue 
needed guidance and web-based tools, educate IRS staff about the new 
rules, and ensure that individual taxpayers and charitable 
organizations have the necessary information to comply with the new 
rules?
    Answer. The IRS has been extremely proactive in its guidance and 
outreach efforts related to the implementation of the charitable 
provisions of the Pension Protection Act of 2006 (PPA). We have updated 
our webpage continuously to reflect the latest developments. We 
explained the PPA changes affecting exempt organizations and their 
contributors on a Tax Talk Today web cast; over 6,100 individuals 
viewed it. We continue to speak at numerous other outreach events for 
organizations involving the PPA changes. We educated our staff and the 
telephone call sites on the PPA changes so they can respond to taxpayer 
inquiries. We have begun to roll out a massive publicity campaign, 
directed especially to small organizations, concerning the new annual 
notice filing requirement, which is applicable to all small 
organizations that did not previously have a filing requirement.
    We made numerous changes to the 2006 Form 990 to implement PPA 
changes. We conducted two phone forums to explain these changes. The 
phone forums were open to all, and over 500 practitioners participated; 
we subsequently posted the script on our website, along with frequently 
asked questions. We issued guidance immediately following PPA's 
enactment addressing issues of critical importance regarding donor 
advised funds, supporting organizations, and procedures for being 
recognized as a publicly supported organization. We recently issued 
guidance on the procedures for section 501(c)(3) organizations to make 
their Forms 990-T available for public inspection. We will issue 
additional PPA guidance and outreach in the near future. We also will 
assist the Treasury Department on PPA mandated studies.
    Implementation of the PPA is important. We have devoted the 
resources required to issue all needed guidance in a timely fashion, 
and we intend to continue to do so until the act is fully implemented.
    We believe the Administration's fiscal year 2008 budget request for 
the IRS, which calls for a $15 million increase for Tax-Exempt Entity 
Compliance, will enable us to effectively serve the public, including 
in the area of prohibited political activity, and we respectfully 
request your support for it.
          effect of new non-cash charitable contribution rules
    Question. In 2004, Congress enacted new restrictions on charitable 
contributions of vehicles. Most recently, in 2006, Congress enacted new 
restrictions and reporting requirements on charitable contributions of 
clothing and household items as part of the Pension Protection Act.
    Has the IRS seen any changes in the amount and/or type of 
deductions being claimed since passage of these new rules?
    Answer. Internal Revenue Code  170(f)(12) went into effect for 
vehicle donations after December 31, 2004. Our Statistics of Income 
Division (SOI) collects this type of data. However, data for the 2005 
tax year (the first tax year where the change applied) has not yet been 
analyzed.
    Question. Has the volume of taxpayer queries increased since 
enactment of the rules?
    Answer. The Accounts Management Toll Free function experienced a 23 
percent increase in inquiries on deductions in fiscal 2005 compared to 
fiscal 2004. Questions received on deductions cover over 26 topics 
including contributions. The data we collect does not allow us to 
provide specific evidence on whether the increase was attributable to 
vehicle donations. In fiscal year 2006 the deduction queries returned 
to a level comparable to fiscal years before 2005.
                                 ______
                                 
               Questions Submitted by Senator Ben Nelson
    Question. Do you support including a preference for companies 
willing to hire disabled veterans and other individuals with 
disabilities within the IRS Private Debt Collection (PDC) program?
    Answer. The IRS is considering a strategy that would give a 
preference to Private Collection Agencies (PCAs) that employ disabled 
veterans and individuals with disabilities.
    Question. Do you support an across-the-board hiring target for 
collection agencies within the PDC to create jobs for veterans and 
other persons with disabilities?
    Answer. In the short term, it may be difficult for the IRS to 
achieve an across-the-board hiring target for all collection agencies 
within the PDC program. Setting a predetermined target could jeopardize 
the program. If we were unable to find a contractor who meets the 
requirements, we could not enter into any qualified tax collection 
contract. PDC companies are often located in rural areas where there is 
a population base that allows them to employ highly qualified people at 
a low cost. These same rural areas may not have a large enough 
population of severely disabled and veterans to draw upon to achieve a 
set goal.
    Nonetheless, the IRS is considering an alternative strategy that 
could give a preference to PCAs that employ the severely disabled and 
veterans. We intend to revise our contract award determinations to 
provide incentives. The IRS intends to offer extra evaluation points 
for PCAs that employ a specified percentage of the severely disabled or 
veterans. We are still in the process of finalizing the Request for 
Quotations for the next contract and have not yet determined the 
required percentages or extra evaluation points. We believe that this 
will encourage the PCAs to hire the severely disabled and veterans to 
work IRS accounts without jeopardizing the PDC program.
    Question. What obstacles exist which prevent the IRS from 
developing a veterans/disability preference program for the PDC?
    Answer. The obstacle to a disability preference program based on a 
hiring target arises after the contract is awarded. The PDC program 
requires the use of long-term contracts with the PCAs. Preparing the 
PCA to process IRS cases requires a significant amount of time and 
resources by both the PCA and the IRS. The contract period must be of 
sufficient time to allow the PCA and IRS to recover their expenses. We 
have determined one year to be the minimum time period for a contract 
to be cost effective.
    The IRS implied obligation under a preference program would be to 
terminate a contract with disability preference if the contractor 
failed to meet the agreed upon condition. If after contract award, a 
contractor, otherwise qualified, is unable to fulfill the agreement to 
hire the required quota of severely disabled for positions to provide 
contract services, the contract would have to be terminated for breach 
of contract. The cost to cancel a contract after 90 days would 
dramatically increase the cost of administering the PDC program. We 
believe that an incentive as described above will encourage the PCAs to 
hire the severely disabled and veterans to work IRS accounts without 
jeopardizing the PDC program.
    Question. What amount of the fiscal year 2008 appropriation does 
the IRS plan to devote to the PDC program? (Or, as fiscal year 2008 
appropriations are as-of-yet unknown, how much has the IRS budgeted for 
administration of the PDC program in fiscal year 2008?)
    Answer. The current projected fiscal year 2008 cost for 
administration of the PDC program is $7.35 million. We project that PDC 
will breakeven in April of 2008, including all start up costs. Of the 
$7.35 million, $5.84 million is for managing the initiative and 
consists of costs for the Referral Unit, Oversight Unit, Project 
Office, and Project Office contractors. The remaining $1.51 million is 
for IT costs.
    Based on conservative projections for revenue, the program is 
expected to recoup all costs in fiscal year 2008 and is projected to 
generate between $1.5 billion and $2.2 billion in revenue over 10 
years. In fiscal year 2008, we expect the PDC ROI will be between 4.0 
to 1 and 4.3 to 1, once the program is in steady state.
    Question. If the IRS is prevented from using any appropriated funds 
to administer the program, how will the IRS allocate the appropriations 
which otherwise would have gone to the PDC program?
    Answer. If the IRS is prevented from using funds to administer the 
program, we would need to determine alternative applications for the 
funding. The staff in the Referral Unit, Oversight Unit, and Project 
Office would be absorbed into other collection activities. The 
remaining non-labor funds would be reprioritized against all agency 
requirements. The IRS will work with the Office of Management and 
Budget (OMB) to determine the most appropriate allocation of resources.
    It is also important to note that if the program is eliminated, the 
IRS would continue to apply available resources to the highest priority 
collection work. Since the cases assigned to the PDC program have 
already been through lower cost methods of collections at the IRS, they 
would remain unworked. The President's fiscal year 2008 budget request 
does not include funds to hire IRS workers to replace Private 
Collection Agency (PCA) employees should the Congress eliminate the 
program. The IRS would need a significant influx of resources over a 
number of years to be able to work enough inventory to get to these 
lower priority cases currently eligible for PCA placement.
    In addition, sec. 6306 of Title 26 (The Internal Revenue Code) 
allows the Secretary to retain and use up to 25 percent of the 
collections for collection enforcement activities of the Internal 
Revenue Service. Termination of the contracts would also cut off 
continued accumulation of the retained funds which can be used to fund 
other Tax Law Enforcement activities. The projected revenue, between 
$1.5 billion and $2.2 billion over ten years, would also be lost.
    Question. If the PDC were repealed or de-funded, is there a 
detailed proposal, including cost and timeline estimates, to replicate 
the PDC within the IRS, or an alterative plan to collect the 
``inventory'' of cases or the debt currently slated to be collected via 
the PDC?
    Answer. No. The types of cases currently assigned to the PCAs would 
not be actively worked by the IRS if the PDC program were repealed or 
de-funded and funding for any alternatives are not assumed in the 
budget request. Due to the volume of higher priority work, there is no 
plan to replicate PDC within the IRS. These lower priority cases would 
remain unassigned.
                                 ______
                                 
                  Questions Submitted to Nina E. Olson
            Questions Submitted by Senator Richard J. Durbin
    Question. Improving taxpayer service is an important part of a 
comprehensive strategy to reduce the ``tax gap'' by helping taxpayers 
understand and meet their tax obligations.
    On April 11, the Taxpayer Assistance Blueprint, Phase 2 was 
published. This Blueprint is the joint response of the IRS, the IRS 
Oversight Board and the National Taxpayer Advocate to comply with a 
congressional mandate for the development of a five-year strategic plan 
for the delivery of taxpayer service.
    The plan includes a variety of specific recommendations to expand, 
simplify, standardize and automate services, and to improve and expand 
technology infrastructure. It also includes recommendations for 
increasing education and outreach to taxpayers, partners and IRS 
employees, and incorporating feedback into future service decisions.
    When the recent Blueprint was issued, you labeled it a ``much-
needed first step to delivering this service in ways that meet taxpayer 
needs.''
    Where does it fall short? What additional steps do you consider 
critical to meeting taxpayer needs?
    Answer. The Taxpayer Assistance Blueprint (TAB) lays out a 
comprehensive, laudable plan to improve taxpayer service over the next 
five years. Now, the critical issue is how the IRS implements the plan. 
I believe the TAB is only a ``first step'' because the TAB report alone 
will not ensure that the IRS delivers service in ways that meet 
taxpayer needs. To improve taxpayer service, the IRS must maintain a 
commitment to improving assistance to taxpayers both now and in the 
future, and must be given the resources necessary to make the needed 
improvements.
    The TAB also is just a ``first step'' because it focuses solely on 
individual taxpayers. The IRS should expand its focus to more 
comprehensively consider the needs of all taxpayers. For example, the 
IRS should use the TAB as a starting point and engage in similar 
efforts to improve services for Schedule C filers, large and small 
businesses, and tax-exempt organizations. Additionally, the IRS should 
begin to look at other areas that affect taxpayer service, including 
return preparers, submission processing, and the content of notices and 
publications.
    The IRS also should continue the research efforts it began in 
preparing the TAB. The taxpaying population will continue to change and 
so will taxpayer needs. The IRS should commit to ongoing research 
related to issues such as taxpayer needs, the link between service and 
compliance, and barriers taxpayers face to using certain IRS services.
    Question. I understand that the Blueprint was a product of a 
collaborative effort. Were there any aspects upon which you could not 
reach consensus that, as a result, were not incorporated in the 
publication?
    Answer. The TAB was designed to reflect the collaborative efforts 
of the IRS, the IRS Oversight Board, and the National Taxpayer 
Advocate. Throughout the development of the TAB, I personally 
participated in the TAB Executive Steering Committee meetings and 
decisions. I met personally with the members of the TAB team to discuss 
with them my views on the TAB and taxpayer service in general. I 
reviewed drafts of the TAB report and provided comments and feedback to 
the TAB team. Members of my staff worked closely with the TAB team both 
in monitoring the research and in drafting the report.
    Throughout the TAB process, disagreements occasionally arose over 
the direction of the TAB report. These issues were discussed among the 
Executive Steering Committee members in order to reach an agreement. I 
worked tirelessly to ensure that the TAB report would reflect a 
taxpayer-centric perspective and that taxpayer needs would not be 
unduly sacrificed for the sake of administrative convenience. I also 
wanted to ensure that given the time allotted, the TAB report would not 
come to any conclusion on reducing or eliminating taxpayer services. 
Instead, I urged that the TAB propose a methodology to evaluate current 
services and make improvements to meet taxpayer needs based on the data 
collected through the TAB research efforts, while not reducing the 
services currently available. For the most part, I believe the TAB 
report reflects this approach.
    As the IRS begins to realize cost savings as a result of providing 
more efficient and effective taxpayer service, I believe strongly that 
any savings resulting from those efficiencies should be reinvested in 
taxpayer service and not shifted to compliance. I also believe that the 
IRS should maintain its commitment to providing face-to-face services 
in the future, as stated in the TAB Guiding Principles.
    Question. As an element of the Taxpayer Assistance Blueprint, the 
IRS recommended a migration strategy to move taxpayers away from 
Taxpayer Assistance Centers (TACs) and toward electronic, self-assisted 
services. I understand the IRS plans to implement Facilitated Self-
Assistance Models in 15 selected sites, including two locations in my 
home State of Illinois. Under the model, taxpayers who come to the TACs 
for in-person help will be directed to in-house telephones and 
computers where they can access both the IRS website and phone 
assistors.
    The National Taxpayer Advocate's Report to Congress for 2006 
provides some data drawn from the IRS Oversight Board's 2006 Service 
Channel Survey. I think it elucidates the concern that migrating away 
from Taxpayer Assistance Centers (TACs) may be problematic. It states:

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

    How do you respond to concerns that migrating to self-assisted 
centers may be laying the groundwork for an expanded effort to move 
persons away from face-to-face interactive contacts and toward 
telephone and Internet access?
    Answer. Throughout the development of the TAB, I advocated strongly 
to ensure that, as the IRS moves increasingly toward the electronic 
delivery of services, the Service remains aware of the needs of those 
taxpayers who may be unable or unwilling to use self-assisted services. 
Many taxpayers face barriers in receiving assistance, particularly in 
using the Internet, and the IRS has an obligation to provide service to 
these taxpayers, including face-to-face service, as well as to help 
these taxpayers overcome the barriers.
    The IRS is making an effort to move taxpayers away from face-to-
face interaction and toward telephone and Internet services. This 
approach is appropriate for many taxpayers who are comfortable handling 
financial transactions by phone or over the Internet. However, the 
TAB's research studies showed that a certain percentage of taxpayers 
will continue to need face-to-face services. Therefore, I will continue 
to advocate that, even as many taxpayers move to electronic service 
options, the IRS must maintain face-to-face services as long as there 
is a segment of the population that still needs them.
    Question. Wouldn't a plan to scale back the number of TACs or 
replace them with self-help centers be an unwise cutback in customer 
service and a step backwards in achieving the goal of increasing 
compliance and shrinking the tax gap?
    Answer. At this point, I believe the IRS lacks the data necessary 
to determine whether it should reduce the number of TACs or replace 
existing TACs with self-help centers. Although the TAB report contains 
a significant amount of information regarding taxpayer needs and 
preferences, the IRS still has not completed enough research to 
evaluate the existing TACs.
    An ongoing survey of taxpayers who visit TACs conducted by the 
Taxpayer Advocacy Panel, an advisory panel that operates pursuant to 
the Federal Advisory Committee Act, should provide valuable information 
regarding whether TACs are meeting taxpayer needs. This is the first 
survey that asks taxpayers who were turned away from the TACs what 
assistance they were seeking, and asks taxpayers who were served by the 
TACs whether they received the service they sought. With this data, the 
IRS can begin to determine whether it is offering sufficient assistance 
or whether it needs to expand both the nature and amount of its service 
offerings to meet taxpayer needs.
    My goal is to work with the IRS as it evaluates the current 
placement of the TACs. The IRS needs to ensure that TACs are located in 
areas where taxpayers need and can use the services offered. By 
evaluating the location of the current 401 TACs, the IRS can identify 
areas in which moving a TAC may make it more convenient for taxpayers. 
Additionally, we may identify areas where the IRS should consider 
adding a TAC.
    The Facilitated Self-Assistance Model (FSM) represents an important 
step forward as the IRS expands its efforts to deliver services 
electronically. FSM is designed to assist taxpayers who have indicated 
a willingness to use alternate service channels, such as the Internet 
and the telephone. If a taxpayer comes into a TAC to obtain a form and 
the TAC does not have the form in stock, FSM will allow the taxpayer to 
use one of the computer terminals provided and, with the assistance of 
a TAC employee, to print out the form he needs. In the future, the same 
taxpayer may wish to return to the TAC to obtain a form, or he may now 
feel comfortable navigating irs.gov to print out a copy of the form on 
his own. FSM will also provide additional information about taxpayer 
needs. In addition to conducting surveys of taxpayers who use the FSM 
work stations, the IRS will be able to monitor taxpayers as they 
navigate irs.gov. This information will identify areas where the 
website can be improved to make it easier for taxpayers to use. This 
type of real world testing is critical to improving irs.gov and making 
it more taxpayer-friendly.
    I do not view FSM as a replacement for traditional face-to-face 
services provided in a TAC. Rather, I view FSM as a complement to 
existing TAC services. If the FSM pilot proves successful and the IRS 
is given the additional taxpayer service funding it needs, I am hopeful 
that workstations will be installed in all TAC offices. By rolling out 
FSM, our goal is to help some taxpayers become more comfortable using 
online and telephone alternatives. FSM has the potential to save both 
taxpayers and the IRS time and costs.
    Question. As your report observes, ``Until [these] barriers to 
Internet access can be addressed, eliminating the option of being able 
to call or visit the IRS means that these taxpayers would not be able 
to use the IRS website for the service they received, increasing the 
burden for these taxpayers to comply with their tax obligations.'' How 
serious is your concern? What are the implications?
    Answer. My concerns are very serious. As I have stated previously, 
the overriding mission of the IRS should be to increase voluntary 
compliance. The IRS should make it as easy as possible for taxpayers to 
comply with the tax laws. As the IRS looks to move more taxpayers 
toward using electronic service delivery options such as the Internet, 
the IRS must consider why some taxpayers cannot use the Internet. One 
way this can be accomplished is through the current Facilitated Self 
Assistance pilot in the TACs. By observing how taxpayers use irs.gov to 
obtain needed services, the IRS can potentially identify barriers to 
using the Internet and modify irs.gov in order to help taxpayers 
overcome these barriers.
    While continued research into the barriers to using electronic 
services is necessary, it is also critical that the IRS continue to 
maintain telephone and face-to-face services for taxpayers who are 
unable or unwilling to use electronic services. The IRS cannot reduce 
or eliminate existing service delivery methods until research 
demonstrates that the available services are meeting the needs of all 
taxpayers. Moreover, it is my belief that there are many tax issues 
that cannot be resolved through electronic communication. That is, the 
conversation between the IRS employee and the taxpayer, whether on the 
phone or in person, is part of the resolution process. Thus, I cannot 
now envision a time when it would be appropriate for the IRS to 
eliminate or sharply curtail the availability of face-to-face services 
for taxpayers who seek them.
                                 ______
                                 
               Questions Submitted by Senator Ben Nelson
    Question. What amount of the fiscal year 2008 appropriation does 
the IRS plan to devote to the PDC program? (Or, as fiscal year 2008 
appropriations are as-of-yet unknown, how much has the IRS budgeted for 
administration of the PDC program in fiscal year 2008?)
    Answer. The IRS estimates that the PDC initiative will cost $7.35 
million in fiscal year 2008.\1\ However, this number does not include 
indirect costs such as the staffing the Taxpayer Advocate Service is 
devoting to oversight and casework arising from the PDC initiative. 
Moreover, the IRS reports that it will have spent about $71 million in 
startup and maintenance costs by the end of fiscal year 2007, again 
excluding indirect costs. As a result, the IRS projects that the 
initiative at this point has lost money and will not break even until 
April 2008.\2\ It is not clear why the IRS is investing so much in an 
initiative that promises to return relatively little and that raises so 
many concerns regarding taxpayer rights, especially when the IRS could 
invest the same amount of money in its Automated Collection System 
(ACS) and generate a greater return on its investment.
---------------------------------------------------------------------------
    \1\ Internal Revenue Service, Filing and Payment Compliance 
Advisory Council (May 1, 2007) at 15.
    \2\ Data furnished by the IRS Filing and Payment Compliance 
Modernization Project Office (June 2007).
---------------------------------------------------------------------------
    Question. If the IRS is prevented from using any appropriated funds 
to administer the program, how will the IRS allocate the appropriations 
which otherwise would have gone to the PDC program?
    Answer. If Congress prohibits the IRS from administering the PDC 
initiative, the IRS could apply its resources to ACS, whose employees 
perform work most analogous to the PDCs. In fact, ACS would likely 
generate a much greater return than the PDC initiative if provided the 
additional funding. For instance, it is estimated that the PDC 
initiative will cost $71 million on startup and ongoing maintenance 
expenses through fiscal year 2007.\3\ If this $71 million were 
allocated to ACS, the Office of the Taxpayer Advocate has estimated 
that the IRS could bring in $1.4 billion, as compared to the $19.5 
million brought in by the PDC initiative to date.\4\ Even if the cost 
of the PDC initiative significantly decreases, as the IRS projects, the 
IRS would still likely be better off spending the PDC program costs on 
hiring more collection personnel. For example, if the IRS applied the 
$7.35 million (which is the PDC initiative's estimated cost for the 
referral unit, oversight unit, program office, contractors, and MITS 
for fiscal year 2008) to ACS, the IRS could collect about $146 
million.\5\ By contrast, the IRS PDC initiative is projected to bring 
in $88 million in gross revenue for fiscal year 2008.
---------------------------------------------------------------------------
    \3\ Internal Revenue Service, Filing and Payment Compliance 
Advisory Council (May 1, 2007) at 15. These estimated costs include 
startup and ongoing maintenance from the PDC Project Office, oversight, 
administration, and IT costs from fiscal year 2004 projected through 
fiscal year 2007. These estimated costs do not include infrastructure 
assessments for any MITS costs or costs associated with TAS oversight 
or casework arising from the PDC initiative.
    \4\ The dollars spent on the PDC initiative could instead have been 
used to fund new ACS employees. We computed the fully loaded cost of an 
average ACS employee at about $75,000 (assuming GS-8, step 5). Based on 
IRS expenditures of $71 million, the number of new ACS employees that 
could have been funded by the PDC initiative (about 942) was multiplied 
by the current average dollars collected by an ACS employee per year 
(about $1.49 million) to estimate the revenue that could be collected 
by ACS in one year.
    \5\ Internal Revenue Service, Filing and Payment Compliance 
Advisory Council (May 1, 2007) at 15.
---------------------------------------------------------------------------
    Question. What is the estimate of the return on investment in terms 
of revenue collected from the alternative use of appropriated funds as 
mentioned in question 1 above? How does this compare to projections for 
fiscal year 2008 collections under the PDC program?
    Answer. It is clear that the IRS can collect these liabilities more 
efficiently and effectively. In fact, the IRS openly acknowledges it 
can do better.\6\ The Private Collection Agencies (PCAs) get a four 
dollar return for every one dollar IRS invests.\7\ By contrast, IRS ACS 
personnel obtain an average return of $20 for every one dollar IRS 
invests in collecting tax liabilities. From the September 2006 
inception of the PDC program through April 19, 2007, the PCAs collected 
$19.5 million in gross revenue. As noted, however, if the $71 million 
invested in the PDC initiative were instead invested in ACS, the IRS 
could bring in about $1.4 billion. Not only can the IRS get a better 
return, but IRS employees, although not perfect, receive significantly 
more training concerning taxpayer rights and are better equipped to 
work with taxpayers on resolving their tax debts.\8\
---------------------------------------------------------------------------
    \6\ Testimony of Commissioner of Internal Revenue, Mark W. Everson, 
House Committee on Appropriations: Subcommittee on Transportation, 
Treasury, Housing and Urban Development, and the District of Columbia, 
Fiscal Year 2007 Appropriations for the Internal Revenue Service (March 
29, 2006).
    \7\ Testimony of United States Treasury Secretary, John Snow, in an 
exchange with Senator Robert C. Byrd, Senate Committee on 
Appropriations: Subcommittee on Transportation, Treasury and General 
Government, Hearing on Fiscal Year 2004 Appropriations for the Treasury 
Department, May 20, 2003.
    \8\ TAS also produced video training, including a 20-minute 
presentation by the National Taxpayer Advocate and a two-hour 
discussion by TAS personnel, that is required to be taken by all PCA 
employees about TAS, taxpayer rights, low income taxpayer clinics 
(LITCs), and procedures for referring TAS cases.
---------------------------------------------------------------------------
    Question. If the PDC were repealed or de-funded, is there a 
detailed proposal, including cost and timeline estimates, to replicate 
the PDC within the IRS, or an alterative plan to collect the 
``inventory'' of cases or the debt currently slated to be collected via 
the PDC?
    Answer. If the PDC initiative is repealed, there are a variety of 
areas in which the IRS could invest that would generate a better return 
and benefit taxpayers. For example, the IRS could invest in ACS, 
including retraining some submission-processing employees whose 
positions are being eliminated due to the expansion of electronic 
filing and the consequent reduction in the need for manual entry of 
data from paper-filed returns. Those employees could work PCA-type 
cases as a stepping stone to more complex collection work. The IRS 
could design a system that would effectively identify the ``next best 
case'' to work and should invest in modernizing its technology. The IRS 
could use the funding to revise or develop collection measures, which 
will accurately identify the true age of its accounts receivable; 
develop realistic measures of collection ``yields'' that accurately 
identify recovery of potentially lost revenue; and improve 
communication to delinquent taxpayers concerning the accrual of 
penalties and interest on collection cases.\9\
---------------------------------------------------------------------------
    \9\ For an in-depth analysis of current IRS collection strategy and 
recommendations for improvement, see National Taxpayer Advocate 2006 
Annual Report to Congress at 80-82.
---------------------------------------------------------------------------
    In addition to funding ACS, there are several alternative areas in 
which the IRS could invest the funds currently being used to oversee 
the PDC initiative. For instance, the IRS has failed to fund the other 
two components of its Filing and Payment Compliance Project (F&PC). 
These components include plans to conduct analysis on a given 
collection case and allow it to be officially routed to the appropriate 
collection unit, whether the IRS automated call sites, IRS campuses, or 
the IRS collection field function. The full impact of this initiative 
is unclear since only the PDC component is funded. But I believe there 
are multiple superior uses for these funds that would produce better 
returns on investment at less risk to taxpayer rights.
    Question. What is the estimate of the return on investment in terms 
of revenue collected from the alternative use of appropriated funds as 
mentioned in question 1a above? How does this compare to projections 
for fiscal year 2008 collections under the PDC program?
    Answer. Overall, the IRS Return on Investment (ROI) is about 4 to 
1. ROI resulting from IRS enforcement programs ranges from $3 to $14 
for every additional $1 invested, depending on the type of enforcement 
activity. For example, labor-intensive activities such as the 
Collection Field Function have lower ROIs, and automated activities 
such as Automated Underreporter have high ROIs. It would be expected 
that the ROI for an ``alternative use of funds'' initiative would be 
consistent with that for enforcement programs and range from 3:1 to 
14:1.
    In fiscal year 2008, we expect the PDC ROI will be between 4.0 to 1 
and 4.3 to 1, once the program is in steady state. We base this 
estimate on fiscal year 2008 gross revenue projections of $86 million 
to $127 million compared to operating costs of approximately $5.84 
million \10\ in IRS costs and the average 18.5 percent payments to the 
PCAs.
---------------------------------------------------------------------------
    \10\ Due to fluctuating costs, there may be additional costs 
incurred that would result in the actual ROI being closer to the low 
end of the range. The $5.84 million does not include MITS Maintenance 
costs which were included in fiscal year 2008 costs ($7.35 million) on 
a prior page.
---------------------------------------------------------------------------

                  ADDITIONAL STATEMENT FOR THE RECORD

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

                          SUBCOMMITTEE RECESS

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




















  FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL 
                               YEAR 2008

                              ----------                              


                        WEDNESDAY, MAY 16, 2007

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

                   SECURITIES AND EXCHANGE COMMISSION

STATEMENT OF HON. CHRISTOPHER COX, CHAIRMAN

                 STATEMENT OF SENATOR RICHARD J. DURBIN

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

                   STATEMENT OF SENATOR WAYNE ALLARD

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

                  SUMMARY STATEMENT OF CHRISTOPHER COX

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

                           PREPARED STATEMENT

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

                   SIMPLIFYING INVESTMENT INFORMATION

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

                         PRIVATIZING SALLIE MAE

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

                            SUDAN DIVESTMENT

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

                        NASD-NYSE CONSOLIDATION

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

                       PROGRAM ASSESSMENT RATINGS

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

                   DECLINE IN IPOS ON U.S. EXCHANGES

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

               RIGHTS AND REMEDIES AVAILABLE TO INVESTORS

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

                   EXPEDITING FAIR FUND DISBURSEMENTS

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

                      VOLUME OF DISCLOSURE REVIEWS

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

                      SCHEME LIABILITY LITIGATION

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

STUDENT LOAN REPAYMENT FOR SECURITIES AND EXCHANGE COMMISSION EMPLOYEES

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

                     ADDITIONAL COMMITTEE QUESTIONS

    Our record will remain open for 10 days if there are any 
written questions to be sent to you from our staff or the 
staffs of the other Senators involved.
    [The following questions were not asked at the hearing, but 
were submitted to the Commission for response subsequent to the 
hearing:]
            Questions Submitted by Senator Richard J. Durbin
                              arbitration
    Question. In response to an inquiry at the hearing, you mentioned 
that a report in The Wall Street Journal that the Commission is 
considering a proposal originally described in the Capital Markets 
Study that would empower corporations to amend their bylaws to mandate 
arbitration of securities fraud class action cases was ``inaccurate'' 
although you did not specify how the article was inaccurate. What 
assurance can you provide the Subcommittee that the SEC is not 
considering any changes regarding arbitration?
    Answer. There is no pending rule or proposal before the Commission 
to allow corporations to mandate arbitration of shareholder claims. 
Corporations should not be able unilaterally to limit the rights of 
investors to sue, and I can assure you that the Commission does not 
plan to advance any proposal that diminishes investor rights.
                         market competitiveness
    Question. Three recently issued reports--the Committee on Capital 
Markets Regulation Report, the McKinsey Report, and a report from the 
U.S. Chamber of Commerce--raise concerns about the competitiveness of 
the U.S. capital markets. These reports concluded that the 
competitiveness of the U.S. markets is being hampered by our 
overzealous regulatory and litigation environment.
    All three reports relied on the same fact to support their claim--
that the U.S. share of the global IPO market dropped between 2000 and 
2006. This statistic, however, is highly misleading. In fact, since the 
implementation of the Sarbanes-Oxley Act, the number of U.S. IPOs has 
risen dramatically. According to a recent article in Barron's, IPOs in 
2006 increased 22 percent over 2005, and 170 percent over 2003. During 
that same period, the number of foreign companies listing in U.S. 
markets and the amount of money they raised here have also increased.
    Furthermore, a recent study by Craig Doidge of the University of 
Toronto and Andrew Karolyi and Rene Stulz of Ohio State University 
found that there remains a significant premium for companies that list 
in the United States, and this premium has not declined in recent 
years, despite recent regulatory developments. The professors also 
found that an exchange listing in New York still continues to provide 
significant benefits to firms.
    These facts confirm that U.S. markets are among the most highly 
competitive in the world, and suggest that we are so competitive 
precisely because of the unmatched protections we provide to our 
investors.
    What is your opinion? Do you believe that a market that provides 
such protection and transparency actually increases competitiveness?
    Answer. Yes. I agree. U.S. markets thrive because of the global 
trust we've earned. That makes the SEC itself a key part of America's 
capital markets that helps secure our global leadership, maintain our 
markets' competitive edge, and secure the benefits of robust capital 
formation for millions of Americans as well as countless people the 
world over. But the SEC can only continue in this role if we constantly 
update our rules, our policies, and our own way of operating to keep 
pace with the increasingly rapid changes in the world of finance that 
we regulate. The new global competition is good in that it tends to 
reduce the cost of capital. But we are working to make sure that that 
competition is not a regulatory competition that lowers standards for 
investor protection and ultimately undercuts America's role as the 
leading capital market in the world.
                    investor fraud targeting seniors
    Question. Chairman Cox, in your prepared statement you discuss the 
SEC's initiatives to combat investor fraud schemes which particularly 
target seniors. I understand that the SEC recently teamed with the 
University of Illinois College of Law and the Federal Reserve Bank of 
Chicago to host a symposium focusing on this issue in Chicago.
    Are there certain schemes that are aimed at older Americans?
    What recommendations do you have for older Americans to better 
guard their retirement funds? What is the SEC doing to inform and 
educate consumers?
    What specific actions has the SEC taken to reduce the prevalence of 
these unscrupulous practices? What remedies have been the most 
effective?
    Answer. It was a great pleasure to be in Chicago on May 18 for the 
Senior Symposium the Commission hosted with the Elder Law Journal of 
the University of Illinois College of Law and the Federal Reserve Bank 
of Chicago. The Symposium featured a distinguished panel of 
representatives from the business, law, regulatory and academic 
communities with significant experience tackling the issues facing 
seniors as they prepare for and enjoy their retirement. The panelists 
discussed how older Americans can protect themselves from investment 
fraud while financially preparing for the future. It was a very 
instructive and successful event.
    As you know, fighting fraud against seniors requires aggressive 
action. That's why last year I launched the SEC's ``Seniors 
Initiative,'' which is designed to better coordinate the work of the 
SEC's various offices and divisions and with state securities 
regulators when it comes to prosecuting and preventing securities fraud 
aimed at swindling senior citizens.
    Educational efforts are an important of the Commission's strategy 
for seniors and we are dedicated to putting better information in their 
hands so they can make informed investment decisions. We are conducting 
a series of seniors events around the country and will hold the second 
Senior's Summit this fall.
    We know that many seniors, and many children and caregivers of 
seniors, use the Internet to search for information on investing. That 
is why we created a section on our website (http://www.sec.gov/
investor/seniors.shtml) aimed specifically at senior investors.
    The information on this website can help seniors fend off high 
pressure sales pitches for legitimate, but arguably unsuitable 
products. After reading our materials on equity-indexed annuities, for 
example, seniors will know to avoid any salesperson claiming that 
individuals ``can't lose money'' in that product. Investors can lose 
money buying an equity-indexed annuity, especially if the investor 
needs to cancel the annuity early.
    In addition to providing critical information on other investments 
commonly marketed to seniors, such as variable annuities, promissory 
notes, and certificates of deposit, the website also provides key 
information about how to detect and avoid fraudulent schemes.
    This is also a top enforcement priority for the SEC. Since many of 
the scams targeted at seniors involve ongoing fraud or Ponzi schemes, 
time is often of the essence--both to stop the ongoing fraud and to 
recover lost investor funds. In these instances, the staff may move 
very quickly and seek emergency relief in the district courts. Once 
emergency relief is obtained and the status quo is preserved to the 
extent possible, the Enforcement staff generally goes through the same 
detailed process it would in any investigation, which include 
interviewing witnesses, requesting and reviewing documents, and taking 
formal testimony.
    The existing statutory penalties provide a broad range of available 
sanctions, including cease-and-desist orders, censures, injunctive 
relief, disgorgement, civil penalties, and industry bars. Moreover, 
civil monetary penalties may be imposed in cases involving repeat 
violations and severe frauds. I believe that the Commission's full 
range of existing remedies allows enough flexibility to ensure that the 
Commission can effectively prosecute cases involving fraud against 
seniors. This is particularly true given the SEC's ability to make 
criminal referrals in the most egregious cases.
               stock option backdating and springloading
    Question. Numerous media accounts in recent months have reported 
that many companies may have bent our securities laws by engaging in 
stock option backdating and springloading as a way to provide senior 
corporate management with manufactured gains.
    Do you view the proliferation of this practice as a serious threat 
to the integrity of the securities laws which you oversee?
    If so, how many cases has the SEC brought in this area in the last 
year?
    Does the SEC need greater enforcement resources to combat 
compensation practices such as these?
    Answer. The SEC's Division of Enforcement is currently 
investigating more than 140 companies for possible fraudulent reporting 
of stock option grants. The companies under investigation are located 
across the country, are of various sizes, and span multiple industry 
sectors. All of the SEC's regional offices are currently involved in 
these investigations.
    Longstanding SEC policy precludes the disclosure of any information 
about these ongoing investigations; however, enforcement actions have 
been filed against former executives of Symbol Technologies, Peregrine, 
Brocade, Comverse Technology, McAfee, Monster Worldwide, TakeTwo 
Interactive Software, Engineered Support Systems, Apple Inc. and 
Mercury Interactive. To date, the Commission has brought enforcement 
cases against 4 issuers and 19 former executives. These cases involved 
alleged misconduct of chief executive officers, general counsels, chief 
financial officers, and other accounting and human resources employees. 
The Department of Justice has also brought parallel criminal actions 
against 10 of the 18 former executives charged by the Commission.
    The SEC has taken many steps to ensure clear, full, and fair 
disclosure about executive compensation, including that relating to 
employee stock options. The revised executive compensation disclosure 
rules the Commission adopted in July 2006 include a number of 
provisions that directly or indirectly address backdating of options. 
For example:
  --A company must now disclose how it determines when it will make 
        equity awards. This will require a company to disclose how, and 
        why, it backdates for its executives.
  --A company must disclose the grant date of equity awards. If the 
        grant date is different than the date on which the board took 
        action, the company must disclose the date of the board's 
        action.
  --A company must disclose the exercise or base price of an option if 
        it is less than the market price of the underlying security on 
        the grant date. If it is less than the market price on the 
        grant date, the company must disclose the market price on the 
        grant date. This disclosure is intended to provide an investor 
        with a complete picture of the true terms of each option award 
        by allowing the investor to compare the grant date market price 
        to the in-the-money exercise price.
  --Further, if the exercise or base price of an option grant is not 
        the closing market price per share on the grant date, a company 
        must describe its methodology for determining the exercise or 
        base price.
    In addition, the Sarbanes-Oxley Act of 2002 tightened up a 
company's obligation to report stock option grants. Before Sarbanes-
Oxley, officers and directors were not required to disclose their 
receipt of stock option grants until after the end of the fiscal year 
in which the transaction took place--which meant that an individual, in 
some cases, had more than a year to disclose a grant. In August 2002, 
the SEC issued rules requiring officers and directors to disclose 
option grants within two business days.
    In combination, these steps are an important contribution to 
preventing backdating abuse. They have effectively eliminated easy 
opportunities for companies to secretly grant options. Companies are 
beginning to file reports with disclosure of executive stock option 
grants in accordance with the Commission's new rules. Staff from the 
Commission's Division of Corporation Finance will selectively review 
these reports for compliance with the new rules, including those 
relating to stock option awards. Where the disclosures indicate 
possible violations of the federal securities laws, appropriate 
referral of the matter will be made to our Division of Enforcement.
                commission approval for settlement talks
    Question. On April 13, 2007, the Washington Post reported that SEC 
had made a change in procedures such that your enforcement lawyers must 
seek approval from the Commission before they begin settlement talks 
that involve fining corporations, including seeking ranges for possible 
fines. It has also been reported that this action may lead to lower 
penalties.
    Please comment on whether this report is accurate and whether you 
believe it will lead to lower penalties and if so, was that its intent?
    Answer. The Commission's procedures for authorizing settlement 
negotiations in cooperate penalties cases are not designed to increase 
or decrease the amount of monetary penalties paid by companies or to 
make penalty payments more or less frequent. Rather, they are intended 
to strengthen the negotiating position of our Enforcement Division in 
settlement negotiations involving corporate penalties and streamline 
the approval process for those cases. The implementation of the 
procedures will be carefully monitored, and the procedures will not be 
continued if they do not achieve these key objectives.
    The process is designed to ensure that the laws are vigorously 
enforced by giving the professional enforcement staff the full backing 
of the Commission in the staff's settlement negotiations.
    The pilot streamlines the settlement process by shortening final 
Commission review and approval when the staff reaches a settlement 
within the range authorized by the Commission.
    The staff may always return to the Commission to recommend a higher 
or lower penalty range if their recommendation changes based on new 
information or a development that occurs during the settlement 
negotiations.
              weaknesses in information security controls
    Question. In carrying out its mission to ensure that securities 
markets are fair, orderly, and efficiently maintained, the SEC relies 
extensively on computerized systems. Integrating effective information 
security controls into a layered control strategy is essential to 
ensure that SEC's financial and sensitive information is protected from 
inadvertent or deliberate misuse, disclosure, or destruction. In fact, 
one of SEC's four strategic goals is ``maximizing the use of SEC 
resources,'' which expressly includes ``enhancing internal controls.''
    A recent GAO study acknowledged that the SEC has made progress 
toward correcting previous weaknesses in information systems security, 
and attributed progress to active engagement by SEC senior management 
in implementing reforms. However, GAO emphasized that despite progress, 
the SEC has not consistently implemented key controls to effectively 
safeguard the confidentiality, integrity, and availability of its 
financial and sensitive information and systems.
    GAO recommends that the SEC Chairman improve the implementation of 
its policies and procedures, control tests and evaluations, and 
remedial action plans as part of its agency-wide information security 
program.
    Chairman Cox, what is the SEC actively doing to implement GAO's 
recommendations to correct information security control weaknesses?
    Answer. The SEC now devotes about 7 percent of the agency's 
information technology budget on technology security--a significantly 
greater share of overall information technology resources than many 
other agencies. Our efforts run the gamut from highly technical 
initiatives such as server configuration management, to equally 
critical but ``softer'' programs such as user awareness training.
    In one major improvement initiative, the SEC has invested over $2 
million during fiscal year 2006 to enhance our core financial 
management system. These upgrades include new hardware and software, as 
well as implementing a more secure database. As part of this upgrade, 
the SEC will continue to make enhancements to business processes and 
automated workflows that will improve internal controls, eliminate 
traditional financial management paper processes, and enhance reporting 
capability and efficiency. Beyond these benefits, the updated hardware 
and software will provide much greater assurance that the system 
complies with modern information security standards.
    We have also taken significant steps to upgrade physical security 
throughout SEC buildings. Specialists have evaluated the structures and 
installed computerized identification card authentication systems, 
cameras, and alarms in key facilities. The number of entrances at our 
data operations center has been reduced. Guards have been redeployed 
and retrained. We have also put in place new technology and changes in 
procedures to restrict access to sensitive rooms on SEC premises, such 
as data centers and network closets.
    We are continuing our efforts to tighten access controls that 
prevent, limit, or identify inappropriate access to data, equipment, 
and facilities. All of these controls are designed to prevent 
unauthorized disclosure, modification, or destruction of sensitive 
information.
    While the SEC has strong access control policies, a number of 
issues identified during the audit were related to inadequate 
compliance with existing agency policies by individuals responsible for 
the system and technical staff. To address this concern, the SEC has 
stepped up educational and enforcement efforts. System owners--
individuals responsible for the system--have been presented with all 
agency information technology policies and have been directed to sign 
documentation showing that they have reviewed those policies. Beyond 
developing an educated population, we are also focused on errors that 
can happen through inattention. To address such issues, the SEC is 
implementing a systemic scanning program administered by teams that are 
organizationally separate from the system owners. System owners will be 
presented with the results of those scans and directed to correct any 
vulnerabilities and mitigate risks on systems that do not comply with 
SEC policies. By implementing a continuous scanning approach, the 
agency expects to achieve dramatic cost savings. These savings can be 
achieved because configurations will be corrected early on, before they 
can have a negative effect on operations. Such practices will also 
reduce the amount of resources and time required to correct problems in 
the future.
    The SEC also is making efforts to address weaknesses in its IT 
``change management'' processes. These are the processes and procedures 
that govern the way that software and other technologies are deployed 
into the SEC's environment. The GAO has recommended a number of 
improvements to ensure that such deployments do not introduce security 
weaknesses, whether inadvertently or as the result of an insider with 
malicious intent. Therefore, we are taking steps to better oversee our 
environment through such measures as weekly change control board 
meetings, better communication between the involved groups, improved 
version management procedures, and an enhanced test environment.
    As Chairman, I am committed to implementing all of the GAO's 
recommendations. I anticipate that we will again see significant 
improvements in our information security posture at the conclusion of 
this year's audit.
              risk-based examinations--targeted activities
    Question. In your budget justification document for fiscal year 
2008, in the section covering the Office of Compliance Inspections and 
Examinations and your risk-based examination program, you explain that 
SEC's resources will be focused on those firms and practices that have 
the greatest potential for violative conduct that can harm investors.
    You state that ``higher-risk activities'' include those that 
``create significant conflicts of interest where compliance policies 
and procedures are insufficient to mitigate those conflicts.''
    Please explain in greater detail what these ``higher risk 
activities'' include, and how you target them.
    Answer. Higher risk activities at adviser, funds, and broker-
dealers include business practices that create significant conflicts of 
interest that, if not monitored and mitigated in some fashion, may 
result in harm to clients or investors, such as: soft dollar 
arrangements; directed brokerage; performance advertising; custody and 
possession of client funds and securities; difficult-to-value 
securities; access to non-public information; and significant personal 
trading by employees of the firm. In examinations of broker-dealers, 
our risk-based focus is on areas such as: compliance with capital 
requirements and operational issues; sales practices including 
suitability, churning, and unauthorized trading; supervision; new 
products; order handling and trading rules; and anti-money laundering 
rules.
    The Office of Compliance Inspections and Examinations (OCIE) has 
implemented a risk-based approach to examinations. OCIE's goal is to 
identify emerging areas of compliance risk, conduct examinations and 
take steps to remedy identified problems. Given the number of firms 
registered with the SEC and the breadth of their operations, the staff 
continues to focus examination resources on those registrants and 
activities where the investing public or market integrity is most at 
risk.
    In recent years, the examination program has enhanced its efforts 
to proactively detect and address potential risks, and provide 
balanced, cost-effective and reasonable oversight of the regulated 
community. Many of these higher risk activities have been identified 
through years of experience with examinations and enforcement 
activities at registered firms. However, we are continually searching 
for areas of risk that are new or unique to the investment management 
community. To assist the staff in identifying risks warranting 
examination follow-up, OCIE utilizes a risk-identification and risk-
assessment methodology. This methodology uses an internal database to 
identify and prioritize risks, consider mitigating and aggravating 
conditions, and recommend regulatory or other actions to be taken to 
remove or mitigate the risks. As part of this risk assessment process, 
examination staff nationwide provide feedback about where risks may 
exist in the industry and to propose possible solutions. This risk-
assessment process is used to identify risks requiring regulatory or 
examination follow-up and to build a culture of risk-assessment within 
the examination program.
    Higher risk activities are targeted primarily through our 
examination process. All of our routine examinations will focus on 
those activities and areas presenting the greatest concern to investors 
(many of which are identified above). In addition, exam staff may 
specifically conduct focused risk targeted examination sweeps to 
determine the extent and interpret emerging risks in the regulated 
community. In such examinations, examiners review risk conditions and 
responsive controls for a particular compliance risk at a sample of 
firms. This approach allows the staff to obtain a more comprehensive 
view of the particular risk, assess the gravity of the risk, evaluate 
the compliance performance of individual firms compared to that of 
their peers, and suggest regulatory solutions. These examinations may 
often identify specific areas of interest and risk that are 
incorporated into our regular examination process.
                                 ______
                                 
              Questions Submitted by Senator Sam Brownback
    Question. As I mentioned in my statement, recent articles in the 
``New York Times,'' ``Wall Street Journal,'' ``Financial Times'' and 
``The Economist'' have all suggested that tenets of Sarbanes-Oxley are 
cause for a decrease in American-listed public companies compared to 
foreign exchanges such as London and Hong Kong, because the Act takes 
away incentives to list on an American exchange. Do you agree with this 
assessment?
    A recent report by McKinsey & Company commissioned by Senator 
Schumer and New York City Mayor Bloomberg found that over the first ten 
months of 2006 U.S. exchanges attracted barely one-third of the share 
of IPOs they captured back in 2001. During that same time, European 
exchanges increased market share by 30 percent and Asian exchanges 
doubled their share. Most importantly, the study found this trend was 
``due to non-U.S. issuers' concerns about compliance with Sarbanes-
Oxley Section 404 and operating in what they see as a complex and 
unpredictable legal and regulatory environment.'' Do you agree with 
these findings? What can we do to stem the flow of companies to foreign 
exchanges?
    Answer. Over the past year, a number of reports have been published 
which advise the SEC and Congress on how to deal with increasingly 
global capital markets. They have offered the Commission and 
policymakers in Congress and the Executive Branch many recommendations. 
These reports, including the report by McKinsey & Company commissioned 
by Senator Schumer and Mayor Bloomberg frequently cite the increase in 
foreign-listed IPOs as cause for concern about the competitiveness of 
U.S. markets, and cite the Sarbanes-Oxley Act as a contributor to 
capital flight from the United States.
    I agree that Sarbanes-Oxley is a factor in the decision of some 
issuers to list overseas. I am comfortable stating this because several 
issuers, underwriters, accountants, and attorneys have shared the 
reasons behind their decisions to list overseas with me and have cited 
SOX as a reason. But despite this kind of unfiltered, episodic 
information much more is at work here. We need to recognize that our 
capital markets are changing at an accelerating pace and that we are 
living in a very dynamic, much more competitive world. There are more 
opportunities to raise money and deeper, more varied pools of capital 
in other countries than ever before. Even if SOX were provably and 
quantifiably a determinant in the increase in foreign market IPOs--and 
sound science does not permit such neat conclusions--the fact is there 
are simply greater competitive challenges than ever before to the 
United States' leading position in the world as the largest, deepest, 
and most liquid markets.
    Our continued global market leadership is not America's birthright. 
We have to constantly earn it. That is true for our private sector and 
it is true for our regulatory system. As regulators, we must constantly 
work to sharpen our competitive edge as well. When it comes to SOX, 
that has meant completely overhauling the expensive, inefficient 
auditing standard that was used to implement section 404. We recently 
repealed it and replaced it with a new standard that is clearly written 
in plain English, is less than half as long, and is risk-based, 
materiality-focused, and scalable for companies of different sizes. We 
expect it to dramatically reduce the costs of SOX 404 compliance.
    That said, the evidence of some high profile foreign IPOs no longer 
listing in the United States may simply be an indication that other 
markets have improved, not that the United States has become 
unattractive. A steady stream of foreign companies continues to tap the 
U.S. markets. In fact, according to Thomson Financial, this year is on 
pace to add the most foreign listings on U.S. exchanges since 1997. It 
was also recently reported that foreign companies accounted for 23.4 
percent of IPO proceeds last year--the highest amount since 1994.
    Question. Chairman Cox, the press has reported that the SEC intends 
to put forward its management guidance in the next few weeks. Can you 
comment on the timeline to putting forth this guidance and the process 
for its adoption?
    Answer. On May 23, 2007, the Commission unanimously approved 
interpretive guidance to help public companies strengthen their 
internal control over financial reporting while reducing unnecessary 
costs, particularly at smaller companies. The new guidance will enhance 
compliance under Section 404 of the Sarbanes-Oxley Act of 2002 by 
focusing company management on the internal controls that best protect 
against the risk of a material financial misstatement. It is currently 
in effect.
    The Commission also approved rule amendments providing that a 
company that performs an evaluation of internal control in accordance 
with the interpretive guidance satisfies the annual evaluation required 
by Exchange Act Rules 13a-15 and 15d-15. The Commission also amended 
its rules to define the term ``material weakness'' as ``a deficiency, 
or combination of deficiencies, in internal control over financial 
reporting, such that there is a reasonable possibility that a material 
misstatement of the company's annual or interim financial statements 
will not be prevented or detected on a timely basis.'' The Commission 
also voted to revise the requirements regarding the auditor's 
attestation report on the effectiveness of internal control over 
financial reporting to more clearly convey that the auditor is not 
evaluating management's evaluation process but is opining directly on 
internal control over financial reporting. These changes, too, are now 
in effect.
    In addition, the SEC in July 2007 repealed the costly Auditing 
Standard No. 2, which had made Sarbanes-Oxley compliance so difficult, 
and replaced it with a completely new standard that is top down, risk-
based, materiality focused, and scalable for companies of all sizes. 
The replacement standard, Auditing Standard No. 5, is now in effect.
    Question. The data shows that smaller public companies have 
experienced a disproportionate burden from Sarbanes-Oxley. Given that 
you are re-writing the rule-book for management, are you going to do 
anything to grant further relief for the non-accelerated filers? Some 
of my colleagues (Sen. Snowe and Sen. Kerry) have called for delayed 
implementation of the Sarbanes-Oxley Section 404 requirements for small 
public firms to ease the burden on complying with the expected new 
auditing standards.
    Answer. The question of further deferral for non-accelerated filers 
is still open. The SEC has, however, already deferred compliance for 
non-accelerated filers four times in an effort to ensure that the 
burden of compliance did not unduly impact smaller companies. The very 
positive result of our determination to phase in 404 for smaller 
companies is that we and they have had the opportunity to field test 
the requirements so that smaller companies have the benefit of learning 
from the experiences of larger firms.
    These experiences have deeply informed the SEC's new Interpretive 
Guidance and the PCAOB's new auditing standard. The continued phased 
implementation will allow smaller firms to start complying with section 
404(a) of SOX starting in 2008, while the first audit under section 
404(b) won't be due until 2009.
    The SEC's new guidance is intended to be of significant help to 
small companies. Completing the implementation of Section 404 is 
important to further enhancing the quality of reporting and increasing 
investor confidence in the fairness and integrity of the securities 
markets. The Commission and the PCAOB will continue our ongoing 
outreach efforts over the coming months to ensure that the changes 
recently made in the implementation of section 404 live up to our 
expectations for a more effective and efficient system for all filers. 
In particular, we will focus on the extent of the expected cost 
reductions for first-time accelerated filers during 2008 under the new 
Auditing Standard No. 5 and our new Interpretive Guidance.
    Question. The majority of the problems with Sarbanes-Oxley have 
been the implementation--not the language itself. What is the SEC going 
to do to ensure that the fixes put forward in its new guidance are 
successfully implemented in order to bring the cost-benefit back into 
alignment?
    Answer. With new guidance that allows management to scale and 
tailor evaluations to focus on what matters most--and with a new 
auditing standard that enables auditors to deliver more cost-effective 
audit services--one final step remains. The SEC and the PCAOB expect a 
change in the behavior of the individuals who are responsible for 
following these new procedures. To that end, the PCAOB's inspection 
program will monitor whether audit firms are implementing the new 
auditing standard in a cost-effective way that is designed to achieve 
the intended results. And the SEC, in our oversight capacity, will 
monitor the effectiveness of the PCAOB's inspections. So both the SEC's 
and the PCAOB's inspectors will be focused on whether audit firms are 
achieving the desired audit and cost efficiencies in the implementation 
of 404. The SEC staff will also conduct an economic analysis--using 
real-world information--to evaluate whether the costs and benefits of 
implementing section 404 are in line with our expectations.
    Question. I understand that, due to concerns about the burdensome 
effects of section 404 of Sarbanes-Oxley, the Chamber of Commerce has 
asked that you delay 404 compliance for smaller public companies. Do 
you plan to delay 404 compliance? How can you limit the burden of 
section 404 on small companies?
    Answer. With respect to the potential for a further delay of 404 
compliance for smaller public companies, see the answer to Question 4, 
above. With respect to other ways that the SEC can reduce the burden of 
section 404 on small companies, we have very recently approved 
Interpretive Guidance recognizes that smaller public companies 
generally have less complex internal control systems than larger public 
companies.\1\ The new Interpretive Guidance is intended to assist 
management of smaller companies in scaling and tailoring their 
evaluation methods and procedures, recognizing that what is necessary 
in a large company may not be appropriate for smaller companies with 
less complex internal controls systems.
---------------------------------------------------------------------------
    \1\ Final Report of the Advisory Committee on Smaller Public 
Companies to the United States Securities and Exchange Commission (Apr. 
23, 2006) at 39-40, (``Advisory Committee Report'') available at http:/
/www.sec.gov/info/smallbus/acspc/acspc-finalreport.pdf.
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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.
---------------------------------------------------------------------------
    \1\ IRS Oversight Board, ``Fiscal Year 2008 IRS Budget 
Recommendation, Special Report,'' at 13 (April 2007).
---------------------------------------------------------------------------
An Ethical, Accountable Nonprofit Community is Essential to Nonprofits' 
        Ability to Improve Lives
    Our country's growing nonprofit community works to improve lives in 
communities across America and around the world. It provides vital 
services in such fields as health, education, social assistance, 
community development, and the arts.
    Crucial to fulfilling our missions is our ability to demonstrate to 
our stakeholders--donors, beneficiaries, volunteers, and policymakers--
that we operate ethically and accountably. Only if we earn and maintain 
their trust will we receive their continued support. Preservation of 
that trust depends upon a combination of vigorous self-regulation by 
charitable organizations and effective enforcement of the law.
    In recent years, media stories have revealed a number of instances 
of abuse by taxpayers using charitable organizations for personal gain 
and individuals claiming excessive contributions. Former IRS 
Commissioner Mark Everson encapsulated this threat in testimony before 
Senate appropriators in April 2005, ``[i]f we do not act expeditiously, 
there is a risk that Americans will lose faith in our nation's 
charitable organizations. If that happens, Americans will stop giving 
and those in need will suffer.'' \2\
---------------------------------------------------------------------------
    \2\ Hearing on Internal Revenue Service Fiscal Year 2006 Budget 
Request Before the Senate Comm. on Appropriations, Subcommittee on 
Transportation, Treasury, the Judiciary, Housing and Urban Development, 
and Related Agencies, 109th Cong. 8 (2005) (statement of Mark W. 
Everson, Commissioner, Internal Revenue Service).
---------------------------------------------------------------------------
    Concerned about the cumulative impact of abuse and convinced of the 
need for better enforcement, in 2004, at the encouragement of the 
Chairman and Ranking Member of the Senate Finance Committee, 
Independent Sector brought together leaders from all corners of the 
nonprofit community to create the Panel on the Nonprofit Sector. The 
Panel was charged with considering and recommending actions to ensure 
that charities and foundations maintain the highest possible ethical 
standards. It submitted its Final Report to Congress and the Nonprofit 
Sector \3\ in June 2005 proposing more than 120 actions to be taken by 
charitable organizations, Congress, and the IRS.
---------------------------------------------------------------------------
    \3\ Panel on the Nonprofit Sector, ``Strengthening Transparency, 
Governance, and Accountability of Charitable Organizations: A Final 
Report to Congress and the Nonprofit Sector,'' available at http://
www.nonprofitpanel.org/final/Panel_Final_Report.pdf (June 2005).
---------------------------------------------------------------------------
    A key recommendation of the Panel is to increase resources 
allocated to the IRS for oversight of charitable organizations as well 
as overall tax enforcement. As noted by the Panel, effective oversight 
of the nonprofit community requires vigorous enforcement of the law. It 
continued, ``without adequate resources for oversight and enforcement, 
those who willfully violate the law will continue to do so with 
impunity.'' \4\
---------------------------------------------------------------------------
    \4\ Id. at 25.
---------------------------------------------------------------------------
    Comptroller General David Walker echoed the Panel's recommendation 
in congressional testimony in 2005: ``Oversight can help sustain public 
faith in the sector and ensure that exempt entities stay true to the 
purposes that justify their tax exemption. It also can help protect the 
entire sector from potential abuses initiated by a small minority.'' 
\5\
---------------------------------------------------------------------------
    \5\ Tax-Exempt Sector--Governance, Transparency, and Oversight are 
Critical For Maintaining Public Trust: Hearing on an Overview of the 
Tax-Exempt Sector Before the House Comm. on Ways and Means, 109th Cong. 
1 (2005) (statement of David M. Walker, Comptroller General of the 
United States, Government Accountability Office).
---------------------------------------------------------------------------
Additional Resources are Needed to Restore and Grow IRS Enforcement 
        Capacity
    Following a dramatic decline in IRS enforcement resources during 
the 1990s, Congress has in recent years enacted targeted increases to 
the IRS budget. We applaud and appreciate these investments, which have 
enabled the IRS to initiate critical investigations into potential 
areas of noncompliance, including political intervention by nonprofits, 
executive compensation practices, and abuses by credit counseling 
agencies.
    However, the IRS's enforcement capacity has not yet fully 
rebounded. As the Government Accountability Office noted in a recent 
statement before this subcommittee, ``[a]lthough IRS has increased 
direct revenue collected through its enforcement programs in recent 
years, enforcement continues to be included on our list of high-risk 
federal programs.'' \6\
---------------------------------------------------------------------------
    \6\ Internal Revenue Service, Assessment of the 2008 Budget Request 
and an Update of 2007 Performance: Hearing on the Department of 
Treasury's Budget Request and Justification for Fiscal Year 2008 Before 
the Senate Comm. on Appropriations Subcommittee on Financial Services 
and General Government, 110th Cong. 1 (2007) (statement of James R. 
White, Director, Strategic Issues, Government Accountability Office and 
David A. Powner, Director, Information Technology Management Issues, 
Government Accountability Office).
---------------------------------------------------------------------------
    IRS enforcement resources have not kept pace with the dynamic 
growth of the nonprofit community. Over the past 20 years, the number 
of charities and foundations has nearly doubled in size, with 
applications for tax-exempt status increasingly steadily. During that 
time period, the number of staff within the IRS Tax Exempt and 
Government Entities Division has remained essentially unchanged.\7\ In 
fiscal year 2006, the most recent year for which data is available, the 
IRS examined 34 percent fewer tax-exempt returns than it did in fiscal 
year 1997.\8\
---------------------------------------------------------------------------
    \7\ Statement of David M. Walker, supra note 5, at 17.
    \8\ Internal Revenue Service, ``Fiscal Year 2006 Enforcement and 
Service Results,'' at 7 (November 20, 2006).
---------------------------------------------------------------------------
    The recent enactment of the Pension Protection Act of 2006 (Public 
Law No. 109-280) has put yet additional pressure on the IRS, making the 
need to strengthen the IRS more urgent. The Pension Protection Act 
(PPA) included what one IRS official has categorized as the most 
``significant, comprehensive legislation'' affecting tax-exempt 
organizations since 1969.\9\ It contained various provisions, many of 
which reflected the recommendations of the Panel on the Nonprofit 
Sector, designed to deter individuals who would use charitable 
organizations for personal benefit and to ensure that donations are 
used for charitable purposes.
---------------------------------------------------------------------------
    \9\ Christopher Quay, IRS Focusing on Forms, Education Issues 
Related to Pension Act, Official Says, Tax Analysts, March 14, 2007, at 
Doc 2007-6377.
---------------------------------------------------------------------------
    Since enactment of PPA, the IRS has issued several pieces of 
guidance implementing and explaining the new law. However, much more 
has yet to be done. For example, PPA mandated that the IRS complete a 
study on supporting organizations and donor-advised funds by August 
2007. The IRS has additionally pledged to develop guidance on a number 
of issues in the coming year as well as to continue efforts to overhaul 
the Form 990, the annual Return of Organization Exempt From Income Tax, 
to reflect new filing requirements enacted as part of PPA as well as 
other much-needed modifications.
    Recognizing the importance of building staff capacity and stronger 
enforcement mechanisms, the Administration requested in its fiscal year 
2008 budget funding to support 12 IRS enforcement initiatives, 
including a program to increase tax-exempt entity compliance. Echoing 
the IRS Oversight Board, we applaud the President's commitment to 
restoring and strengthening the oversight capacity of the IRS. However, 
we urge you to fund the initiatives at the level recommended by the 
Board--$351.4 million, or $105 million above the President's 
request.\10\ Increased funding will better equip the IRS to serve its 
enforcement functions--to ensure nonprofits meet the requirements of 
the tax laws, in particular the new mandates included in PPA, and help 
to protect charitable organizations from unscrupulous individuals 
looking to exploit them for personal gain.
---------------------------------------------------------------------------
    \10\ IRS Oversight Board, supra note 1, at 17-19.
---------------------------------------------------------------------------
Education and Outreach are Needed to Enhance Voluntary Compliance
    As articulated in its guiding principle--``service plus enforcement 
equals compliance''--the IRS will only achieve maximum compliance with 
our nation's tax laws if it balances its oversight activities with a 
strong program of education, outreach, and accessibility.
    Recent increases in the IRS budget have enabled the agency to 
develop myriad new educational tools for charitable organizations, 
including issue-specific teleconferences and web forums; an online 
training workshop, www.stayexempt.org; and numerous fact sheets and 
notifications. As in the enforcement arena, however, the passage of PPA 
makes additional IRS education crucial.
    PPA increased the complexity of laws governing charitable 
organizations. Nonprofits will look to the IRS for explanation and 
guidance as they attempt to comply with these important new mandates. 
Tax practitioners too will turn to the IRS for technical guidance to 
ensure that they accurately and effectively advise their nonprofit 
clients.
    The large number of small organizations within the nonprofit 
community magnifies the need for stronger education. The majority of 
nonprofit organizations are community-based groups, many of which rely 
entirely on voluntary staff. Of the one million 501(c)(3) organizations 
registered with the IRS in 2004, approximately 63 percent had annual 
revenues of less than $25,000 and were not required to file with the 
IRS. Of those obligated to file with the agency, nearly 63 percent 
reported total budgets of less than $200,000.\11\
---------------------------------------------------------------------------
    \11\ Independent Sector analysis of the National Center for 
Charitable Statistics Core Data Files for Public Charities and Private 
Foundations. Analysis run on May 16, 2007. Internal Revenue Service, 
``Internal Revenue Service Data Book, 2006,'' at 56.
---------------------------------------------------------------------------
    PPA mandates a new reporting requirement for the smallest 
organizations, those with annual receipts of less than $25,000. Failure 
to comply for three consecutive years will result in revocation of tax-
exempt status. Oversight alone will not ensure these organizations--
some 600,000 groups, the majority of which do not have access to tax 
and accounting advisers--comply with the law. It will be incumbent upon 
the IRS to find and notify these organizations of their new 
responsibility. The IRS Oversight Board's budget recommendation would 
enable the IRS to meet these service needs--to reach out to and educate 
nonprofit organizations that want to comply with the law but may not 
know how--while balancing its enforcement responsibilities.
                               conclusion
    Following a significant decline in resources, the Internal Revenue 
Service has made great strides toward restoring its tax enforcement 
program while maintaining adequate taxpayer services. This achievement 
is due in large measure to recent investments by Congress. We applaud 
and appreciate these efforts.
    However, we concur with the recommendations of former IRS 
Commissioner Everson, the GAO, and others that additional resources are 
necessary to enable the IRS to continue to ensure effective oversight 
of the charitable sector and enforcement of our tax laws, while also 
maintaining taxpayer service. In order to help preserve and grow public 
trust in the nonprofit community's ability to improve lives and 
strengthen communities, we urge you to fund the IRS in fiscal year 2008 
at the level recommended by the IRS Oversight Board: $11.406 billion.
    We thank you for your consideration of these comments. If you have 
any questions, please feel free to contact Patricia Read, Independent 
Sector's Senior Vice President of Public Policy and Government Affairs, 
by phone at (202) 467-6100 or by email at [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

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