    [House Hearing, 111 Congress]
    [From the U.S. Government Publishing Office]

       FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR 2010

    _______________________________________________________________________

                                    HEARINGS

                                    BEFORE A

                               SUBCOMMITTEE OF THE

                           COMMITTEE ON APPROPRIATIONS

                             HOUSE OF REPRESENTATIVES

                          ONE HUNDRED ELEVENTH CONGRESS
                                  FIRST SESSION
                                    ________
           SUBCOMMITTEE ON FINANCIAL SERVICES AND GENERAL GOVERNMENT
                                 APPROPRIATIONS
                       JOSE E. SERRANO, New York, Chairman
     DEBBIE WASSERMAN SCHULTZ, Florida          JO ANN EMERSON, Missouri
     ROSA L. DeLAURO, Connecticut               JOHN ABNEY CULBERSON, Texas
     CHET EDWARDS, Texas                        MARK STEVEN KIRK, Illinois
     ALLEN BOYD, Florida                        ANDER CRENSHAW, Florida
     CHAKA FATTAH, Pennsylvania
     BARBARA LEE, California
     ADAM SCHIFF, California

     NOTE: Under Committee Rules, Mr. Obey, as Chairman of the Full
    Committee, and Mr. Lewis, as Ranking Minority Member of the Full
    Committee, are authorized to sit as Members of all Subcommittees.
                       David Reich, Bob Bonner, Lee Price,
                        Karyn Kendall, and Andria Oliver,
                               Subcommittee Staff

                                    ________

                                     PART 8
                                                                       Page
     Internal Revenue Service.........................................    1
     Office of Management and Budget..................................   71
     Treasury Department..............................................  115

                                       S

                                    ________

             Printed for the use of the Committee on Appropriations
                                     Part 8

       FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR 2010

       FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR 2010

    _______________________________________________________________________

                                    HEARINGS

                                    BEFORE A

                               SUBCOMMITTEE OF THE

                           COMMITTEE ON APPROPRIATIONS

                             HOUSE OF REPRESENTATIVES

                          ONE HUNDRED ELEVENTH CONGRESS
                                  FIRST SESSION

                                    ________

           SUBCOMMITTEE ON FINANCIAL SERVICES AND GENERAL GOVERNMENT
                                 APPROPRIATIONS
                       JOSE E. SERRANO, New York, Chairman
     DEBBIE WASSERMAN SCHULTZ, Florida
     ROSA L. DeLAURO, Connecticut
     CHET EDWARDS, Texas
     ALLEN BOYD, Florida
     CHAKA FATTAH, Pennsylvania
     BARBARA LEE, California
     ADAM SCHIFF, California            JO ANN EMERSON, Missouri
                                        JOHN ABNEY CULBERSON, Texas
                                        MARK STEVEN KIRK, Illinois
                                        ANDER CRENSHAW, Florida

     NOTE: Under Committee Rules, Mr. Obey, as Chairman of the Full
    Committee, and Mr. Lewis, as Ranking Minority Member of the Full
    Committee, are authorized to sit as Members of all Subcommittees.
                       David Reich, Bob Bonner, Lee Price,
                        Karyn Kendall, and Andria Oliver,
                               Subcommittee Staff

                                    ________

                                     PART 8
                                                                       Page
     Internal Revenue Service.........................................    1
     Office of Management and Budget..................................   71
     Treasury Department..............................................  115

                                       S

                                    ________

                         U.S. GOVERNMENT PRINTING OFFICE
     53-601                     WASHINGTON : 2009

                                      COMMITTEE ON APPROPRIATIONS

                       DAVID R. OBEY, Wisconsin, Chairman

     JOHN P. MURTHA, Pennsylvania
     NORMAN D. DICKS, Washington
     ALAN B. MOLLOHAN, West Virginia
     MARCY KAPTUR, Ohio
     PETER J. VISCLOSKY, Indiana
     NITA M. LOWEY, New York
     JOSE E. SERRANO, New York
     ROSA L. DeLAURO, Connecticut
     JAMES P. MORAN, Virginia
     JOHN W. OLVER, Massachusetts
     ED PASTOR, Arizona
     DAVID E. PRICE, North Carolina
     CHET EDWARDS, Texas
     PATRICK J. KENNEDY, Rhode Island
     MAURICE D. HINCHEY, New York
     LUCILLE ROYBAL-ALLARD, California
     SAM FARR, California
     JESSE L. JACKSON, Jr., Illinois
     CAROLYN C. KILPATRICK, Michigan
     ALLEN BOYD, Florida
     CHAKA FATTAH, Pennsylvania
     STEVEN R. ROTHMAN, New Jersey
     SANFORD D. BISHOP, Jr., Georgia
     MARION BERRY, Arkansas
     BARBARA LEE, California
     ADAM SCHIFF, California
     MICHAEL HONDA, California
     BETTY McCOLLUM, Minnesota
     STEVE ISRAEL, New York
     TIM RYAN, Ohio
     C.A. ``DUTCH'' RUPPERSBERGER,
    Maryland
     BEN CHANDLER, Kentucky
     DEBBIE WASSERMAN SCHULTZ, Florida
     CIRO RODRIGUEZ, Texas
     LINCOLN DAVIS, Tennessee
     JOHN T. SALAZAR, Colorado          JERRY LEWIS, California
                                        C. W. BILL YOUNG, Florida
                                        HAROLD ROGERS, Kentucky
                                        FRANK R. WOLF, Virginia
                                        JACK KINGSTON, Georgia
                                        RODNEY P. FRELINGHUYSEN, New
                                        Jersey
                                        TODD TIAHRT, Kansas
                                        ZACH WAMP, Tennessee
                                        TOM LATHAM, Iowa
                                        ROBERT B. ADERHOLT, Alabama
                                        JO ANN EMERSON, Missouri
                                        KAY GRANGER, Texas
                                        MICHAEL K. SIMPSON, Idaho
                                        JOHN ABNEY CULBERSON, Texas
                                        MARK STEVEN KIRK, Illinois
                                        ANDER CRENSHAW, Florida
                                        DENNIS R. REHBERG, Montana
                                        JOHN R. CARTER, Texas
                                        RODNEY ALEXANDER, Louisiana
                                        KEN CALVERT, California
                                        JO BONNER, Alabama
                                        STEVEN C. LaTOURETTE, Ohio
                                        TOM COLE, Oklahoma

                     Beverly Pheto, Clerk and Staff Director

                                      (ii)

       FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR 2010

                                  ----------

                                                 Tuesday, May 19, 2009.

                            INTERNAL REVENUE SERVICE

                                    WITNESS

    DOUGLAS SHULMAN, COMMISSIONER OF INTERNAL REVENUE
        Mr. Serrano. The subcommittee will come to order. Good
    morning to all. Today the subcommittee meets to discuss the
    Internal Revenue Service and its budget request for fiscal year
    2010.
        The IRS is by far the largest budgetary item within the
    subcommittee's jurisdiction, and the administration's budget
    request for the IRS for fiscal year 2012 is $12.1 billion, an
    increase of $603 million, or 5.2 percent, above 2009.
        We welcome the Commissioner of Internal Revenue, Douglas
    Shulman, back for his second appearance before our
    subcommittee, 2 for 2.
        As we all know, the IRS helps collect 96 percent of the
    Federal Government's revenue, helping to ensure funding for
    every important government function imaginable. Each year the
    IRS processes more than 140 million tax returns. The IRS
    assists millions of taxpayers each year over the phone, at
    walk-in sites, and via the IRS Web site. The IRS does all of
    this while continuing its Business Systems Modernization
    program to modernize the information technology systems that
    make all of this possible.
        The issue of the tax gap; that is, the difference between
    the amount of taxes owed and the amount actually collected, has
    grown in prominence in recent years. The most recent estimate
    of the tax gap is $290 billion, which the IRS Taxpayer Advocate
    has described as a surtax of more than $2,022 per taxpayer to
    subsidize the noncompliance of others.
        I am pleased that the administration has put forward a plan
    to hire additional IRS enforcement personnel to pursue, for
    example, individuals seeking to avoid U.S. taxes by parking
    cash overseas. At the same time, the Taxpayer Advocate has
    noted the recession has brought increased hardship to a great
    many taxpayers of more modest means, rendering many unable to
    pay overdue tax debts.
        The balance between these two priorities, closing the tax
    gap while at the same time exploring special accommodations for
    taxpayers facing economic hardship, is an ongoing issue with
    the IRS.
        We also would like to continue to emphasize my strong
    support for expanding IRS efforts to provide quality services
    for taxpayers. As noted in last year's IRS progress report on
    the Taxpayer Assistance Blueprint, a portion of the tax gap is
    attributable to errors by individual taxpayers, errors that IRS
    service programs should be designed to prevent and correct.
    While volunteer organizations have done terrific work in
    providing free or low cost assistance to taxpayers all across
    the country, volunteers alone cannot be expected to provide
    these important services.
        The importance of IRS services and the continued high
    demand for such services is particularly illustrated by the
    experience of the IRS toll free hotline last year. Because the
    IRS received a higher than expected volume of phone calls with
    questions related to the 2008 economic stimulus checks, the IRS
    did not have the capacity to assist millions of taxpayers in a
    timely manner, though the Commissioner and the IRS are to be
    commended for making every accommodation to assist as many
    taxpayers as possible.
        Commissioner Shulman has served as IRS Commissioner since
    March of last year. Prior to that he served as Vice Chairman of
    the Financial Industry Regulatory Authority. Earlier in his
    career, he served as Senior Policy Advisor and Chief of Staff
    to the National Commission on Restructuring the IRS.
        Commissioner Shulman, thank you very much for your service,
    and we very much look forward to your testimony and to
    discussing the challenges faced by the IRS. And while my
    opening statement does seem critical of some of the work, I
    know that you are really trying to turn this agency around.
        It is just that there are two agencies in this country that
    bring fear into the hearts of people. One is IRS and in some
    neighborhoods it is I-C-E, ICE, the immigration department, and
    the IRS. And both at times have had a reputation for being a
    little rough on folks. And so in our desire to balance things
    out, we know that you play a major role, and our private
    conversations have shown that to me. So I stand ready to assist
    you in every way possible and ready to listen to your testimony
    today.
        And now I turn to a woman who is obviously allergic to the
    IRS.
        Mrs. Emerson. Or something.
        Mr. Serrano. Or something. My colleague and my friend and
    my sister, the ranking member, Ms. Jo Ann Emerson.
        Mrs. Emerson. I thank you. I seem to have gotten an allergy
    once I walked in this room. Thanks so much for being here,
    Commissioner Shulman. I really appreciate it, and I appreciate
    the hard work that you are doing in getting things turned
    around at the IRS. I believe, too, that fairness in our tax
    administration is critical.
        Back in February the IRS Oversight Board released a survey
    indicating that 89 percent of those asked think it is not at
    all acceptable to cheat on their taxes, the highest level ever
    recorded for this question on the survey.
        The tax gap is estimated to be $290 billion, and this
    undermines the idea that everyone is paying their fair share.
    The budget request proposes an enforcement increase of $332
    million to address this gap. While I support increased
    enforcement efforts, I don't believe that you can eliminate the
    tax gap through enforcement alone. The tax system is very
    complex and IRS needs to provide sufficient services to the
    public to help honest taxpayers file their taxes correctly.
        I do agree with the vast majority of Americans that it is
    not at all acceptable to cheat on your taxes, and I will work
    very hard to ensure you have the necessary resources to educate
    consumers on how to comply and have the necessary resources to
    identify those who haven't paid their fair share.
        With the fiscal 2009 deficit approaching $2 trillion in
    deficit spending, expected to continue for the foreseeable
    future, it is real obvious that effective tax administration is
    critical. So we recognize that you are leading the IRS during
    very challenging times.
        I am grateful for your service. I am sure it is not fun
    when people say, hey, what do you do? And you say I run IRS. As
    my dear friend Joe Serrano said, it is one of the most, or at
    least it used to be, one of the most feared agencies. But once
    people meet you, I don't know how they can fear you because I
    think that you are really doing a very good job and appreciate
    so much the work of you, Commissioner, as well as 100,000 IRS
    employees around the country.
        We look forward to hearing your testimony.
        Mr. Serrano. Thank you. Please, we always ask that you keep
    your testimony to 5 minutes, the whole statement will go in the
    record, and this will give us time to grill you to a point
    where you will resign and leave. Only kidding, don't get
    nervous. Please proceed.

                   Opening Statement of Commissioner Shulman

        Mr. Shulman. Thank you, Chairman Serrano, Ranking Member
    Emerson. I appreciate the kind words of support, and I
    appreciate all the support this Committee has given me, and the
    time the two of you personally have spent learning about the
    agency and supporting us.
        I appreciate the opportunity to appear today to talk about
    the President's fiscal year 2010 budget request for the
    Internal Revenue Service. Over the past year I think that the
    agency has demonstrated both performance improvements, as well
    as the ability to be agile and respond quickly to rapidly
    changing situations, particularly the economic downturn.
        This budget, the goal of this budget, is to build on our
    strategic foundations and invest in the Nation's tax system.
    The IRS, and I have talked to both of you about this, must
    excel at both service and enforcement. It is not an either/or
    proposition. This budget will help us to continue along the
    path of continuous improvement around service and enforcement,
    along with the critical underpinnings of those, which are
    technology and our workforce.
        The budget requests an increase of $332 million for
    investments in compliance programs. This includes a robust
    portfolio of enforcement for the International Enforcement
    Initiative that the President, Treasury Secretary, and I
    unveiled on May 4th. I have made international issues a top
    priority of the IRS, and this budget will give us unprecedented
    tools, resources, and people to make sure the overall coverage
    in that area is appropriate.
        We also know that increased resources for compliance
    programs have a direct return on investment. I think that is
    incredibly important in a difficult budget situation and with
    the deficits we have. The initiatives that we have asked for
    will account for $2 billion a year of direct additional revenue
    once they are fully implemented in a couple of years, once we
    staff up and get the programs in place. That doesn't take into
    account the indirect revenue effects. When people know that the
    IRS is watching certain behaviors, it also increases voluntary
    compliance.
        We have also asked for significant resources to make sure
    that we have quality and effective taxpayer service, and we are
    looking for support for our in person, our telephone, and our
    Web based tools for service. We think this is incredibly
    important with a voluntary tax system, making sure that when
    people come to the IRS they get their questions answered.
    Getting their issues resolved is just as important to us as
    bringing in the $2.5 trillion that it takes to run this country
    and as enforcement programs.
        I am also pleased to report that I think this agency has
    really stepped up in implementing the American Recovery and
    Reinvestment Act, known as the stimulus program or the Recovery
    Act. This budget gives us continued resources to implement that
    vital piece of recovery for the economy.
        Let me talk for one minute about the modernization of our
    core account database. I believe that the IRS has consistently
    delivered over the last several years and proven that it can
    run technology programs. This year alone 40 million taxpayers
    were processed through a modern database.
        We have adopted what I think is a much more focused
    strategy going forward. We have gradually shifted course from
    simultaneously developing a database and the software
    applications that plug into that database to a very streamlined
    focus on completing the database first and then working on the
    applications a step behind. I think it is going to be an
    accomplishment in itself to have all the taxpayer accounts on a
    modernized database. It will also position the IRS well for
    future online services and new compliance and enforcement
    systems.
        Let me mention two more things. One is efficiency. This
    budget reflects efficiency savings from increased electronic
    filing and other innovations that we have put in place. Just
    for electronic filing, this budget accounts for a 5-year
    savings of $100 million. So ramping down some of the processing
    sites to account for more electronic filing.
        And finally, I would ask you to pay some attention to the
    legislative proposals that are in our budget, which complement
    the direct expenditures. Three that I will mention quickly: one
    is there is a suite of offshore tax evasion proposals that will
    be very important to us executing our mission. Two, there is a
    proposal to require tax preparers who have a certain volume of
    tax return filings to file electronically. This is quite
    important to us. And three is a proposal that we drop the down
    payment requirement when you are applying for an offer in
    compromise with the IRS, which is someone coming in who is
    usually in a hardship situation. Right now you have to put down
    a 20 percent down payment, which we think can discourage people
    from using offers in compromise. We have a legislative proposal
    to drop that, to increase the use of this program.
        So Mr. Chairman and Ranking Member Emerson, thank you,
    again, for allowing me this opportunity to testify. I very much
    urge the passage of this budget. It is going to give us the
    tools we need to provide high quality taxpayer service, as well
    as a robust enforcement portfolio, and also to invest in our
    technology and our people, which are key underpinnings. I am
    happy to answer any questions that you have.
        [The statement of Mr. Shulman follows:]

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                               ELECTRONIC FILING

        Mr. Serrano. Thank you. As you were speaking, something
    came to mind--I don't know if you mentioned it in your
    testimony--how many people are now filing electronically? What
    is the percentage? Do you know?
        Mr. Shulman. This year we had quite an uptick, we hit the
    90 million mark. To date, that amount has been just under 70
    percent. People who file extensions, though, a lot of times
    come in on paper, so we expect that percentage to drop a little
    bit. But last year we were just around the 60 percent mark. So
    we have seen a big jump this year.
        Mr. Serrano. Now electronically if you don't have a
    checking account or a bank account, what can you do using the
    electronic filing? If you owe, you can still file
    electronically, right?
        Mr. Shulman. Right.
        Mr. Serrano. But if you are getting a refund then you have
    another issue altogether.
        Mr. Shulman. Yes. The best thing for people to do is file
    electronically and get direct deposit. In general, we get
    deposits back in about 5 to 10 days. If you get a paper check,
    it takes longer. We actually are quite interested, this
    Administration is interested and we are interested, in the
    whole issue of the unbanked and people who do not have bank
    accounts. And we have done some innovative programs around
    automatic debit cards and ran a pilot with a bank this year
    around debit cards. We are going to keep exploring that option
    because we have a problem with a lot of people not being banked
    and we have a problem with people getting taken, sometimes,
    using refund anticipation loans. And so we are very interested
    in electronic filing, getting it in to us, getting it into a
    bank account, being part of the whole savings mechanism of the
    whole country.
        Mr. Serrano. I would encourage you to continue to do that.
    Those loans have been a problem, and I think they will continue
    to be a problem unless we stay on top of them.

                              OFFSHORE TAX EVASION

        As you know, earlier this month the President announced a
    major initiative to target businesses and wealthy individuals
    who avoid U.S. taxes by putting their cash overseas. Part of
    the $332 million in enforcement initiatives in the budget
    request would go towards staffing in support of this
    initiative. My question is, in addition to that, other than the
    increased appropriation, is there anything else you need from
    Congress in order to make this initiative work? Because we want
    it to work. We are considering the amount of money, but in
    addition to that is there legislation or anything else that you
    need that has to happen?
        Mr. Shulman. Yes. First, let me say Secretary Geithner and
    the President and the whole Administration has been incredibly
    supportive of our efforts around international tax
    administration, and it is something that the President brought
    to the job with him, a real interest in curbing offshore tax
    abuse.
        The proposal that we announced last week had a set of
    legislative proposals and increased resources for IRS
    enforcement. The resources we have requested are ones that we
    think we can prudently put to work, because every time we go
    and hire new people, we have to take our best people off-line
    to train them. And so keeping current performance while
    investing in the future is a challenge. So the resources needed
    are great.
        There is a suite of international proposals that are part
    of the President's budget, and they were also released in
    detail in the Treasury Green Book last week. The proposals
    vary--some are targeted at deferral of expenses. These are much
    more broad tax policy. There is a set, though, of
    administrative proposals. For example, we count on the banks
    who transfer money in and out to be our eyes and ears, and to
    be good citizens in tax administration. We have a program
    called the Qualified Intermediary Program, in which people
    report information about people who are investing in the U.S.
    or U.S. citizens who have money overseas. There are proposals
    in there to increase those banks' due diligence, to make sure
    if you set up a foreign trust that you are actually not a U.S.
    person. There are pieces in there that make them report their
    worldwide income, and then there are disincentives for any bank
    that does not sign up and agree to give us information; there
    is withholding at the source. Those are critical to our
    enforcement efforts around individuals.
        So that in creating that whole suite of international
    legislative proposals, the IRS had a seat at the table. I was
    intimately involved in those and I really encourage the passage
    of all those. If we don't get, especially, the administrative
    pieces together with our requested enforcement folks, it is
    going to be much harder for us to do our job.
        Mr. Serrano. What kind of cooperation do you get from
    overseas? I mean, is this something that you understand they
    want to work with you on?
        Mr. Shulman. Yes. In the business context, sometimes it is
    a zero sum game. Either one country gets taxes or the others
    get foreign tax credits. And so there are some debates with
    what we call the competent authority process. We have a pretty
    well-defined procedure to work out where someone is paying
    taxes.
        When it comes to individuals, people who are cheating the
    U.S. Government are usually going to be cheating other
    governments, and there is a lot of commonality of interest and
    coordination. Over the last 5 years, we have set up
    international communication and dialogue forums with foreign
    tax administrators and us. We have something called JITSIC,
    which is Joint International Tax Shelter Information Centre,
    where we collocate people. We have a group of the 10 leading
    countries' tax administrators get together informally each
    year, something called the Leeds Castle Group. And we have the
    Forum on Tax Administration, commissioners from 35 countries.
        I believe our international efforts are us doing it alone,
    us using information better, us coordinating with our partners
    overseas. And so I am personally quite invested in that
    coordination. I would say we get good cooperation with most
    countries. We have a lot of information exchange treaties. The
    countries with which we don't have good cooperation and don't
    have treaties, feel a lot of international pressure on them
    right now through the G-20 and through our enforcement efforts
    and others.
        Mr. Serrano. Ms. Emerson.

                             INTERNATIONAL TAX GAP

        Mrs. Emerson. Thank you, Mr. Chairman.
        Let me ask a couple more questions if I could on this
    issue. Of the $3 billion tax gap that exists today, do you know
    what percentage would be attributable to international tax
    evasion schemes?
        Mr. Shulman. We don't. It is very hard to estimate. The tax
    gap research--just to put it in context--a lot of it is
    extrapolated numbers from the 1980s and 1990s, and so these are
    big, broad general numbers. It is generally broken down by
    corporations, individuals, et cetera. A lot of the
    international information we get comes from a return with a
    piece of the return that has an international component and a
    piece that has a domestic component.
        What I will say is there have been some wild estimates
    thrown out by academics with which we certainly don't agree.
    People have talked about $100 billion and other numbers. Those
    numbers are pretty broad numbers that don't have much basis.
    The way you really get these numbers, in a way that we feel
    confident talking about, is through random audits of people and
    corporations that we usually wouldn't do. Usually we do an
    audit when we think there is an issue. We do random audits to
    figure out the difference between what those people should have
    paid but didn't, and go from there. And so there is not a good
    estimate for the international tax gap.
        With that said, with the focus we have put on the
    international tax gap and with the focus the President has put
    on it, I have challenged our research team to get creative
    about quantifying that number.

                        ENFORCEMENT RETURN ON INVESTMENT

        Mrs. Emerson. Do you have--let me ask this a different way.
    Do you believe that just through increased discussion of new
    enforcement mechanisms, if you will, that businesses and
    individuals will change their behaviors and perhaps be less
    likely to engage in tax fraud, internationally specifically?
    But I mean is it enough of a hammer; do we really have to do
    the legislation to back it up?
        Mr. Shulman. Well, I think there is clearly direct revenue.
    We send people out, they bring money in. That is the direct
    revenue effect. The indirect revenue effect that I was
    referring to in my oral testimony is really about when people
    know we are watching certain segments and they become more
    compliant.
        I think for many years some people have felt relatively
    safe taking these risks, and some financial institutions have
    marketed, ``come hide your assets over here, the IRS won't find
    them.'' And so I think we need to back up our words and have a
    comprehensive program to keep going after and finding people
    who are hiding assets overseas.
        What I will tell you is that it is my belief that during
    the last year this net is tightening, we are finding more
    people. We also have a voluntary disclosure program which, if
    people come in and voluntarily--truly voluntarily, not because
    they know we are about to knock on their door--they can avoid
    going to jail, because a lot of these people are criminally
    evading taxes. We have seen a significant uptick in our
    voluntary disclosure program. And so I think we are going to
    need to stay at it. Frankly, us just having more people without
    some of the legislative pieces that I talked about, like the
    Qualified Intermediary Program, like withholding at the source
    if you don't report income, will significantly water down our
    efforts.

                    COOPERATION WITH ENTITIES ON ENFORCEMENT

        Mrs. Emerson. Let me ask you one last question with regard
    to this. Back in February an international bank headquartered
    overseas entered into a deferred prosecution agreement in which
    they admitted to helping U.S. taxpayers hide income from you
    all, the IRS. Tell me what process you used to get that bank to
    agree to do that so in turn they would end up--you know, as
    part of the agreement they would end up helping us in the
    United States identify people who were in fact hiding income?
        Mr. Shulman. Yes. So first let me just state, any specific
    taxpayer I can't talk about.
        Mrs. Emerson. Right, right.
        Mr. Shulman. And the matter you are talking about is one in
    which the criminal settlement has been done.
        Mrs. Emerson. Right.
        Mr. Shulman. But there is ongoing civil litigation. So the
    Justice Department has asked me not to speak specifically about
    that. But let me talk in broad terms. We have informants who
    come in. Part of your voluntary disclosure and not going to
    jail is telling us who your advisers were and others. When we
    find out there are institutions facilitating or selling
    offshore tax accounts, we will then go after both individuals
    who are evading taxes, and institutions that are facilitating
    them. And we have got a range of tools to do that. We have a
    very close relationship with the Justice Department. They are
    committed because this whole Administration is committed to
    combating offshore tax evasion, and so there are criminal
    tools. There is settlement potential like you are talking
    about, and then there is us continuing to pursue the
    individuals.
        I always like to make clear, and my staff reminds me of it
    often, that there is a lot of leverage going after institutions
    because you get big swaths of taxpayers. But at the end of the
    day, it is each citizen's and taxpayer's responsibility to pay
    their taxes dollars, so we will continue to pursue both.
        Mrs. Emerson. I appreciate that. Thank you, Mr. Chairman.

                        PARTICIPANTS IN OFFSHORE EVASION

        Mr. Serrano. Another thought comes to mind, I know you
    can't tell us individuals' names or corporations, but what kind
    of individual or group hides money overseas to avoid taxes? Is
    it underworld people, is it individual taxpayers or
    corporations or all of the above?
        Mr. Shulman. I would split it up--I think of offshore tax
    evasion and offshore tax non-compliance in two very distinct
    categories. One is individuals and one is corporations, and we
    have different problems and different programs for both of
    them.
        With individuals you have legal source income issues, which
    is where I make money legally, but then I go hide it overseas
    and don't pay taxes on it. There is also illegal source income:
    people who are doing things illegally here and pushing the
    income overseas. We pursue both, criminally and civilly.
        With corporations, I think it is more as the world becomes
    more globalized, some of the statistics are startling. In 1990
    there were 3,000 global multinational corporations in the U.S.;
    today there are 63,000. And there are a lot of very honest
    taxpaying citizens and there is a lot of very legal tax
    planning going on. What I tell people is if you are going to
    push the envelope, you are usually going to do it where there
    is complexity. We have seen that in our capital markets, from
    the world I come from, in some of the derivatives. And you see
    the same thing in tax administration. And so corporations are
    pushing intangibles, like patents, overseas. We need to make
    sure they are allocating the expenses and the income to those.
    They are doing cost sharing. And people who want to push the
    envelope and push into gray areas will do it in the
    international arena and with global capital flows.
        And so what we are doing in the corporate arena is making
    sure we can match the sophisticated lawyers and accountants and
    advisers that people have, and we are going to try to keep
    people who are within the gray zone on the right side of the
    law and not pushing the envelope, to make sure they are not
    overpaying their taxes, but they are not underpaying their
    taxes to the U.S.
        Mr. Serrano. Thank you. Ms. Lee.
        Ms. Lee. Thank you very much. Good to see you and thank you
    for being here and thank you for your testimony.
        Mr. Shulman. Thank you.

                     EXECUTIVE COMPENSATION AND TAX EQUITY

        Ms. Lee. Well, I guess I can say the IRS is really a very,
    very important entity now within our government in terms of
    just cracking down on white collar crime, which has been I
    think allowed to just run amok in the last 8 years. I was on
    the Financial Services Committee and watched the whole
    deregulation of the financial services industry take place and
    also had great concern about the skyrocketing pay of the
    executives in the financial services sector. And of course many
    of us believe that it is time now to fix the Tax Code, to stop
    taxpayer subsidies of these outrageous bonuses and compensation
    packages.
        I want to just mention one bill that I have introduced as a
    result of this. That is the Income Equity Act, H.R. 1594. What
    that does is limit the tax deductibility of executive
    compensation packages that are larger than 25 times the annual
    pay of the lowest paid worker in the company.
        Currently, as you know, companies are allowed to deduct up
    to $1 million in wage income to pay their top execs, and
    because of this, noncash executive compensation, which is fully
    deductible under the Tax Code, has really exploded.
        So how do you see the current tax law and how might we
    address this growth of the executive compensation?
        And secondly, do you think that reasonable limits on the
    deductibility of the highest paid employees would bring some of
    the most egregious pay packages down to earth? Do you think we
    need to look at ways to address tax equity at this point?
        Mr. Shulman. Let me say a couple things about your
    questions and comments. One is the Treasury Secretary, I know,
    has been very focused on the dual issues of stabilizing the
    economy during this tough time for the benefit, ultimately, of
    taxpayers, including, sometimes, stabilization of the financial
    services sector, and looking to the future to make sure we have
    a sustainable economy. I would refer you to the President's
    budget and the tax proposals that this Administration has
    submitted to address some of the issues of income inequality
    and some of the issues concerning the gap that has been growing
    between the rich and poor in the country.
        Clearly the President has, through the Making Work Pay
    Credit, tried to get money into people's pockets. Where there
    are limits, it has been to restrict some of the deductions that
    are taken by higher income individuals. So I think this
    Administration is trying to get there. I won't comment on
    executive pay specifically.
        Ms. Lee. Sure. I understand that and I believe this
    administration, the President is moving very assertively in the
    right direction. I also just for the record, Mr. Chairman, want
    to say that taxpayers need to recognize that they are
    subsidizing these huge executive compensation packages by
    allowing the deductibility by these corporations. I mean that
    is a direct subsidy. And so hopefully sooner or later we will
    be able to address this in a very systemic way.

                         TROUBLED ASSET RELIEF PROGRAM

        Let me ask you also with regard to TARP and the TALF
    initiatives as it relates to the IRS. Are you involved in any
    of the accountability mechanisms to make sure that these funds
    which have been sold as assets to any of the Treasury programs,
    like the commercial paper funding facility, are you, is the IRS
    involved in any of this monitoring and accountability effort
    with respect to those funds.
        Mr. Shulman. Beyond our ongoing work that we do with--you
    know, every major corporation in the U.S. has ongoing dialogue
    with the IRS around tax issues. We are not involved
    specifically in accountability.
        Ms. Lee. You are not?
        Mr. Shulman. That is not part of the mandate.
        Ms. Lee. Okay.
        Mr. Shulman. We are not. Philosophically, the IRS tries to
    be nonpartisan, and traditionally has been, and this
    Administration has asked me to be a very nonpartisan,
    nonpolitical institution. You know, we have TARP recipients,
    multiple years of lots of different issues, credits and debits
    on the books. And I instructed our staff to keep doing their
    job, as they always have, so we have long-term stability in tax
    administration.

                              HIRING AND DIVERSITY

        Ms. Lee. And diversity in hiring, how are you in terms of
    your workforce?
        Mr. Shulman. We are very focused. One of the first things I
    did was start the Workforce of Tomorrow Task Force. We, like
    the rest of the Federal Government, have a lot of people
    eligible to retire, some potential turnover. We have a lot more
    turnover in the boom times than you have in bust times. We
    serve every single American and because we serve every American
    and are the face of the government, we have been very focused
    on diversity for a long time. I have been very public with our
    employees. I see having a diverse workforce as far as gender,
    background, race, et cetera, not as only a requirement, but
    also as a strategic imperative for us as we serve all the
    American people.
        Ms. Lee. Thank you very much. Thank you, Mr. Chairman. Let
    me just thank you again, because I know all of our offices have
    many, many constituents who have IRS cases and you know we
    appreciate your response to our case work efforts, also.
        Mr. Shulman. Thank you.
        Mr. Serrano. Yes, we do. Thank you.
        Mr. Boyd.
        Mr. Boyd. Thank you, Mr. Chairman. Commissioner, thank you
    for your service.
        Mr. Shulman. Thank you.

                                   COLLECTION

        Mr. Boyd. I know all of us want the fairest tax system and
    tax administrative agency that we can have. One of the things
    that makes that difficult is the people that do owe or scam a
    system or don't pay it and I know there has been a lot of talk
    about that. I have been really intrigued by this conversation
    over how you collect some of the debts that people owe, and
    particularly on the issue of the ones that the IRS and the
    taxpayer both agree that the taxpayer owes, but because of a
    lack of resources or lack of technology you are unable to
    collect those debts, and there has been some attempt in the
    past to do that in some other ways through the private sector.
        I know that there has recently been a decision by the
    administration to not do that anymore. Can you tell me what the
    analytical basis for that is and talk a little bit about that
    and how we might do better?
        Mr. Shulman. Sure. Look at our whole pipeline. We go out
    and we look at taxpayers. If they have an adjustment made, we
    assess more tax, or sometimes they voluntarily come in, but
    that is just the beginning, Some pay and some don't pay, like
    any place else, and then we have a collection process.
    Collection is a big deal to us and it is obviously where the
    rubber hits the road because in our enforcement efforts, it is
    where we actually bring cash into the government.
        2003 is when this first discussion came up around using
    private debt collectors versus our people--what makes sense,
    what doesn't. And back then we had about $7.3 billion of agreed
    upon debt, which we call potentially collectable inventory. So,
    that is the inventory of debt to collect that we put on the
    shelf because we didn't have the resources. If we sent out a
    collection letter, we needed to make sure we had the necessary
    service and the phone resources to answer that phone call when
    someone calls back. As the Chairman said, not everybody is not
    excited to see the IRS's return address, and so we want to make
    sure we give them good service when they get to us.
        Through our very focused efforts on collection over the
    last 5 years, we have cut that potentially collectible
    inventory in half. The analytics around the private debt
    collectors and why we decided not to renew the contract is,
    one: we ran an apples-to-apples study of agreed upon debt of a
    certain size. And we found that on average, we were bringing in
    three times more dollars for every dollar we spent on our
    people than spent on the private debt collectors.
        Two: in this difficult economic environment, I gave our
    people a lot more authority to waive debt, put things in the
    back of the queue, do an offer in compromise. By statute, the
    private debt collectors didn't have all the tools that our
    people had. And so I wanted to make sure every taxpayer who was
    dealing with someone trying to collect their tax debt had the
    same opportunity for the flexibility of the resources.
        And three: this President has made a multiyear commitment
    to our enforcement efforts.
        I do want to make clear this, obviously, became a
    relatively polarizing and political issue. I made the decision
    based on analytics. I believe that the private sector
    individuals doing the job were not abusive; there weren't
    incentives for abuse, and we could have overseen them just
    fine. It was really that I thought that the dollars we invested
    in our people, in our systems, A: would have a greater return;
    B: that we would get those dollars under this Administration;
    and C: that taxpayers should all have access to the same
    options. It is no fault of the private debt collectors. It is
    by statute. We couldn't give them all the powers of our people,
    and I figured we should run a uniform collection program.
        Mr. Boyd. So it becomes an issue of who will finance the
    debt collection effort. Are we as a Nation, as an agency
    willing to do that? We have not--obviously that was part of the
    problem in the past. We weren't willing to do it and so we went
    out to the private sector to ask them to do it on some sort of
    commission basis, I assume. Is that fair? Are you--based on
    what you said, you sound comfortable that we as a government
    now are willing to finance that collection effort?

                                   COLLECTION

        Mr. Shulman. I guess I would phrase it a little bit
    differently. I would say you need to spend money, regardless,
    to oversee the program, manage the inventory, kick the
    inventory back to the IRS when there is an issue a private debt
    collector can't take care of. And so, I feel comfortable now
    that we are going to fund even more robust collection and we
    are going to be able to do our job even better. Even barring
    that, my analysis is the money we spent on private debt
    collectors was better spent with us doing the programs.
        Again I want to be very clear, I did not participate in the
    demonization on either side of the issue. At the end of the
    day, it is because some of the inherently governmental
    functions that, by statute, the private debt collectors
    couldn't perform we ended the program. I think running a
    uniform program so every taxpayer gets a call with somebody
    who, on the enforcement side, can put a levy on their account,
    which private debt collectors can't, and on the service side
    can actually give them relief when they have a real hardship is
    important. And so philosophically, that is where we landed.

                                 TYPES OF DEBT

        Mr. Boyd. Can you quickly review what some of those numbers
    are, outstanding debts in different categories; for instance,
    the ones that the taxpayer concedes he owes versus some of the
    other numbers?
        Mr. Shulman. Well, I can get you all the numbers, so I
    don't get them wrong, but let me give you a couple of very
    relevant facts. One is, by statute, we have to keep debts on
    our books for 10 years. When you look at all the debt packed
    on, there is no private sector comparison to a 10-year old debt
    for somebody who has gone through multiple jobs and gone
    through bankruptcies; it stays on the books with the IRS. And
    so some of our numbers are inflated. So when you see our
    overall numbers, that is not real money that you go and get.
    Unlike corporations, we can't write it off because we have
    statutory requirements.
        The most relevant number that we track is our potentially
    collectible inventory, and that is what we determined really
    could, potentially, be collected. That amount has decreased
    from 2003. That number was $7.3 billion. It is down to $3.6
    billion. In this budget there is money for us to go after some
    of that debt. And some of it is as simple as using our
    automatic collection system, where we send out a letter to you.
    We won't send out letters to people unless we know we can man
    the phones to answer those questions.
        I would be happy to get you all the statistics. I just
    don't want to get them wrong.
        Mr. Boyd. Thank you. Thank you, Mr. Chairman.
        [The information follows:]

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Mr. Serrano. Thank you. Mr. Culberson.

                                   COLLECTION

        Mr. Culberson. Commissioner, thank you very much for
    coming. Mr. Boyd has already covered the area I really wanted
    to focus in on. From a personal perspective I have always been
    a coauthor and supporter of the fair tax. I hope you don't take
    it personally whenever I talk about we need to I think shift
    tax collection back to the State level, let them collect retail
    sales tax, and send that on to the Federal Government. I am a
    big 10th amendment Jeffersonian. So if I ever talk about
    putting the IRS out of business, I hope you will forgive me. It
    is nothing personal.
        Mr. Shulman. I take very few things personally, especially
    at the witness table.
        Mr. Culberson. It is a matter of deep philosophical
    commitment on my part to try and restore the 10th amendment and
    get back to what Mr. Jefferson and Madison intended.
        Actually you have covered most of areas that I wanted to
    talk about. So I don't have any questions, Mr. Chairman. Thank
    you very much.
        Mr. Serrano. That is a first, a historic moment.

                   STIMULUS AND DECLINES IN CUSTOMER SERVICE

        Commissioner, last year the IRS was tasked with helping to
    administer the stimulus checks in addition to the tax filing
    season duties. Congress appropriated additional funds for this
    purpose, and the IRS implemented both the filing season and the
    stimulus payments successfully, except that the level of
    service on the IRS 1-800 help line declined from 82 percent in
    fiscal year 2007 to 53 percent in fiscal year 2008.
        In addition, as you know, more than $500 million in
    enforcement revenue was not collected as a result of the need
    to shift IRS personnel to customer service related to the
    stimulus checks. Looking back at that experience of last year,
    what might the IRS do to prevent similar problems in the
    future? Could the decline in customer service and the foregone
    enforcement revenue problem have been avoided? Did the IRS
    simply underestimate the volume of phone calls and what, if
    any, changes have been made to IRS internal processes as a
    result of lessons learned by the experience of last year?
        Mr. Shulman. I tell our employees all the time, we were hit
    with stimulus last year, Recovery Act this year. We are working
    with the Department of Education around income verification for
    student loans, all sorts of things. I tell people that we
    execute quite well, which is the good news. The bad news, which
    is also in my view good news, is we are going to be asked to do
    a lot more. And so as you said, we implemented stimulus last
    year on top of regular filing and it wasn't just regular
    filing, it was regular filing with really late, like late
    December, changes to the AMT and other tax laws that had us
    scrambling and behind the 8-ball already.
        Can I give you my perspective on filing season and tell you
    some of the things we are doing differently, to give you a
    sense of phone calls? In 2007, from January 1 to May 1st, we
    had 48 million phone calls come into our toll free line. Last
    year, during the stimulus checks, we had 64 million phone calls
    come through. So from 48 million to 64 million. This year it
    increased again, to 74 million. Part of it is Recovery Act,
    part of it is people truing up stimulus.
        As far as estimating, I have looked at this. I wasn't there
    when legislation and plans were put in place, but I have asked
    the question. The only experience we had were the 2001 stimulus
    checks and 2002, and we didn't get that volume of phone calls.
    So I am not sure what we would have known. Once all the high
    number of calls started coming in, we did a few things that are
    ongoing. One is we have changed our scripts on our phone lines
    to try to direct more people to get automated service and to go
    to the Web. We have worked on just the science of call routing.
        Two is we are investing in the Web. Let me give you an
    example from this year. This year one of the big questions is,
    ``what was my adjusted gross income last year'' because you
    need it for all sorts of Federal aid, but you also need it if
    you are going to true up your stimulus from last year. Because
    we are so serious about information security on our Web site,
    we have an authentication process which includes you having
    your adjusted gross income. We couldn't provide that on the Web
    this year. Next year we are working towards having ``what is my
    AGI?'' on the Web, so you can go in and get that information on
    the Web to push more people to the Web. The other thing we now
    have implemented is estimated wait times for almost all of the
    calls. And so some of that lower level of service is hang-ups.
    So you call in and it says, ``it will be 15 minutes,'' and you
    hang up the phone and call back at a time when there will be
    less of a wait. We don't consider that all bad, because at the
    end of the day we have a limited number of resources and we
    need to make choices around those resources. But we are very
    focused on that.

                          BACKLOG OF PAPER PROCESSING

        The last thing I would say is one of the biggest backlogs
    we had last year was from paper piling up. So amended returns,
    questions from taxpayers, responses to questions we sent out,
    et cetera. We peaked at over 2 million pieces of paper sitting
    there. We usually peak at about a million and we work it down
    to half a million by the end of the year. We, in that area,
    have now created lots of flexibility and cross-training of our
    workforce, so when paper comes in we can triage people on the
    phones, on the paper. Different units that used to be
    specialized can do more things. So we are very focused on this.
        I stay focused. You were talking about level of service,
    which is one thing, phone level of service. I want to be very
    clear. If you have a 60 percent level of service, that does not
    mean 40 percent of people walk away unhappy. Some people hang
    up and some go to the Web. That level of service is just the
    people who actually get through and get their questions
    answered by a live assister.
        I also focus on our American Customer Satisfaction Index
    scores, which have been steadily going up since 2000. So there
    are all of our specific measures, but then the big measure for
    me is when taxpayers are surveyed about their experience with
    the IRS, how they are feeling about it in a service context.
    Those numbers remained flat last year. We are going to have to
    keep working at it and we are very focused on it.
        I don't want you to misinterpret and think we are happy
    with where we were. Any taxpayer who makes a call that doesn't
    get a good, quick response from us, I want to get better. But
    with all the resources, we are going to triage resources and
    make tradeoffs.

                   TRANSACTIONAL RECORDS ACCESS CLEARINGHOUSE

        Mr. Serrano. There has been some information and some of
    this obviously happened before you came on the job, but we want
    you to comment on these anyway. The Transactional Records
    Access Clearinghouse at Syracuse University had some data, and
    for fiscal year 2008 the audit rate for the largest
    corporations, those with assets greater than $250 million, was
    27.4 percent, down from 44.1 percent in fiscal year 2005.
        In addition, according to IRS data reported by the
    Transactional Records Access Clearinghouse at Syracuse
    University, the audit rate for millionaires dropped by at least
    19 percentage points between fiscal year 2007 and fiscal year
    2008. By contrast other categories of individual taxpayers and
    corporations experienced the same or even higher levels of
    audit coverage in fiscal year 2008 compared with fiscal year
    2007.
        Why do you think we are seeing these trends? Why have the
    audit coverage rates for millionaires in the largest
    corporations gone down while other audit coverage rates have
    remained steady or increased? And will the fiscal year 2010
    budget request help to change that disparity?
        Mr. Shulman. I am well aware of the statistics. We dispute,
    and I have gone deep into these numbers, the way that TRAC came
    up with some of those numbers. So, we think some of that is
    just wrong, and then some of it is looking at somewhat unfair
    comparisons.
        We have doubled our coverage rate of large corporations in
    the last 5 years. We have seen a steady trend increase of
    audits of millionaires, or people with income over a million
    dollars, in the last several years, and you are going to see
    those trends continue.
        As Commissioner of Internal Revenue with 100,000 employees
    and a $12 billion budget, I kind of think of myself the way I
    would hope America's CEOs think about themselves: they
    shouldn't be managing quarterly results in snapshots. They
    should be managing long-term trends and where the agency is
    headed.
        The millionaires, that number did not decrease by 19
    percent. There was actually a statistical error that we put out
    the fall before, and so we put the numbers out wrong before and
    everybody knew about this. We were very clear when those
    numbers came out. They came out wrong before I was there, but I
    stand behind them. There was not a 19 percent decline. There
    was a slight decline because the denominator grew. So the
    number of audits was relatively steady but the denominator
    grew.
        Similarly with large corporations, the number of audits was
    steady, but the denominator grew. So that you know the general
    statistics, average taxpayers have about a 1 percent chance of
    being audited. If you have over a million dollars of income,
    you have a 5.51 percent chance of being audited. So we have
    much higher coverage rates of million dollar folks.
        The other thing that contributed, frankly, to some of these
    numbers is continuing to be under continuing resolutions where
    we freeze hiring. People have to cut back, we are not adding
    and filling bodies. In both those years we were under
    continuing resolutions. As head of an agency and seeing what
    that is like this year, I did some things with high income
    audits and international, to continue our hiring and take a
    bet, and saying I was going to cut other places if the
    appropriation wasn't passed, which it was, but that creates
    some issues.
        So, I guess what I would say is the long-term trends are
    going to be continued focus on large corporations, high net
    individuals, flow-through corporations and international. Those
    are my priorities. Those are on enforcement and that is where
    the 2010 budget is giving us more resources. These numbers are
    going to fluctuate in certain years. And as I said before, we
    are hiring a lot of people this year and next year. We are
    going to take some of our best people off to train them. You
    may see fluctuation in numbers as they are training, but our
    long-term investment is to have a trend where we make sure
    wealthy individuals and large corporations, who have really
    benefited from being in the U.S. and from all our rules and
    economy, pay their taxes. We are also going to have coverage in
    all spectrums, so that everybody knows that their neighbor is
    paying taxes if they are paying taxes.

                               USE OF STATISTICS

        Mr. Serrano. In your answer just now in disputing these
    numbers you used the phrase or word ``unfair.'' What was
    unfair?
        Mr. Shulman. Well, we put out enforcement statistics and
    then we put out our statistics of income. Some of those use
    different measures. I mean, we hold the data for all the income
    in the U.S. and for the taxpayers. It is a very important data
    set for this country. I am a big fan of people watching our
    numbers and reporting on our numbers and having a public
    debate. I think that keeps us on our toes and leads to a
    vibrant democracy.
        I think on large corporations we had a slight decline of
    actual audit closures, but most of those large corporations are
    under audit anyway, so we just didn't close out audits. The
    denominator grew. The way I would look at it is, with the
    resources we had, we did as many audits. They chose to look at
    percentages instead, which is what I mean when I say unfair.
    Everyone decides what their headline is going to say. They
    chose to have a different headline. And I think picking the
    period, I think you said 2005 to 2008 was the number that was
    picked.
        Mr. Serrano. Right.
        Mr. Shulman. That may be a correct number or it may not be,
    but we doubled the coverage in the last 5 years. And so one
    trend says we have gone down and one says it has gone up. When
    I used the word ``unfair,'' that is what I was talking about.

               SERVICES FOR LIMITED ENGLISH PROFICIENCY TAXPAYERS

        Mr. Serrano. Thank you. Before I turn it over to Ms.
    Emerson, I want to delve into one area here. Can you tell me
    what is the status of the services you render to limited
    English speaking folks. I know you made some serious progress,
    for instance, in putting together the ``Where's My Refund?''
    feature on the IRS Web site in Spanish. What can you tell me
    about where you are heading? And do you see more and more need
    for these services?
        Mr. Shulman. When we had a chance to talk before, I told
    you, directionally and conceptually, where we are headed in
    service is to move as many people as we can to self-serve on
    the Web. But we will also continue to have a robust suite of
    in-person phones, volunteer sites, grants for low income people
    and for underserved populations. I view the limited English
    proficiency population as often underserved by us. We can
    always do better. We have done a whole set of things, for
    example, around trying to have a Spanish-language Web site,
    having publications translated, making sure when we are working
    in an area of the country that has non-English speaking or
    people for whom English isn't their first language, we are
    staffed with people with appropriate language skills. Our media
    department has a special outreach to non-English media outlets
    around the country.
        So we have had a focus. I am not going to sit here and tell
    you we are as far as we need to go. So we are going to keep
    pushing in that direction on getting as many people on the Web
    as we can. If there are specific targeted populations that need
    to be served, we are going to keep trying to serve them better.
        Mr. Serrano. Thank you. Ms. Emerson.

                             NARCOTICS TRAFFICKING

        Mrs. Emerson. Thank you. I am switching the subject here.
    Back in I guess fiscal year 2009 the IRS Oversight Board
    recommended that Congress provide $24 million above the budget
    request to enhance financial investigations of narcotics
    trafficking organizations.
        Mr. Shulman. Yes.
        Mrs. Emerson. Estimates are that over 7,000 people have
    been murdered in Mexico as a result of the ongoing drug war
    between cartels and Mexican authorities since January 2008, and
    we all know that there has been spillover violence in Georgia,
    Alabama, and Arizona, not to mention all of the drugs that
    enter into the United States, whether it is cocaine,
    methamphetamine, heroin. We have too much of it in my home
    State of Missouri.
        Is the IRS Oversight Board correct, should we dedicate
    additional resources to financial investigations of drug
    traffickers? That is my first question. And then how do you all
    interface or work with the Departments of Homeland Security and
    Justice to address violence? I don't know that you would
    actually do that specifically. And does the IRS typically
    generate a significant amount of enforcement revenue from
    taking down drug trafficking organizations.
        Mr. Shulman. It is a great question. We have a very strong
    Criminal Investigation Division, who, obviously, specialize in
    finance. Taxes is their roots. But I think they are well known
    as, probably, the best forensic accounting criminal
    investigators there are, worldwide.
        We have very close working relationships with the FBI, with
    the Justice Department, with lots of local law enforcement and
    others. And we are brought in, often, when there is a tax
    matter. But our people also assist on nontax matters relating
    to all sorts of criminal activity.
        And so I think this is always just a balance. It is always
    recognizing we are all the Federal Government trying to aim in
    the same direction, but we all have our jobs to do. So there
    has been an ongoing dialogue about how much of IRS agents' time
    is spent on nontax matters, because criminal tax enforcement is
    vital to the tax system. You know, the ultimate hammer is you
    go to jail if you evade paying your taxes in a criminal method;
    so people need to be reminded of that, and we balance that
    time.
        So I have actually kept the number relatively steady. I
    have good relationships with the head of other bureaus that are
    involved in crime, the head of the FBI and others. And we are
    going to pitch in where we can, but recognize we have limited
    resources.
        Regarding the Oversight Board's specific requests, the
    Oversight Board is incredibly thoughtful. I can't speak for the
    Oversight Board, but I interact with them quite a bit. They
    view their job as recommending what we need to do our job
    without the constraints of an overall budget. And obviously the
    Administration has education, health care, energy, the economy,
    lots of things to wrestle with.
        So I am supportive of what we have here. We are going to
    make do. It is very similar to some of the questions about
    service, and our service levels. It is always my job to
    advocate for the agency, get all the resources we need. But in
    doing so, we have got to make choices. And I think the choices
    we have made in this budget are very prudent. I think they are
    ones that are going to lead us to good enforcement, good
    service, good investments in the future.
        Mrs. Emerson. I appreciate that.

                         TROUBLED ASSET RELIEF PROGRAM

        Switching gears yet again, the Special Inspector General
    for the TARP has stated in written testimony, and I will quote:
    ``We stand on the precipice of the largest infusion of
    government funds over the shortest period of time in our
    Nation's history. History teaches us that an outlay of so much
    money in such a short period of time will inevitably attract
    those seeking to profit criminally. If, by percentage terms,
    some of the estimates of fraud in recent government programs
    apply to the TARP programs, we are looking at the potential
    exposure of hundreds of billions of dollars in taxpayer money
    lost to fraud,'' end quote.
        Are you all detailing staff to the Special Inspector
    General to provide experienced financial auditors and examiners
    to support this critical mission, particularly since I know he
    is short-staffed? And secondly, what are the tax implications
    for the banks receiving TARP funds? I mean, how do they report
    the income received from the TARP and the dividends paid to the
    government? And that is more of a process question. I am very
    curious how that happens or how they report that.
        Mr. Shulman. Let me start at the broadest response to this
    and then get to your two specific questions.
        In the broadest sense, I think the President has been very
    clear about this in his speech before Congress, which is there
    is the decision by the Administration that this extraordinary
    economic times needed, a very powerful response. Obviously
    Congress, through a combination of approving the TARP,
    approving the Recovery Act, agreed with that.
        At the same time, there are unprecedented outlays. There is
    going to be leakage, there are going to be mistakes, and there
    is going to be fraud. So what this Administration has tried to
    do is respond appropriately and forcefully and aggressively
    with cash outlays to get the economy moving again, but at the
    same time make sure that we try to account for every dollar
    spent and try to minimize leakage.
        It is not going to be perfect on either end, right? With
    TARP, yes, we detailed people to TARP to help with their
    efforts because we know it is so important to the economy.
    Regarding the tax treatment of TARP funds, we have put out a
    lot of guidance. Some of it is loans, some of it is equity,
    some of it is convertible equity. It is hard to speak in broad
    generalizations because the money has been used in different
    ways. But because the government has been doing innovations, we
    have had to be very clear about our interpretations, and we
    have worked closely with Treasury to make sure that the proper
    tax treatment under the law is what has happened with TARP
    recipients. I would be happy to go through all the details with
    your office.
        Mrs. Emerson. That would be terrific. Thank you very much.
        Thanks, Mr. Chairman.
        Mr. Serrano. Thank you.
        I only have a few more questions.
        Mrs. Emerson. I have a few more, or I can submit them for
    the record, whatever you prefer.
        Mr. Serrano. We will keep him here until 3 o'clock. No, I
    am only kidding.

                          FLEXIBILITIES IN IRS ACTIONS

        Your main role--well, one of your main roles is definitely
    to collect taxes, and we all support that, the fact of that
    mission. But these are difficult economic times, and we read
    daily about people losing their homes, people not being able to
    buy groceries, people not being able to pay tuition. And I am
    sure there are people who at the end of the year owe money, who
    didn't intend to owe money, who didn't do anything improper to
    owe money, but they do. Does the IRS in any way take that into
    consideration, and how do you deal during this very difficult
    time with the fact that there are some people who owe money
    that can't pay it right now?
        Mr. Shulman. That is a great question. I am quite proud of
    the Agency for the way we have responded to this this time.
        Last August and September I sat down with our senior staff
    and said, I think all the experts agree, the people we work
    with, my colleagues at the senior levels of government, that we
    are headed into an uncharted territory with the economic time,
    and it ended up being true, unfortunately. And we said, we are
    going to find taxpayers for the first time who are in
    incredibly difficult, dire straits, making choices between
    paying for their mother's medicine or paying tuition for their
    kid or paying their taxes, and what can we do to respond within
    our administrative authorities? We need to keep in mind the
    tension. More than ever we need to fund the government because
    the government has, through a whole set of circumstances, very
    large deficits, and so we need to collect the money. So if you
    can pay, you have to pay; but if you can't pay, we need to be
    fair and compassionate as an agency.
        We put in place a whole number of programs, shifted some
    resources. One is for small businesses and businesses
    generally, we recognize that expedited refunds would be a
    lifeline for cash with frozen-up credit markets. We actually
    shifted resources to deal with people who are coming in and
    asking for expedited refunds. There is a procedure that allows
    you to do that. So we made sure we were staffed up there.
        We work closely with individuals, especially our collection
    personnel. What I did was raise the limits. The number is not
    public, and we are not going to make it public, but under a
    certain threshold, if you are out doing collection, our
    frontline employees have lots of discretion about what they do
    with people. So we can suspend collection for 6 months to let
    people get through a rough time, and we gave people more
    authority to do that.
        With housing, a lot of times in offering compromise, the
    reason you don't get an offer in compromise is because you have
    home equity. But the way we know you have home equity is we see
    your appraisal, we see your mortgage, we know you have home
    equity. We recognized that the housing market was in dire
    straits, and that actually a lot of these appraisals weren't
    the true value of the home because the value was plummeting so
    rapidly. We set up a specialized unit of real estate
    specialists who work in coordination with realtors'
    associations around the country. So normally we would reject an
    offer in compromise because the documentation didn't show
    decreased home value. Any time an offer in compromise is
    rejected during this period--and it is still ongoing--because
    of home equity, it gets kicked to our specialized unit to have
    a second look.
        We also set up expedited levy release; so if we were
    levying your bank account, and you were released, you would get
    the money a lot quicker. We set up a section on our Web site
    which is called ``What If''--What if I lose my job? What if I
    lose my home? What if I lost one of my jobs? What if my income
    declines?--those kinds of things. All of it is geared towards
    doing right by the American people and being compassionate. We
    deal with every single taxpayer, and they need to have faith in
    their government, but it also helps for just the pure
    collection of taxes.
        We are in this for the long haul, and the last thing we
    want to do is be unfair with someone, have them drop out of the
    system. What we want to do is keep them in the system for the
    long run. We want to make sure we have as much flexibility as
    possible to help them through this difficult dip in the
    economy, where there are people who have been paying their
    taxes their whole life and for the first time can't pay their
    taxes.
        So as an agency we responded to this. We pushed a lot of
    judgment into the hands of our people, and we gave them the
    authority to work with taxpayers during a difficult economic
    time. I think the response has been good. I think we have hit
    the balance right. We are always going to be fine-tuning this
    balance, but it is an example of how we are trying to fine-tune
    this agency so when surprises come at us, we can respond
    rapidly.

                          FLEXIBILITIES IN IRS ACTIONS

        Mr. Serrano. And I am glad you are doing that, because when
    you watch the news, when you read, you see, you hear the horror
    stories of people not being able to pay their mortgage or all
    the other issues that I mentioned before, but you never hear
    about people paying their taxes, because that is always assumed
    that you have to or else, and only a bad person will not pay
    their taxes. But the fact of life is if a person hasn't been
    able to pay their mortgage or their rent for the last 4 or 5
    months, and then owes $2,000 to the IRS through no fault of
    their own, just the math, I mean it happens to all of us, that
    is a tough thing to deal with, whereas paying--as sad as not
    paying the mortgages and the rent, there is nothing illegal
    about that, whereas not paying your taxes, owing taxes, there
    are laws against that; so that just adds to the stress level.
        Mrs. Emerson. Can I add something really quickly?
        Mr. Serrano. Sure.
        Mrs. Emerson. It is interesting particularly how you have
    changed or been a little more flexible on the equity issue in
    the house, because even if there is equity in the house, it
    doesn't mean necessarily that the homeowner would be able to
    qualify during these economic times to even grab out any of
    that equity to pay off. So I appreciate the fact that
    flexibility, which probably has not traditionally been the
    hallmark of the IRS, seems to be an important part of how you
    are working with people who are under terrible stress right
    now.
        Mr. Serrano. I can see the new IRS Web site: ``We Have a
    Heart.''
        Mrs. Emerson. ``We Are Flexible.''
        Mr. Serrano. ``We Are Flexible.''

                               THE IRS WORKFORCE

        I have one more question for you, Commissioner. The
    operating plan for fiscal year 2009 notes that ``as early as
    fiscal year 2010, 20 percent of the total IRS workforce,
    including 30 percent of all IRS managers and 47 percent of IRS
    executives, are eligible to retire. The operating plan further
    notes that 2009 funding will be used to enhance recruiting and
    training programs and help attract, develop, and retain an
    outstanding workforce.'' That is the quote.
        Please describe for us some of the ways in which the IRS is
    preparing to cope with this coming wave of retirements.
        Mr. Shulman. As I mentioned earlier, my view as the leader
    of IRS, is there is nothing more important that I do than focus
    on our workforce. I pulled one of our senior operating
    executives out of the field, had her report to me directly for
    the last year, to focus with our HR department on workforce
    issues. I am a big believer that workforce isn't just an HR
    problem, it is actually a leadership problem. People look to
    their managers and they look up their chain of command to the
    people running the agency for leadership.

                           RECRUITMENT AND RETENTION

        We, like every Federal agency, have this impending
    retirement boom. We are using this recession, in which fewer
    people are retiring because their retirement savings have
    shrunk. A Federal job is actually a great, well-paying, stable
    job, and so some of our attrition numbers have fallen off. But
    we are not going to rest on our laurels, because as the economy
    rebounds, we could have a cliff of retirement. So, people who
    are eligible to retire this year don't retire, the ones who are
    eligible to retire next year don't retire, and then the year
    after, all three of those waves actually decide to retire. And
    so we are laying the groundwork to really invest in the
    workforce of the future.
        One thing we have done is centralized recruiting. As we are
    doing recruiting now for revenue agents, revenue officers, and
    lawyers, we are running it centrally out of a group that is
    reporting to my two Deputy Commissioners, who are involved in
    this every week. I get an update every week. In the past, it
    was very decentralized. So it allows us to leverage hiring, see
    candidates across the whole organization. So we have made this
    an enterprise priority.
        Two, we are focusing on fewer institutions for recruiting.
    Instead of having a scattershot approach to 1,000 colleges and
    universities around the country, without deep relationships, we
    are going to target 100 and have much deeper relationships. We
    want to get to know the heads of the accounting departments,
    the deans of the law schools, the different professors, so that
    we are doing recruiting as we go. And so we are using this
    current hiring wave as an experiment around more focused
    centralized recruiting.
        We are also making senior executives responsible for
    recruiting in geographic areas and developing relationships
    with the schools. If the head of an accounting department goes
    to meet somebody who runs a business unit, it is a much more
    engaging conversation than meeting an HR specialist who just
    does recruiting. And not to denigrate--I mean, we have a great
    HR group and they have an important role to play--but it is a
    partnership role. So we have a lot of focus on recruiting.

                           RECRUITMENT AND RETENTION

        We are also focusing on making the IRS a great place to
    work. And some of the examples of the things we are doing is
    trying to get rid of what I call ``administrivia,'' where
    managers spend more time filling out forms and not as much time
    mentoring and developing people. So we have a very focused
    effort on trying to knock down some of the paperwork burden of
    our frontline managers so that's an attractive job, and so
    people can spend time managing, leading, motivating, coaching,
    and not spending as much time on non-value-added administrative
    work. And my belief is these things kind of build on each
    other.
        So we are also working on just training our leaders and
    managers to be great leaders and managers. We are driving a
    culture and a set of values through the organization that I am
    trying to teach by example, values like respect, continuous
    improvement, valuing diversity, personal accountability. People
    aren't seeing me promote people who don't live up to that set
    of cultural values.
        I am challenging managers and the senior people. You have a
    subject matter expert who maybe doesn't exhibit the long-term
    behavior you want, but those people sometimes get promoted in
    large organizations. We are trying to be very focused on the
    future, because I believe if everyone shows up to work feeling
    respected, feeling they know what their job is, feeling that
    they are rewarded if they hit their goals, feeling that they
    are coached, mentored, it becomes a self-fulfilling prophecy.
    If they don't, the dead weight is moved out. People stay
    longer. People recruit their neighbors to work there, and the
    agency grows and flourishes. So I am very passionate and very
    focused on people issues, as is our whole senior team.

                        TAXES AND PROFESSIONAL BASEBALL

        Mr. Serrano. In closing my part, let me just tell you that
    there is an ongoing joke in the committees I serve on is how
    long before I bring up Puerto Rico or Cuba. But it doesn't fit
    in this hearing. So I will bring up something related that I am
    always curious about.
        You have folks here who come to play baseball, professional
    ballplayers, and they come from other countries. Do the Major
    League teams withhold their taxes just the way all other
    Americans get, or are they on their own with their business
    manager to pay their taxes? And, you know, you have States that
    have these arrangements where if you live in one State and work
    in another, you pay in one, and the other one recognizes the
    fact that you are living here and working there. There is no
    arrangement between countries; right? These millionaires pay in
    both the place where they have a legal residence and where they
    play ball; am I right?
        Mr. Shulman. Is this a baseball question or a tax question?
        Mr. Serrano. A tax question.
        Mr. Shulman. Let me get back to you. I mean, I think you
    have different arrangements with----
        Mr. Serrano. So the question was not as silly as I thought.
        Mr. Shulman. No. I don't want to give you the wrong answer,
    especially around a baseball question.
        Mr. Serrano. Around a millionaire question. See, it always
    causes a problem. Okay. Thank you.

                   SECURITY INFORMATION TECHNOLOGY WEAKNESSES

        Mrs. Emerson. I have two IT questions, and then I will put
    the rest in the record, Mr. Chairman, if you like.
        Over the past several years, GAO and Treasury Inspector
    General for Tax Administration have been critical of the IRS's
    IT security weaknesses, and so I am really very pleased that
    the budget proposes an increase to address that issue.
        Three questions with regard to this: What processes are in
    place to inform taxpayers if their personal information has
    been compromised? Number two, what will the additional $90
    million included in the budget request provide? And number
    three, if this request is funded, and I am assuming it is going
    to be, can we expect the IT security criticisms from the GAO
    and others to be either minimized or eliminated totally?
        Mr. Shulman. I have been very clear that we have a sacred
    trust. The American people send us their financial information,
    and we need to be very focused on information security. I came
    into the job about a year ago, sat down with both GAO and our
    Inspector General, looked at those reports, and directed our
    team to take the findings very seriously. Start telling me what
    budget they need to knock down some of these security
    weaknesses and, pay attention to it and not always prioritize
    new functionality against security weaknesses.
        I will say you are never going to get to zero potential
    security weaknesses, and I will also say these reports have not
    talked about security breaches. They have talked about places
    where they could potentially be. So the American citizen should
    feel very confident that their information is protected at the
    IRS, but as the world changes, as people trying to do bad
    things with computer systems change, we need to stay ahead of
    that curve.
        For the processes for informing people, we have a privacy
    office that is very focused on identifiable information: Social
    Security number, name, dates of birth, the kinds of things you
    can use for identity theft. We have not had incidents of
    leakage out of the IRS in the area of identity theft, but we
    are very focused on that.
        We have a joint operations committee from which, literally,
    every morning I receive an e-mail that shows all sorts of
    physical security, information security issues, et cetera. It
    goes out to all our executives. I receive it and review it
    daily. Any time that there is a potential loss of data--of
    taxpayer data--that could harm a taxpayer, it goes to our head
    of Information Security and Disclosure. There is a committee
    that meets, looks at what the breach is, looks at the Federal
    standards about notification. If there is a need for
    notification, we do notification, and we err on the side of
    caution. So we notify lots of taxpayers that we found a
    security weakness, or a letter went out with your address to
    the wrong person. As we are dealing with 130 million taxpayers,
    mistakes happen, and we send letters out to them so they can
    double-check and make sure things are fine.
        The other thing is we set up an identity theft specialized
    unit last year. It used to be decentralized. Identity theft
    usually comes to the IRS not because you lost your identity
    through the IRS, but because someone steals your identity, and
    then they file a tax return with a fraudulent refund, or you
    are having a hard time getting your return because something
    happens. So we now have special indicators, a whole program to
    work through that issue. Again, when an American citizen has a
    devastating financial situation with identity theft, we want to
    be part of the solution.

                              INFORMATION SECURITY

        Your second question about what we will do, I think it is
    very important and lobbied hard to get the $90 million that we
    put in for security and material weaknesses. It is going to
    knock down not the whole list of everything that the IG and the
    GAO have ever shown, but a lot of the ones that we have decided
    are important.
        One of the most important things that will happen is new
    systems. And on some of the old systems, we are going to put in
    audit logs, because there are always threats from the outside,
    but we have 100,000 employees, so we need to make sure we can
    track what people inside are doing. So a lot of that funding is
    to audit logs and addressing the weaknesses that were in those
    reports.
        As to your last question, what I will tell you is some of
    the long-term investments, such as in modernizing our data
    accounts, will help us to get a fully modernized data system.
    That is, a relational database for taxpayers, to knock out some
    of the material weaknesses that have been ongoing with GAO,
    like tracking accounts receivable at the entity level in our
    general ledger. So, some of that will take more time. This $90
    million won't take care of it all. A lot of things will be
    knocked down.
        I certainly hope that the GAO and the TIGTA will see
    progress, but I can't speak for them. But what I will tell you
    is I believe in a balanced IT portfolio that invests in the
    future, that shores up current systems, and that invests in
    infrastructure. I think before I got here, there was a lot of
    emphasis on modernizing. Modernization is in the eyes of the
    beholder. But I have been very focused, and this budget
    reflects my handprint around a balanced portfolio of technology
    that sustains the good work already done, shores it up, focuses
    on security, builds the new database.

                         BUSINESS SYSTEMS MODERNIZATION

        Mrs. Emerson. The thing that makes me so nervous about
    doing new IT or business modernization systems is just the
    history that we have seen from other departments within the
    government and the billions and billions and billions of
    dollars that have just been wasted. Are you comfortable with
    the processes you have in place to ensure that whichever
    contractor you hire can execute all of the changes that you
    need made, and that you can stay on track with those changes?
        Mr. Shulman. Let me say a couple things about my views on
    technology. One is in my life before this, I have built big
    infrastructure for the securities industry of the country,
    high-speed trading networks. Building big technology is
    difficult. Technology is changing. Expectations of the users
    are changing, American taxpayers' expectations about the
    technology can change. It is also a nonlinear process. You
    don't say, ``right here, for the next 5 years, this is the
    plan,'' because the world changes, and you learn as you go, and
    expectations change as you go.
        So it is usually best to breed technology when you do
    development. Usually it throws away about 30 percent of the
    code. So if you're at a big corporation, the board of directors
    looks at it and says, ``we are going to spend a million
    dollars,'' but about $700,000 of that will actually get
    implemented. That is not $300,000 of waste. That is the cost of
    operations, and that is what it takes to iterate through the
    process.
        Sometimes in government people have bungled it and wasted
    money, and sometimes people have characterized some of the
    throwaway, which is natural in a big IT program, as waste, when
    in reality that is just the way that IT works going forward.
        I am quite confident in the IT leadership. I brought in a
    new Chief Technology Officer who had been Chief Technology
    Officer of Boeing, which had old systems that had to be
    revamped. He had been Chief Technology Officer of EDS. He had
    been Chief Technology Officer of Visa International. That
    person now runs our IT department, oversees contractors. So he
    has been a big contractor at EDS. He knows you need to hold
    people accountable, partner with them appropriately, but not
    absolve your responsibility for oversight.

                         BUSINESS SYSTEMS MODERNIZATION

        We are very focused on having the right combination of
    drive to get it done with tight processes and controls along
    the way. What I have told you privately, and I will say
    publicly, is I believe you put projects in place that you can
    get done on your watch. Success is a combination of the systems
    and the processes and the people, but it is also the leaders
    staying focused on the project. And so the modernization
    portfolio we are putting forward finishes our e-file project,
    which allows the whole 1040 series to be electronically filed
    not on our current standard, but on XML technology that can be
    used by everyone who e-files. So it is a lot more user friendly
    and stable. And the main thing we will get done is our account
    database--the goal is on my watch--which then allows us to
    really move forward into Web services and internal use of data
    for enforcement purposes.
        And so I am confident we are going to stay focused on it.
    My track record is that when I stay focused on it, things get
    done. I never promise that everything is going to be done
    perfectly, but we know that we are asking for money, and we are
    asking for people to believe we can get it done. I think I have
    got as good a team as I have seen in private-sector or
    government, so we have a good chance of getting it done, and we
    will keep running tight processes to maximize the chances of
    good, strong delivery.
        Mrs. Emerson. Hopefully you can serve as an example to the
    rest of government then. Thank you very much.
        Mr. Serrano. Thank you. I will submit the rest of my
    questions for the record.
        You have questions.
        Mrs. Emerson. I have questions I would like to submit as
    well.
        Mr. Serrano. It shall be.

                               Closing Statement

        We thank you for your testimony. We stand ready to assist
    you. We fully understand the role that you play, how important
    it is. I was very appreciative of your comments that the agency
    will be sensitive to the fact that during difficult economic
    times, people who intend to be good citizens that pay their
    taxes run into issues, situations just like they did with their
    mortgage or their rent or the children's tuition. They didn't
    intend to, it just happened that way. And it is very important
    for us to hear that.
        It is important for us also to hear that you will continue
    to reach out to those folks who have limited proficiency in
    English to help them walk through the system and the fact that
    you are reaching out to the taxpayer to try to help them. We
    stand ready to assist you in every way. So we congratulate you
    on that work, and, as I say, we understand how difficult this
    job is, but you seem to continue to want to do it and do it
    right.
        Let the record show, however, that the Commissioner did
    come here unable to answer just one question: How baseball
    players pay and where they pay their taxes. And that is one
    that I think we will get quite a bit of study and analysis.
        But we thank you for your service, and we thank you for
    your testimony here today.
        Mr. Shulman. Thank you.
        Mr. Serrano. The meeting is adjourned.
         QUESTIONS FOR THE RECORD SUBMITTED BY CHAIRMAN JOSE E. SERRANO
                               taxpayer services
        1. With regard to the budget request for Taxpayer Services, the
    overall Taxpayer Services request is one percent below 2009, while the
    Filing and Account Services budget activity, which includes both
    submission processing costs and the cost of running the IRS 1-800 help
    line, among other things, is 2.2 percent below last year. If the IRS
    falls short of its electronic filing goals next year--and submission
    processing costs rise as a result--is there a risk that the IRS will be
    left with insufficient resources to staff the 1-800 help line service,
    and that taxpayer service will suffer as a result?
        2. The fiscal year 2010 IRS budget submission shows that the IRS is
    planning a 71.2 percent Level of Service on the IRS 1-800 help lines
    for fiscal year 2010. This is lower than the 82 percent Level of
    Service achieved in fiscal year 2007. What is the IRS currently doing
    to improve the Level of Service on the phone lines, and why isn't the
    IRS aiming for a higher Level of Service on its phone lines for fiscal
    year 2010? Would a higher appropriation for Taxpayer Services, above
    the budget request, ensure a higher Level of Service on the 1-800 help
    lines?
                  audits of large financial services companies
        3. IRS data, as reported by the Transactional Records Access
    Clearinghouse at Syracuse University, show that only 15% of large
    financial services companies were audited in 2008, compared with 64% of
    all other large corporations. Why are large financial services
    companies less likely than other large companies to be audited? Is the
    IRS budget request for Enforcement designed to help boost the number of
    audits of large financial services companies?
                         business systems modernization
        4. With regard to Business Systems Modernization, I understand the
    IRS is embarking on a new direction with regard to the Customer Account
    Data Engine, the project aimed at modernizing the taxpayer database.
    Please describe for us exactly what BSM schedule changes the IRS is
    envisioning, and why. What was wrong with BSM's previous schedule? Are
    you confident that full modernization is still on track, and that
    delays and cost overruns will be avoided?
                           health coverage tax credit
        5. The American Recovery and Reinvestment Act included changes to
    the Health Coverage Tax Credit program, designed to expand the numbers
    of taxpayers who are eligible to participate in the program. To help
    the IRS handle the increased volume in fiscal years 2009 and 2010, $80
    million in supplemental appropriations was provided to the Health
    Insurance Tax Credit Administration. Does the IRS have a reliable
    estimate at this point as to how many additional taxpayers are
    participating or will participate in this program? Is the $80 million
    in additional supplemental appropriations sufficient to allow the IRS
    to effectively administer this program this year and next year?
        6. The budget request assumes $13.7 million in savings as part of a
    ``Government-wide Reduction for Productivity Improvements.'' Please
    describe the current types of expenditures and inefficiencies in which
    the IRS expects to achieve cost savings. Why are a disproportionate
    amount of these savings--$10.6 million--expected to come from the
    Operations Support account?
                                  audit rates
        7. For each of fiscal years 2007 and 2008, how many correspondence
    audits were conducted of taxpayers with adjusted gross income between
    $100,000 and $200,000?
        8. For each of fiscal years 2007 and 2008, how many face-to-face
    audits were conducted of taxpayers with adjusted gross income between
    $100,000 and $200,000?
        9. For each of fiscal years 2007 and 2008, how many correspondence
    audits were conducted of taxpayers with adjusted gross income greater
    than $200,000?
        10. For each of fiscal years 2007 and 2008, how many face-to-face
    audits were conducted of taxpayers with adjusted gross income greater
    than $200,000?

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                               Wednesday, May 20, 2009.

                        OFFICE OF MANAGEMENT AND BUDGET

                                    WITNESS

    PETER R. ORSZAG, DIRECTOR
        Mr. Serrano. The subcommittee will come to order. We
    apologize for the delay. We were on the House floor voting on
    the credit card bill that had a gun in it. It is very strange;
    I don't know if that means from now on, when you go to an ATM
    machine, you need to be packing.
        Mrs. Emerson. It is just Federal parks, Joe.
        Mr. Serrano. Oh, I see, only for Federal parks.
        We welcome you to our annual hearing with the Office of
    Management and Budget. We again apologize for the delay.
        OMB, of course, plays the lead role in formulating the
    President's budget, which we spend so much time studying and
    debating. On that subject, I would like to say how refreshing
    it is that this year's budget gives the Appropriations
    Committee some fairly realistic numbers to work with rather
    than continuing the previous approach of pretending that we
    don't need to adequately pay for all the important things the
    government does in areas like public safety, education,
    science, and health.
        But while OMB does the Nation's budget, we do OMB's budget,
    which is one of the reasons we are having this hearing today.
        Last year we decided it was time to help OMB out a bit.
    Over the years their funding has not kept up with rising costs,
    and as a result, the size of the OMB staff has been shrinking.
    In the 2009 appropriations bill we tried to help reverse that
    trend by adding money to restore some staff and also to deal
    with problems in OMB's computer system. At today's hearing we
    will be interested in learning how OMB is using those funds.
        Our subcommittee also crosses paths with OMB in the general
    provisions carried out in our bill dealing with matters of
    government-wide policy. For example, one issue that we have
    been concerned about is the rapidly rising volume of government
    contracts as the previous administration increasingly turned to
    private contractors to take over functions previously performed
    by public employees. Some of that activity may have been
    beneficial, but much of it has been wasteful, inefficient, and
    demoralizing to the Federal workforce.
        Further, far too many contracts are being awarded without
    full and open competition. And there has been inadequate
    management and oversight to make sure that contractors actually
    perform and provide good value.
        To help deal with these problems, we have been carrying
    various requirements and restrictions in our annual bill, and
    we are gratified to see that policy change is on the way in the
    executive branch as well. President Obama has asked the OMB
    Director to study various issues regarding Federal procurement
    in cooperation with other senior government officials and to
    make recommendations for change. We look forward to the results
    of that effort.
        OMB also deals with government-wide policy in a number of
    other areas, including the regulatory process, information,
    technology, and statistical policy. We are likely to explore
    some of these areas in the course of this hearing.
        Our witness today is Peter Orszag, who was appointed
    Director of OMB by President Obama. Dr. Orszag is an economist
    by training. During the Clinton administration, he served as
    Special Assistant to the President For Economic Policy and in
    various positions at the Council of Economic Advisors. He has
    been a Senior Fellow and Deputy Director of Economic Studies at
    The Brookings Institution and, most recently, has worked in the
    legislative branch as Director of the Congressional Budget
    Office during '07 and '08.
        Welcome, Dr. Orszag.
        And we really do welcome you to today's hearing. I must say
    that in reading some things about you, I should have been
    impressed, but I was troubled by the fact that while I try to
    run at 7:15 in the morning, you run at 6:00. And you should
    never try to--take advice from Mayor Fenty. Every time I see
    him running or he sees me running, he slows down to make it
    look like I am fast because he knows who handles his budget.
        So if you see me out there, just look like you can't keep
    up with me. I would appreciate that.
        But welcome today. And I turn now to my colleague and
    friend, Jo Ann Emerson, from St. Louis Cardinal territory.
        Mrs. Emerson. St. Louis Cardinal territory it is, but I am
    very pleased, Director Orszag, to know that you are a Toby
    Keith fan, and so am I. As a matter of fact, I recently went to
    one of his concerts with some radio guys from my district. It
    was quite interesting, but it was lots of fun.
        Anyway, I can't begin to tell you how much we appreciate
    the hard work that your staff of, what, just about 500 does,
    and the dedication that all of you have in serving the American
    public. It is not an easy job, and obviously you are always
    made out to be the bad guy--by us appropriators, particularly--
    but nonetheless, thank you. Because of those enormous
    responsibilities that you all have in assisting the President--
    any President, Republican or Democrat--it is very important
    that we give you the tools you need to do your job, and I am
    very appreciative.
        However, I am also, and it would be expected, I think, of
    my party that I am not too excited about the Federal budget for
    fiscal year 2010. I know that the American public knows how
    tough things are, and they also believe, at least my
    constituents believe, in shared sacrifice.
        But I can't tell you--every time I am home they want to
    talk about the budget and the, you know, $1.84 trillion
    projected deficit for 2009 and those deficits well into the
    future. And when I say, well, in the tenth year things will go
    down to, you know, the billions, they look at me and they just
    can't comprehend that.
        So this is worrisome. It is worrisome to me. It is
    worrisome to my very frugal constituents who are not at all
    wealthy. As a matter of fact, I have the 20th poorest district
    in the country. But nonetheless they are very worried, and they
    ask me all the time, Where are we borrowing this money from,
    China or Saudi Arabia, even sovereign wealth funds. So I am
    worried that this public borrowing will crowd out investment in
    the private sector, which could potentially slow recovery.
        They are asking me who is going to ultimately pay for this
    borrowing; is it our children, our grandchildren, or their
    grandchildren? And what will this budget do to the country's
    long-term health? Are any tough funding choices being made?
        And I know it is not easy. So while we may not agree on all
    of the budget policies, I really do recognize the challenges
    that you all face, and I hope that you know that we want to
    work as closely and as collaboratively as we possibly can.
        So thanks so much for being here.
        Mr. Serrano. Thank you.
        Just for the record, she mentioned 20th. I represent the
    poorest congressional district in the Nation, located within
    the richest city on Earth, within walking distance of the
    wealthiest congressional district in the Nation, which is the
    East Side of Manhattan. My constituents don't like to get into
    that either, but they know that spending money on education and
    health care and making their lives a little better is a good
    expenditure. So they are as frugal as anybody else, but they
    also know that government can't stay totally away from their
    future.
        We once again thank you. We ask you to keep your testimony
    down to 5 minutes. Your full statement will go in the record
    and that will give us time to grill you to death before us
    today.
        Mr. Orszag. Thank you very much, Mr. Chairman, Mrs.
    Emerson, members of the committee.
        Actually, before I begin, let me just say two things
    briefly. One is with regard to running. I did make the mistake
    of going running with Mayor Fenty and realized after 2 or 3
    minutes my sole objective was not to come in last because they
    are way too fast.
        In September, I will be attending the Toby Keith concert at
    the Nissan Pavilion. So maybe we can get together to go out and
    listen to Mr. Keith.
        Thank you very much for having me here today. We did
    important work together with regard to the Recovery Act to get
    the economy back on the path towards economic growth, and there
    is much more to be done.
        The fiscal year 2010 budget, overall, is intended to move
    the economy, help push it out of the worst recession that we
    have experienced since the Great Depression and bring down
    medium-term and long-term deficits. We do that by investing in
    key areas like in education and clean energy, and in--
    especially with regard to the fiscal path that we are on, I
    have said repeatedly that the most important thing we can do is
    bring down health care costs. If health care costs over the
    next four decades grow at the same rate as they did over the
    past four, Medicare and Medicaid will go from 5 percent of the
    economy today to 20 percent by 2050. That is unsustainable and
    that needs to be changed, and changing that has to be at heart
    of our health care effort this year, working with you.
        I could go on about education and clean energy, but perhaps
    we can leave that for the question-and-answer period and just
    turn to the work that OMB does.
        One of the things that we are trying to accomplish is
    putting a significant emphasis on evidence-based policy making,
    looking at specifically what works and what doesn't. I was
    particularly heartened by the fact that the Coalition for
    Evidence-Based Policy recently commended the administration for
    emphasizing evidence in making our decisions; and I would be
    happy to talk about, for example in education, the way that we
    are trying to reorient some of the programs that have been
    demonstrated not to work as well towards those that do to get
    as much as we can from taxpayer dollars.
        Part of what we are trying to do also involves managing the
    Federal Government better. The President has put forward and
    nominated Jeff Zients as his first Chief Performance Officer
    and Deputy Director for Management at the Office of Management
    and Budget. If he is confirmed, he will lead the overall
    administration effort in trying to make government work better.
    And that has multiple components; a key component is improving
    and motivating the quality of the Federal workforce.
        This morning I attended the award ceremony for the best
    places to work in the Federal Government. I was very pleased
    that OMB and CBO, they actually tied for third, which is good.
    We are going to look to beat the tie next year.
        But there is much that can be done to promote the Federal
    workforce, because that is at the heart of what we are trying
    to do. And that speaks in part to contracting, it speaks to
    acquisitions. It is very difficult to get anything done in
    government without a high-performing workforce.
        So we have a robust agenda to try to shorten the hiring
    process, provide better training, provide better mentoring,
    provide better incentives for high performance, working with
    John Berry, who heads up the Office of Personnel Management.
        There are other components to the management agenda which I
    could speak to also, but let me, in my brief remaining time,
    turn to OMB itself.
        OMB could not succeed without its cadre of highly qualified
    and just outstanding staff, but in recent decades OMB has taken
    on more responsibilities including in financial management,
    procurement oversight, E-Government, to name just a few.
        Staffing levels have actually steadily declined. If you
    look at around 1990, for example, OMB staffing was in excess of
    600 budgeted full-time equivalent staff. By 2008, budgeted
    staffing levels had fallen to 489, and this was during a time
    in which OMB was asked to do more.
        As the chairman already noted, in the fiscal year 2009
    budget appropriations, Congress recognized that staffing at OMB
    had become insufficient; and we appreciate the funding that you
    provided that will allow us to raise our staffing to 528 FTEs,
    still significantly below where we were 20 years ago, but
    nonetheless above where things had been in 2008, for example.
        Largely as a result of annualizing the cost of those
    additional FTEs, the President's budget requests $92.7 million
    for OMB in fiscal year 2010. So I thank the subcommittee for
    having funded the additional staffing in the fiscal year 2009
    appropriations cycle. I believe it represents an important
    investment in being able to make government work better and
    look for more effective programs; and I look forward to working
    with you. I hope you will fund the 2010 request at the level
    that we have submitted.
        And I would welcome your questions. Thank you.
        Mr. Serrano. Well, thank you.
        In 2009, this subcommittee provided OMB with a $10 million
    increase, a decision made before you took office. What
    priorities have you set for using that increase and why? To the
    extent you are using the funds for increased staff, what
    functions within OMB would the additional staff be assigned to?
        Mr. Orszag. The majority of the increase does go for
    additional staff, as I just mentioned. That reflects the
    decline that had occurred, and I think, coming into OMB, a
    clear need for additional staff in some areas.
        One of the changes we made, for example, was to create--
    recreate what had existed during the 1990s, which is a PAD, or
    Principal Associate Director for Health Care, given the
    importance of health care policy not only this year but on an
    ongoing basis. So one important area is health care.
        But, in addition, I mentioned Jeff Zients, who will be the
    Deputy Director for Management. We have some additional
    staffing on the management side of things, even though I don't
    like that separation between budget and management. If you just
    look at the org chart, at least, on the management side there
    are additional staffing.
        The majority of the additional funding went for personnel,
    which is not surprising given that roughly 80 percent of OMB's
    overall budget goes for personnel. That is also where we put
    the bulk of the additional resources. But in addition to that,
    there was funding provided for some additional improvements to
    the MAX system, which is the computer system that we use for
    budgeting, and other IT investments including in a--I have to
    say there was a mixed reaction to requiring OMB staff to have
    BlackBerrys so that we could reach them all during--any time of
    the day or night.
        Mr. Serrano. Maybe they can give us their pin number so we
    can reach them.
        So obviously there is going to be an emphasis on the health
    care issue, government-wide actually, but certainly at OMB.
        Mr. Orszag. Absolutely. I would say I am personally
    probably, depending on the week, spending a half to two-thirds
    of my time on health care right now.
        Mr. Serrano. You mentioned MAX system. What else can you
    tell us? How much of the 2009 appropriation are you using for
    that and where are we at?
        Mr. Orszag. Sure.
        Of the 2009--let me just give you--in total, the MAX
    funding for fiscal year 2009 was $4.1 million. There was some
    additional funding that is being provided, $435,000, in fiscal
    year 2009, so that would bring the total to about 4.5.
        Let me just say, there is a strategic question that we are
    working our way through with regard to upgrading and improving
    the MAX system. One of the complaints that I get from OMB staff
    and from agency staff is--involves the operations of the MAX
    system. So we are in the process of evaluating the best way
    forward in improving it.
        Mr. Serrano. Well, our information is that it is over 20
    years old; is that correct?
        Mr. Orszag. It is old, yes. I can't give you the exact
    date. I may be able to get it, but it is something like 20
    years old, yes.
        Mr. Serrano. You buy a computer, and a couple years later
    it is not working properly. So how the heck did you get all
    those numbers? Was that the reason why we were saying
    throughout the year that those numbers were not correct?
        Mr. Orszag. Well, it is an old system. It still works. I
    think the issue is not whether it works or not, but rather how
    cumbersome it is and whether it could be made more efficient.
    And so one of the complaints that is issued is just how long it
    takes to enter things into the MAX system, that it is not as
    effective as it could be in--so it is not a question of sort of
    quality or accuracy. It is more, I think, a question of degree
    of difficulty of inputting and processing the information.
        Mr. Serrano. In addition to your regular budget request
    this year, the President's budget is seeking 1.75 million for a
    Partnership Fund for Program Integrity, which would be
    administered by OMB. What is the purpose of that fund and how
    would it be used?
        And under the partnership proposal it looks like OMB would
    actually be administering a substantial grant program. Is it
    appropriate for OMB to be running programs itself? Does OMB
    have the expertise to do so?
        Mr. Orszag. No. And we won't. So let me try to be clear
    about what this is intended to do and how it would be
    administered.
        There are many government programs that are the joint
    responsibility of the Federal Government and State and local
    governments. Consider Medicaid, for example. The SNAP program,
    which used to be called food stamps, has some joint Federal-
    State roles also in terms of processing applications.
        One of the problems that we have is, because of the lack of
    adequate IT infrastructure in many States, someone applying for
    this program, information about that person, may not be usable
    for some other program. What we are trying to do is see if we
    can become more effective. This is a general theme, making sure
    that the right person gets the right benefit at the right time
    and not otherwise.
        If you are on this system and you don't qualify for this
    benefit, then we need to be able to kind of crosswalk that
    better. And similarly if you are over here and it does look
    like you qualify for this other benefit, we might want to
    notify you of that.
        What we are trying to do through this program is conduct
    some pilot projects that would allow better IT integration
    across different platforms, across different programs. So what
    will happen is, these pilot projects would be administered by
    agencies.
        We will not be administering them. But in the examples I
    was just giving, either HHS or the Department of Agriculture,
    or you can imagine the Department of Labor in other settings,
    administering a grant for a pilot project to see if we can
    better integrate and provide an IT backbone for some of the
    programs that are the joint responsibility of the Federal
    Government and the State government. Our role would just be to
    help evaluate the submissions for those pilots, the sort of
    grant applications, if you will.
        Mr. Serrano. So it would be clear to us that you would not
    be running a grants program as such.
        Mr. Orszag. No. The grants pilot programs--the grant would
    run from a Cabinet agency with a State or locality. We would
    play some role in helping to choose which pilot projects to
    fund.
        Mr. Serrano. Thank you.
        Mrs. Emerson.
        Mrs. Emerson. Thank you, Mr. Chairman.
        I am going to ask you a policy question. I will get to the
    other issues, budget issues afterwards.
        Recently you made three points that health care--on health
    care reform, one, that health care reform would have to be
    deficit-neutral, self-financing, and work to keep the overall
    costs of care low. I think you said, quote, ``You are not going
    to see a deficit increasing health care reform.''
        In the House, I am actually working on several different
    reform measures including a program to initiate tax credits for
    insurance expenditures up to about $17,000 for a family of
    four. And obviously any plan that requires a personal mandate
    for health insurance, with which I agree, or a public option
    that gets the Federal Government into the insurance business,
    with which I don't agree, at least at this moment in time, is
    going to cost the taxpayers money.
        I also appreciate the fact that the various stakeholders in
    the health care system have come to the White House offering
    concessions, which you all ball-park at about $2 trillion, I
    think. I also appreciate the fact that you all have budgeted
    for a down payment on reform of about $634 billion. But I don't
    see that down payment, if you will, being part of a self-
    financing health care reform because the savings aren't
    necessarily going to be taken from the health care system, with
    perhaps the exception of Medicare Advantage.
        So my first question is, why does a self-financing health
    care reform require a $634 billion down payment from the U.S.
    taxpayer, who has seen no reform in the system to this point?
    First question.
        Second, can you tell me how the administration plans to
    control costs in the private sector despite the serious problem
    of medical inflation which, outside the scope of Medicare and
    Medicaid, has a particularly severe effect on America's
    seniors? And if the big pharmaceutical companies and insurance
    giants can afford to voluntarily offer $2 trillion in savings--
    which, to me, should really be about $3 trillion--as a
    consequence of just being asked, doesn't that signal then the
    existence of other meaningful regulatory reforms that could be
    achieved in Medicare and Medicaid?
        So what measures are you all taking to create savings in
    existing government health care programs without cutting
    benefits to citizens and seniors?
        And last, how do you--this is the part that is probably the
    most complex. How do you plan at OMB to measure the savings
    generated by the private sector for Medicare and Medicaid and
    other government programs, whether it is SCHIP or the like, in
    an effort to leverage health care reforms? And how are we going
    to hold the private sector to its commitments?
        I am sorry. There are several questions.
        Mr. Orszag. That is okay. Thank you. Let me try to answer
    that in two steps.
        The first involves whatever happens within the next 5 or 10
    years within the Federal budget. We have been clear that over
    the next 5 or 10 years we are insisting that health care reform
    be deficit-neutral with hard, scorable savings--that is, with
    savings that, for example, CBO would score, including through
    changes to Medicare Advantage, but including through changes in
    reimbursement rates for hospital readmissions and home health
    agencies and a whole host of other proposals that we have put
    on the table.
        The second piece involves changes that we call ``game
    changers,'' changes in the way that health care is practiced in
    the United States that are unlikely to be scored by CBO, but
    that are crucial to, A, the long-term fiscal path that we are
    on, and B, that require the involvement of the private sector
    in order to work.
        So what do I mean by that? I mean four things in
    particular.
        And let me back up. We have huge variation across the
    United States in health care costs for a beneficiary that you
    can't explain, based on----
        Mrs. Emerson. Region.
        Mr. Orszag. Across regions, across hospitals within a
    region, across doctors within a hospital, which is perpetuated
    by a lack of specific information about what is best for a
    particular patient, and a payment system that just says always
    do more rather than do better.
        So what do we need to change? We need health information
    technology so that we reduce redundancy and we eliminate the
    need to fill out that form every time you go to a doctor. We
    need more research into what specifically works, so your doctor
    is armed with better information. We need prevention and
    wellness so that we are oriented towards health and not just
    health care. And, by the way, all three of those steps were--
    there was significant progress made in the Recovery Act.
        And, finally, we need changes in financial incentives so
    that hospitals and doctors are not penalized for more effective
    care. That is what happens today. If you have a hospital that
    is really good at avoiding readmissions, for example, they are
    financially penalized relative to some other hospital that is
    not as good as that, which makes no sense.
        So what we are trying to do is in the first case, hard,
    scorable savings; and in the second case, change the set of
    incentives in the way that health care is practiced, so that we
    get to a more efficient system, because there are so many
    indicators that substantial efficiency improvements are
    possible. To do that second piece, you need the private sector
    involved.
        And that was what was so significant, I think, about what
    happened last Monday, which was that you had insurance
    companies, doctors, hospitals, device manufacturers,
    pharmacists saying, Yes, we can get more efficiencies out of
    the health care system. That will be crucial to helping to
    drive down premiums for consumers and sustaining the changes in
    Medicare and Medicaid, because if we just ramp down Medicare
    and Medicaid growth over here and the underlying rate of health
    care costs continue unabated, these changes would not be
    sustainable.
        Mrs. Emerson. With regard to administrative costs for the
    insurance companies, can you actuarially--I mean, do you know
    how much padding is in, on average, the 21 percent overhead
    costs that is claimed today?
        I mean, is there a way to get at that, so that if you have
    insurers saying, We will do a guarantee issue, we will have
    maybe a community rating, blah, blah, blah--all of which will
    help get costs down, because you can expand the number of
    people who are insured; but it is that administrative cost that
    is kind of tough to pinpoint.
        Is there a way to get at that?
        Mr. Orszag. Well, there have been some attempts. The
    McKinsey Global Institute, for example, tried to examine the
    administrative loadings or the administrative costs in our
    system relative to the other systems, to see what the
    differential is.
        One of the complexities, just for whatever it is worth, is,
    many of the things--for example, I mentioned prevention and
    wellness. Some of the things that insurance companies do to
    promote prevention and wellness will count as administrative
    costs in a sense or as nonmedical loss expenditures, which is
    typically what the category of administrative costs include.
        So, there is an example of--I don't know that we would want
    to be discouraging that kind of cost as opposed to unnecessary
    duplication and lack of the complexity in forms and what have
    you.
        So I think that is the challenge. But it is clear that
    there are efficiencies that are possible, which is why the
    insurance association, AHIP, was part of that group last Monday
    and said, ``Yes, we can do better on our internal
    administrative costs.''
        Mrs. Emerson. Well, and even, you know, we have been able
    to get the administrative costs for crop insurance down
    substantially in the last 4 or 5 years. So, I mean, there is
    wiggle room.
        And one final question on this. Is it conceivable or can
    you score--maybe this is a better way of putting it--if, in
    fact, we took all Americans, regardless of whether they are
    Medicare, Medicaid, whether they are dual-eligible, whether
    they are uninsured, underinsured, we took all Americans and put
    them together in a plan like the Federal Employee Health
    Benefits Program and gave options--and, obviously, one would be
    okay for everybody, and then you could buy up--I mean, would
    that not be less expensive overall, perhaps, than having
    different types of programs and creating disparities? Like, if
    you have Medicaid, obviously Medicaid, for a lot of people,
    isn't nearly as good as our basic BlueCross BlueShield. I mean,
    is it possible to even figure out how much something like that
    would cost?
        Mr. Orszag. Yes, it is possible. I mean, there are a couple
    of different dimensions to that. One is whether the individuals
    already have coverage and you are picking up additional costs,
    so there is sort of a displacement effect. The second is
    administrative savings from unifying and getting economies of
    scale into--you know, you put more people into a plan, the cost
    per beneficiary of fixed overhead can be lower.
        Although, the evidence suggests that you reach an efficient
    scale pretty quickly, so it sort of flattens out, and there is
    probably not--at level of the size of things like Medicaid,
    there is probably not very much additional efficiencies that
    are possible.
        Mrs. Emerson. Okay. All right. I appreciate that. Thanks.
        Thanks, Mr. Chairman.
        Mr. Serrano [presiding]. Thank you.
        We will now begin our questioning under the 5-minute rule
    by members of the committee. And we will first go to the
    gentleman from Pennsylvania, Mr. Fattah.
        Mr. Fattah. Thank you, Mr. Director.
        Now, the budget that OMB produced this year was $3.6
    trillion. What was the budget last year? $3.1 trillion?
        Mr. Orszag. Well, actually, it depends exactly how one does
    the calculation. But it was actually, for fiscal year 2009, $4
    trillion, under our proposals. Under current laws, $3.8
    trillion.
        Mr. Fattah. Okay. And, well, you added in the costs for the
    war effort, so you took that off the--rather than go through
    the supplemental route, which became the normal way to proceed,
    those costs are now included in the budget?
        Mr. Orszag. Correct.
        Mr. Fattah. And you also included other items that somehow
    have been listed in supplemental efforts in the past, including
    responses to weather, hurricanes and the like, right? So you
    put those in, and that was preferable because it gives a better
    sense of what the real spending of the needs of the government
    may be, right?
        Mr. Orszag. Correct.
        Mr. Fattah. Now, you also set aside--is it $636 billion for
    health care, this downpayment?
        Mr. Orszag. $635 billion.
        Mr. Fattah. $635 billion. So when this final proposal comes
    forward, you expect that, even if it costs more or costs less,
    that you have at least allotted some dollars to try to phase in
    a health care solution?
        Mr. Orszag. Well, yes. And, in particular, that was
    intended to be a downpayment on whatever the ultimate reform
    looks like. We have been clear, though, that, to the extent
    that the ultimate reform involves any additional costs beyond
    that, they will need to be offset through either savings within
    the health system or revenue from outside the health system.
        Mr. Fattah. Now, inside OMB and your budget, as you
    allocate your 500-plus employees--you talked about the
    percentage of your time focused on health care. What percentage
    of this FTE complement is focused on health care now?
        Mr. Orszag. I will look it up in a second, but it is more
    evenly distributed than my own time. And that is, frankly, the
    way it should be, because we have lots of other things going on
    at the same time. And while I can swing from one area to
    another quickly, it is hard to take a health analyst and put
    them on, you know, the defense budget.
        So the allocation, though, in particular for fiscal year
    2009, on health programs, we have roughly 50 staff. And that
    is, again, pretty evenly deliberated across national security,
    general government, natural resources, education, and then
    there are a few other offices. But in health care we have about
    50 people.
        Mr. Fattah. Now, it may be difficult for you to, as you go
    forward, to rationalize some of the critics--you know, I
    noticed when the $100 million savings was announced, people
    said, ``Well, that is nothing.'' And then you got to the $17
    billion, and they said, ``Well, that is a drop in the bucket.''
    And then the health care announcement last week of $2 trillion
    in savings over 10 years from the various participants, people
    said, ``Well, somehow it is still--you know, we are not on
    target.'' It is kind of a moving target around here.
        But what is important, I think, from the committee's
    standpoint, is to make certain that you have the resources at
    OMB to do the work that you need to do. And your budget calls
    for a small increase, 4 or 5 percent?
        Mr. Orszag. Five percent, yes, sir.
        Mr. Fattah. Five percent. But at the same FTE complement as
    last fiscal year?
        Mr. Orszag. Yes. And, indeed, a bulk, a significant part of
    the requested increase takes--the fiscal year 2009
    appropriations was passed in the middle of the fiscal year, and
    so we need to annualize the costs of the additional FTEs. And
    so a significant chunk of the increase from 2009 to fiscal year
    2010 request reflects that annualization process.
        Mr. Fattah. Right. Well, my only point is that, given the
    effort of the administration on a number of fronts, obviously
    it creates a significant challenge for OMB.
        Mr. Orszag. Yes.
        Mr. Fattah. And, you know, the job of our committee is to
    make sure that you have the resources you need to serve the
    country and to serve the administration in the vital role that
    OMB plays.
        Mr. Orszag. I appreciate that. I would come back again,
    this morning, on the best places to work in the Federal
    Government, we did very well, ranked third overall. But on
    work-family balance, we were not so good. So, you know, the
    folks at OMB are working very hard.
        Mr. Fattah. Well, I want to thank the chairman, but I think
    the chairman's question about your 20-year-old computer system
    illustrates some of the concerns. And as we deal with health
    care and energy and balancing this budget and tax reform, which
    is also on the President's agenda, we want to make sure that
    you have all the resources that are necessary.
        Mr. Orszag. I appreciate that. Thank you.
        Mr. Fattah. And I have one question for the record on one
    of your program integrity efforts around erroneous payments,
    and I will submit that for the record, and I would like to get
    a response.
        Mr. Orszag. Sure, of course. Thank you.
        Mr. Fattah. Thank you.
        Mr. Serrano. Mr. Culberson, the gentleman from Texas.
        Mr. Culberson. Thank you, Mr. Chairman.
        I appreciate your testimony here, Director. And, of course,
    the committee is going to do everything we can to help support
    the work of OMB. But I want to focus, if I could, your
    attention on what David Brooks on Friday in his column called
    approaching financial national suicide.
        In my opinion, the administration is not being realistic.
    And, by the way, I don't play favorites here. I voted against
    $2.3 trillion worth of spending under President Bush. I
    represent his parents. And I have voted against $1.6 trillion
    in spending so far under this administration.
        I am deeply concerned, as Mrs. Emerson's constituents are,
    with the financial path the country is on. And I, frankly,
    don't see the estimates coming out of OMB as being grounded in
    reality. To have, for example, the President's--where did I see
    that? You all's budget this year, I think your term for it was
    that--I am sorry, I don't have it right in front of me, but you
    would refer to the President's budget this year as trying to
    return to being responsible. Yet the deficit that we are
    running is at record levels. It looks like, this year, OMB just
    increased your budget deficit estimate this year to $1.8
    trillion. Estimates are that it is going to stay over a
    trillion dollars for the foreseeable future.
        We, according to David Walker, the comptroller of the
    currency--and I mean this very sincerely--this is not--I mean,
    forget--I have actually quit referring to the political
    parties. I would like to focus on what is fiscally responsible
    and what is fiscally irresponsible. And I really believe that
    we really need a little bit of Dave Ramsey in the way that the
    Federal Government approaches things and do everything we can
    to save money, even if it is a little bit at a time.
        And I really wanted, if I could, Mr. Chairman, to have the
    director talk to us about what the administration intends to do
    to try to--for example, let's take one bite at a time.
    Medicare, the trustees tell us, is out of money in 2017. That
    is only 8 years away. Bankruptcy, there is no more money, no
    more checks.
        What is the administration specifically proposing to do to
    prevent Medicare from becoming bankrupt in 8 years?
        Mr. Orszag. Several things.
        First, we have already put forward in the budget--there was
    reference before--more than $300 billion in Medicare and
    Medicaid savings, including roughly $175 billion in Medicare
    Advantage savings, which would help to extend the life of the
    Part A trust fund to which you were referring.
        More important than that, though, is, if you look out over
    time, nothing else that we could possibly do will matter as
    much as whether we can reduce the rate at which health care
    costs per beneficiary are growing relative to income per
    capita, which has averaged 2 to 2.5 percentage points per year.
    If we can get that down to 0.5 or 0.75 or 0.25 or something
    significantly below its historical level, that has such
    monumental effects.
        So, for example, Medicare and Medicaid savings in 2050, if
    you reduce the growth rate by 1.5 percentage points per year,
    which is difficult to do--it comes back to some of the things
    we were talking about--but if you succeeded in doing that, gets
    reduced by 10 percent of GDP.
        Mr. Culberson. Right, but we may not even get there. I am
    talking 8 years. This is, like, immediate. What do you
    recommend we do in the next----
        Mr. Orszag. Well, again, we have put forward $177 billion
    in Medicare Advantage savings, significant additional savings
    in Medicare, and then more that will be part of an overall
    health care reform effort. That is moving the trust fund in the
    right direction.
        Mr. Culberson. So you believe, if we adopted--let's just
    say, for the sake of argument, that Congress adopted all of
    those proposals, Medicare will not be bankrupt, then, in 2017?
        Mr. Orszag. No, it would extend the life of the trust fund
    by a couple of years. More important than that is to reduce the
    long-term growth rate. If----
        Mr. Culberson. Bankrupt in 10 years?
        Mr. Orszag. Just to give the number for a second, if you
    reduce the growth rate by 1.5 percent per year, you reduce the
    long-term imbalance in Medicare by two-thirds. It doesn't
    eliminate it; there is more that would need to be done. But you
    would reduce the long-term imbalance within Medicare by two-
    thirds, which is the key fiscal problem that we face.
        Mr. Culberson. That is the long-term outlook. So you think
    you would extend the bankruptcy by maybe--prevent it by about 2
    years?
        Mr. Orszag. If you then also build in slower growth rate in
    health care costs overall, which would help on Medicare and
    Medicaid, it is an additional couple of years.
        Mr. Culberson. Do you disagree with--and my time is
    limited--David Walker, who is the comptroller for the United
    States, our auditor until about 18 months ago, is now head of
    the Peterson Foundation because he got so concerned. And this
    is really straight from my heart, and party labels are
    irrelevant when it comes to protecting the country's solvency.
    Moody's has now warned us formally that we could lose our AAA
    bond rating. That is extraordinary.
        David Walker points out in an editorial he ran, Mr.
    Chairman, in the Financial Times that it costs more to buy
    credit default insurance on U.S. Government debt than on debt
    issued by McDonalds. It is really scary that the--and he points
    out, how can one justify bestowing a AAA rating on an entity,
    the United States, with an accumulated negative net worth of
    more than $11 trillion and off-balance-sheet obligations of $45
    trillion, and an entity that is set to run $1.8 trillion-plus
    deficits for the current year and trillion-dollar deficits for
    the years to come?
        The chairman has been very generous with his time. But I
    want to, if I could, Mr. Chairman, just urge OMB to be
    realistic. And you have kids, I bet.
        Mr. Orszag. I do. I have two.
        Mr. Culberson. Let's focus on what is good for them. And
    forget political party, and let's make sure America is going to
    be solvent first.
        Mr. Serrano. Thank you so much.
        Ms. Lee.
        Ms. Lee. Thank you, Mr. Chairman.
        Good afternoon. Well, first of all, let me say how happy I
    am to meet you. This is my first year on this subcommittee, and
    I know that OMB faces many challenges. And so I look forward to
    working with you on many of these challenges.
        One I wanted to just reference is the rising unemployment
    rate, as well as the harsh reality of living in poverty. The
    national rate now is about 9 percent. In my own State--I come
    from California--it is a little over 11 percent. Money that was
    invested in the economic recovery package hopefully will spur
    the growth of a green energy independent economy and will save
    countless jobs and create countless more.
        But many economists are projecting now that over 10 million
    more Americans will fall into poverty due to this recession.
    And so I am wondering if OMB has looked at poverty rates per se
    and is looking at policies, programs, and initiatives on behalf
    of the President to kind of make some suggestions on what we
    need to do to keep families out of poverty and those living in
    poverty, to help lift them out of poverty. That is the first
    part of my question.
        The second part is, last year, we passed, and it was signed
    into law, the legislation that repealed the international HIV
    travel ban. I believe OMB is responsible for reviewing the rule
    that HHS has put together. I think, if my information is
    correct, that that was submitted to OMB April 20th of this
    year.
        So I would just like an update on this rule and if there
    are any specific issues that OMB may have with regard to this,
    any budget-related issues, and how long do you think this is
    going to take. Because we passed this last year, it was signed
    into law by President Bush in our global HIV/AIDS initiative,
    and it is really time to lift this travel ban and to move on.
    And so, I am wondering about the bureaucracy in all of this and
    what your time frame is on it.
        Thank you again.
        Mr. Orszag. Okay, let me deal with the second question
    first. I need to be careful not to comment on things that are
    in the middle of the regulatory review process. But I am sure
    we can get back to you in writing with a date for a timetable
    for when the next steps will occur.
        With regard to unemployment and poverty, I guess I would
    say several things. First, one of the reasons that the
    President has put forward, and embodied in the Recovery Act we
    have, a progressive change in the tax system is, in terms of
    immediate impact, that, along with strengthened unemployment
    insurance benefits and other things, provides the most
    immediate relief to households. So, for example, the Making
    Work Pay Tax Credit, which is refundable, the American
    Opportunity Tax Credit for higher education, which also has
    refundability components, provides relief to low- and moderate-
    income families.
        Beyond that, and as you get out of immediate relief and
    into the not just providing the fish but learning how to fish,
    education and health are absolutely essential. And that is one
    of the reasons why the administration has focused so much on
    improving our educational system, not only in early childhood
    but throughout the process, and trying to get more college
    enrollment and more college graduation through an expanded Pell
    grant program; through simplifying the application form for
    Pell grants, which are too complicated right now; through
    reorienting the Perkins loan program; through a college access
    and completion fund that we are trying to create.
        And, finally, one of the things that I think has not
    received enough attention--we talk a lot about income
    inequality in the United States. The growing gap in life
    expectancy inequality has received very little attention. Most
    people know that life expectancy is going up. Many people know
    that better educated, higher-income people live longer than
    less educated, lower-income people. The fact that that gap
    between better educated, higher-income people and less
    educated, lower-income people is literally exploding in life
    expectancy I don't think has received as much attention.
        One of the motivations--it is not the only one, but one of
    the motivations for reforming the health care system, not only
    to reduce costs but to expand coverage, is to get at that
    growing gap.
        Ms. Lee. Thank you very much. And let me just add to that,
    within that growing gap, though, you are looking at a large
    percentage of that growing gap being with communities of color,
    in the African American, Latino, and Asian Pacific American
    communities. Part of the health care reform debate has to
    include closing those health care disparities.
        And I just want to say for the record, Mr. Chairman, the
    Tri-Caucus, the Black, Hispanic, and Asian Pacific American
    caucus, have been trying to communicate what you just said to
    those who are beginning to write this health bill so that we
    can have a provision in the health care reform bill that really
    addresses this widening gap in disparities. And a large
    percentage, as I said, are based on race and ethnicity.
        Thank you very much.
        Mr. Serrano. I thank the gentlewoman from California, and I
    just want to piggyback on that statement.
        I think any health care approach that we take has to deal
    with the disparity. I mean, studies have taken place all over
    this country, and it just goes right along. It is not just
    housing, it is not in jobs, it is not how much people make, but
    it is in the health care delivery and what people get in return
    within that system.
        And so, if we are truly going to deal with health care, we
    have to make sure that the middle-class gets protected,
    absolutely, and we have to deal with the disparities in the
    system.
        Mr. Orszag. Absolutely.
        And, by the way, one other aspect of this is not just
    health care, but there are other aspects of health behavior
    that influence that life expectancy gap. For example, one of
    the things that I think we are hoping for, just as an example,
    in school nutrition reauthorization is to move the system
    towards providing healthier meals to kids so that you are on a
    better path, even apart from the health care system.
        Mr. Serrano. And, with that in mind, a place that produces
    great food, the gentleman from Florida, Mr. Crenshaw.
        Mr. Crenshaw. You will have a bag of oranges on your
    doorstep.
        Mr. Serrano. And it is totally allowed under the rules.
        Mr. Crenshaw. Exactly. Thank you, Mr. Chairman.
        And thank you for being here today. I just have a couple of
    policy-type questions to help me understand.
        I know you used to work in a different agency, the
    Congressional Budget Office. And they just, as I understand it,
    they just came out and said that the red ink is going to be
    about $9.3 trillion over the next 10 years. And I think the
    White House, the original number was, I think, maybe about $2
    trillion less. So that is about an, I don't know, 18, 20
    percent difference in terms of projection, what those numbers
    are.
        I was going to ask you, like, who is right? You are not
    there anymore, so--but I imagine there are some different
    criteria or different ways they calculate that. But just help
    me understand that accounting discrepancy, if you could.
        Mr. Orszag. Yeah, a lot of it is driven by very small
    differences in assumptions. One of the things, when you focus
    on the deficit, the impact gets magnified, because it is a
    difference between two very large numbers, revenue and outlay.
    So, for example, if spending is $1,000 and revenue is $950, the
    deficit is $50. If revenue then falls by 10 percent, the
    deficit will go up by almost $100, so it will go from $50 to
    $150. It will triple, the deficit will triple in response to a
    revenue decline of only 10 percent.
        And I think that is often what goes on in differences in
    out-year numbers, which is, don't make it 10 percent, make it a
    1 or 2 percent difference in the revenue number or the outlay
    number and you get these very dramatically different deficit
    numbers as a result. Because the deficit is very sensitive to
    even small changes in assumptions.
        And so, CBO itself will say, okay, the 2014 deficit is
    projected to be X, but our confidence interval is plus or minus
    $500 billion or $600 billion. So there is a significant amount
    of uncertainty as you go out over time, and that is because the
    deficit is so sensitive to small changes in the rate of growth,
    in capital gains realizations, in the ratio of taxes--lots of
    variables that feed into it.
        Mr. Crenshaw. But, I guess, is it easy to manipulate what
    those numbers might be? If they are so sensitive, it is pretty
    important what the assumptions are, because you can, obviously,
    make it look better or make it look worse. And everybody is
    concerned about it. Does that bother you, or is that just kind
    of part of it?
        Mr. Orszag. What I think it suggests is being careful about
    the degree--while you do have to make your best guess, being
    careful about the degree of reliance that you are placing on,
    you know, a deficit forecast for 2019, because it is highly
    uncertain, and the probability that you are right is very, very
    small.
        But, as an example, CBO has a different pattern of economic
    activity than OMB does. They have, in a sense, slower economic
    growth for the next year or 2 or 3--I am sorry, faster economic
    growth, and then slower.
        If you look at the out-years, we are at about 2.7 percent
    in terms of GDP growth. The blue chip is at about the same
    rate. The Fed is at about the same rate. CBO is below that, and
    not for any--I don't think they are trying to bias the numbers.
    I think they just have a different perspective on what the
    underlying productivity growth rate is, for example. But there
    is an example where we are in line with blue chip and the Fed
    and they are below it. And there are going to be others where
    we are on the other side.
        These are done by professional forecasters both at CBO and
    at OMB. It is unfortunately the case that the art and science
    of economic forecasting is not as good as we would like.
        Mr. Crenshaw. I got you.
        One other question, and this has to do with the big debate
    when we did the stimulus about Keynesian economic theory. There
    is a lot of discussion about that. And one of the studies I
    read, Christina Romer had done a study that kind of indicated,
    when you are talking about taxes, if you--I think she said tax
    increases are contractionary and tax decreases are, kind of,
    expansion-oriented.
        When you sit around talking about how to raise revenue,
    obviously there are some tax increases that are anticipated
    down the road. One of the things I saw in one of her studies is
    that if you raise taxes, like, 1 percent of GDP, then it
    decreases GDP by 3 percent. And, contrarily, if you decrease
    taxes by 1 percent of GDP, then you raise GDP by 3 percent.
    Kind of a 3-to-1 ratio.
        So, I mean, how does that jibe--when you all are sitting
    around talking, does she talk about that study that would lead
    you to believe that, if you reduced taxes, you could actually
    grow the economy? But there are a lot of proposals to raise
    taxes that come out of your shop. So, I mean, is she right or
    wrong, or is that--
        Mr. Orszag. Let's separate a couple of things.
        First, it is traditionally the case that folks will argue,
    if GDP goes up by $3, you get something like a dollar, or maybe
    a little bit less than that, but a dollar in extra revenue.
    That is different from saying that the causality goes in the
    opposite direction.
        Mr. Crenshaw. But did her study show that if you decreased
    taxes----
        Mr. Orszag. I don't think the multiplier was anywhere near
    that large.
        And what I would also say is, in terms of short-term
    economic impact, she has been very clear, which is consistent
    with traditional macroeconomic analysis, that if you are if a
    situation like we have today, where the capacity to produce is
    much higher than what we are actually producing, and you need
    to increase aggregate demand, that while tax relief can help--
    which is one reason why we included that in the Recovery Act--
    additional spending, that is, investments in infrastructure and
    direct spending, actually has a bigger per-dollar impact in
    closing that gap in the short term. And she has been clear
    about saying that also.
        Mr. Crenshaw. Thank you.
        Thank you, Mr. Chairman.
        Mr. Serrano. Thank you.
        The gentlewoman from Florida.
        Ms. Wasserman Schultz. Thank you.
        We have Florida bookends for you, Mr. Orszag.
        Mr. Orszag. There you go.
        Ms. Wasserman Schultz. Good to see you.
        I wanted to turn to the issue of child pornography and the
    pursuit of individuals who are engaging in child exploitation
    on the Internet.
        I was the sponsor, along with our wonderful Vice President,
    Joe Biden, when he was in the Senate last year, of the Protect
    Our Children Act. That legislation was passed into law. It was
    designed to expand our ability to reach the 500,000--no
    exaggeration, 500,000--known individuals that are trafficking
    in child pornography on the Internet. In at least one of three
    of these pornography trafficking suspects, we have a hands-on
    abuser who is abusing a real, local child.
        So we have been spending, in the previous administration, a
    colossally irresponsible amount of money. I mean, we were at
    something like $15.9 million. It was less than 2 percent of the
    cases--the FBI and the ICAC, our Internet Crimes Against
    Children task force, was able to investigate less than 2
    percent of those cases.
        So the Protect Our Children Act authorized up to $60
    million a year, for several years, for us to be able to
    strengthen the ICAC backbone and be able to allow them to
    investigate more cases. We know that, in 30 percent of the
    cases, when they investigate them, they rescue a child.
        So, at the end of the day, we only had $70 million included
    in NCMEC's budget this last year, 2009. It went down to $60
    million in fiscal year 2010. $21 million of that, in 2009, was
    budgeted by the Justice Department for the ICAC program. And,
    obviously, with less money for NCMEC, I assume that there would
    be less money for the ICAC. I don't have a full breakout on
    that.
        I mean, the resources that we don't spend are the children
    that we don't save. And what I would like to know is, is the
    administration committed, through OMB actually including the
    request in the Protect our Children Act in your budget request
    next year, as we develop the components of the legislation, to
    fully funding the Protect Our Children Act and making child
    exploitation a priority?
        I also serve on the Judiciary Committee and had an
    opportunity to question the Attorney General, who did
    specifically tell me that he would seek full funding, fight for
    it, make child exploitation a priority, but also noted that he
    hoped he had a responsive OMB listening. And I said,
    ``Conveniently, I sit on the Financial Services Appropriations
    Committee, and I am going to be able to ask him this week.''
        Mr. Orszag. Well, a couple comments.
        First, as you noted, there is $60 million in a broader
    fund, the missing and exploited children programs fund, that
    can be used for this purpose--part of it can be used for this
    purpose. In addition, there was $50 million in the Recovery Act
    that can also----
        Ms. Wasserman Schultz. But that is the whole NCMEC budget.
        Mr. Orszag. I understand, but that could be used for this
    purpose. So, the combined resources need to be sub-allocated,
    but there are resources there.
        I would be happy to work with the Attorney General, as we
    develop new budget proposals, to ensure adequate funding for
    this activity. And, you know, I haven't received anything from
    him. We are in the midst of--we will be, over the next several
    months, be in the midst of putting together next year's budget.
    And I would work with you in the appropriations process for
    fiscal year 2010 to ensure adequate funding.
        Ms. Wasserman Schultz. That would be great. Thank you very
    much.
        Mr. Serrano. Thank you.
        Mr. Kirk.
        Mr. Kirk. Senor estimado.
        Mr. Serrano. Un placer para mi tambien.
        Mr. Kirk. We have spent so much time in this hearing
    talking about your situational awareness on what we have spent
    and how money is being spent. But a great part of your job is
    how we raise money. Your second source of funding is borrowed.
    So I wanted just to see what your situational awareness is, as
    the director of the Office of Management and Budget, on your
    current financial situation.
        Do you know the answers to these questions: One, how much
    have we borrowed since you have become OMB director? Two, who
    is your top provider of funds? Three, have any Treasury
    auctions gotten into trouble since you took office? Four, have
    any sovereign governments failed to sell debt since you took
    office?
        Mr. Orszag. I am sorry, could you repeat that one?
        Mr. Kirk. Have any sovereign borrowers failed to sell debt
    since you took office?
        And lastly, do you know how much the Fed has printed to
    cover U.S. debt?
        Mr. Orszag. Okay, so let's just go in order.
        I can get you the precise figure, but, given that we are in
    May, I would be betting that roughly $800 billion to $900
    billion in deficit financing and somewhat more than that, given
    the way that some of the credit transactions are occurring in
    the Federal budget, have been issued. I can get you the exact
    number.
        Mr. Kirk. Here is why I am worried. Do you know who raises
    your money on the borrowing side?
        Mr. Orszag. The Treasury Department does.
        Mr. Kirk. Where?
        Mr. Orszag. Bureau of Public Debt.
        Mr. Kirk. Have you ever been to that office?
        Mr. Orszag. No, I have not been. They report to the
    Secretary of the Treasury.
        Mr. Kirk. Since it is responsible for over 40 percent of
    the money that you raise, do you think you might want to take a
    visit there?
        Mr. Orszag. I would be happy to do so. Again, that bureau
    reports to the Secretary of the Treasury, and I have full
    confidence in the internal operations of the Treasury
    Department.
        Mr. Kirk. You may not have that. Actually, you borrowed
    $3.2 trillion, because, remember, you have to roll over debt.
        Mr. Orszag. Okay. In terms of net issuance.
        Mr. Kirk. Correct. Who is your top lender?
        Mr. Orszag. The top lender, at this point, would likely be
    foreign creditors. And within foreign creditors, in terms of
    cash flow, China probably tops the list.
        Mr. Kirk. Has that changed probably in the last 2 months?
        Mr. Orszag. To my knowledge, I don't know whether that has
    changed in the last 2 months.
        Mr. Kirk. I would hope that you would know the answer to
    that question, because this is the top provider of external
    funds to you.
        Mr. Orszag. Okay, again, though, responsibility within the
    Federal Government for issuing debt rests with the Treasury
    Department.
        Mr. Kirk. But this is 40 percent of the funds coming into
    you.
        Mr. Orszag. I understand that.
        Mr. Kirk. Okay. Any problems in selling debt recently?
        Mr. Orszag. There were rumors of a potential issue with
    regard to one Treasury auction, but all Treasury auctions have
    been completed smoothly.
        Mr. Kirk. Actually, you had a big problem with a 30-year
    note. You had to lift the interest rate up 50 basis points. And
    the interest rate that you assumed for next year, which a lot
    of you budget projections hinge on, is actually a full half a
    point below where it is today. So I am worried about your
    situational awareness.
        What about--any other governments, western democracies
    having trouble borrowing money lately?
        Mr. Orszag. There have been various concerns in financial
    markets. I wouldn't want to make a definitive statement without
    going through the numerous countries that issue debt all the
    time, especially if you are including just simply rolling over
    debt as opposed to net issuance.
        Mr. Kirk. The U.K. and Germany both failed to auction debt
    since you have become director. How much money has the Fed
    printed and then used that printed money to purchase U.S. debt?
        Mr. Orszag. Expansion of the--I would have to get you the
    exact numbers, but the expansion of the Federal Reserve's
    balance sheet has been significant. And I don't have off the
    top of my head the additional purchases of Treasury securities.
        Mr. Kirk. I am worried about that, because this printing of
    money----
        Mr. Orszag. I understand the concern.
        Mr. Kirk [continuing]. Is $126 billion, so far, of printed
    money used to cover U.S. debt. If you were a creditor to the
    United States, would you be worried about that?
        Mr. Orszag. The particular concern being future inflation?
        Mr. Kirk. Correct.
        Mr. Orszag. No, I--again, look, the Federal Reserve is
    among the most credible financial institutions--or, central
    banks in the world.
        Mr. Kirk. Let me back up. Has the Fed ever used printed
    money to purchase U.S. debt at this level, ever, before the
    Obama administration?
        Mr. Orszag. My understanding--well, actually, you have to
    go back to the--in the modern era, after the 1950s, when the
    Fed and the Treasury went their separate ways, I don't believe
    that that is the case.
        One of the reasons that the Federal Reserve changed policy,
    however--and I will refer you to Chairman Bernanke--is concerns
    about whether they were being as effective as they could be in
    doing their own job. And, beyond that, I am going to defer to
    Chairman Bernanke, who is, as you know, responsible for the
    Federal Reserve's portfolio.
        Mr. Kirk. Right. Because this authority didn't exist until
    last year, but now we have basically $126 billion in completely
    invented cash being used to cover Treasury auctions. It is no
    wonder that Treasury auctions are succeeding, because you can
    just print money to cover what you don't sell.
        Mr. Orszag. There are still significant, as you know,
    private entities--in fact, frankly, one of the striking
    aspects----
        Mr. Kirk. Let me get to that. When you say significant----
        Mr. Fattah. Excuse me. Could the witness answer the
    question, please?
        Mr. Kirk. All right. Well, I just----
        Mr. Fattah. Chairman, could the witness answer the
    question?
        Mr. Kirk. I actually wasn't----
        Mr. Fattah. We want to be able to hear what he is saying.
    You asked an important question. I would like to hear him.
        Mr. Kirk. You know, I haven't interrupted you.
        Mr. Serrano. Okay, let's have some order in the committee.
        Mr. Kirk. Yes, thank you, Mr. Chairman.
        I would just say, when you say there has been significant
    demand, what has happened to the demand for Treasuries since
    you have been director?
        Mr. Orszag. Bond yields have increased slightly, which
    would reflect----
        Mr. Kirk. Actually, what I am talking about is the bid----
        Mr. Serrano. But the Chair would note that there is a
    desire to have the members hear the witness answer the
    question.
        Mr. Kirk. I am actually--let me refine the question. What
    is your bid-to-sale ratio since you have become----
        Mr. Orszag. The best indicator of demand for Treasuries is
    the bond yield. And the bond yield is actually, if anything,
    remarkably low relative to history. It has increased somewhat.
    Over the past several weeks, it has increased by, let's say, 30
    basis points or so on the long end of the Treasury market. But
    if you look back over history, both in real and nominal terms,
    U.S. Treasury debt still has yields that are, if anything, very
    low by historical standards.
        That reflects, again, flight to safety and the view that
    the U.S. Government is still--that U.S. Treasury securities are
    still among the safest investments in the world.
        Mr. Kirk. So when we see a falling bid-to-sale ratio, which
    we have seen now, from a 7-to-1 ratio to a 2-to-1 ratio, you
    would be completely not----
        Mr. Orszag. No, no, in other words--no, but the yield is a
    sufficient statistic. So there are various inputs that go into
    the yield, one of which is the one that you are referring to.
        But, ultimately, if you wanted to pick one thing reflecting
    the confidence or state of demand for Treasury securities,
    changes in the yield are the best single statistic, in my
    opinion.
        Mr. Kirk. Thank you.
        Mr. Serrano. Time has expired.
        With Mr. Edwards's permission, I would like to ask you a
    question.
        Mr. Edwards. Any time, Mr. Chairman.
        Mr. Serrano. Thank you.
        What was the outlook for the deficit in January 2001, and
    what was the outlook for the deficit in January 2009?
        Mr. Orszag. The outlook for the deficit in January 2001 was
    significant surpluses. The outlook for the deficit in January
    2009 was a deficit well in excess of $1 trillion.
        Mr. Serrano. Mr. Edwards?
        Mr. Edwards. I thank the chairman for getting into my
    questions.
        And, obviously, every member has a right to ask questions.
    I think Mr. Kirk's questions touch on important issues. I would
    say, for the record, I am little surprised we are getting into
    a Jeopardy situation today. And, for the record, let me say,
    many of the responsibilities addressed by Mr. Kirk's questions
    are under the jurisdiction of the U.S. Treasury Department and
    other Federal agencies.
        But as long as we are going to play Jeopardy, let me just
    ask: Is it correct that, prior to the George W. Bush
    administration, the previous largest annual deficit in American
    history occurred in 1992, under the administration of former
    President Bush, President George H.W. Bush?
        Mr. Orszag. Although, as a share of the economy, there were
    larger deficits in the early 1980s under the Reagan
    administration.
        Mr. Edwards. Right, but in terms of total dollars. Then,
    so, previously, as a percentage of the total GDP, there were
    larger deficits during the Reagan administration.
        Mr. Orszag. Right. And before that, during World War II.
        Mr. Edwards. And then, in terms of total dollars, the
    largest deficit was in 1992 of about $292 billion, is that
    correct?
        Mr. Orszag. I can get you the exact figure. It will just
    take me a second.
        Mr. Edwards. Okay.
        Mr. Orszag. 1992, total deficit was $290 billion.
        Mr. Edwards. $290 billion was the largest numerical deficit
    in any one year in the history of the country?
        Mr. Orszag. That is correct.
        Mr. Edwards. And then did President Bush, just to clarify,
    George W. Bush, when he was sworn into office, did he inherit a
    deficit or a surplus?
        Mr. Orszag. He inherited a surplus.
        Mr. Edwards. Okay. And, at that time, it was projected
    those surpluses would continue for a number of years, is that
    correct?
        Mr. Orszag. That is correct.
        Your version of Jeopardy is pretty easy.
        Mr. Edwards. Yes, I am trying to make it balance out with
    my colleague. But the points are certainly serious ones.
        And am I also correct in understanding that, after the
    philosophy was pushed--and during the 8 years of the Bush
    administration, Bush 43, I think 6 of those 8 years Republicans
    controlled the majority in the House and the Senate. So these
    were essentially their budget proposals.
        We went from $292 billion in 1992 being the largest single
    deficit in American history to--do I understand the fiscal year
    2009 budget, without a dime of deficit being added by President
    Obama, was going to be over $1 trillion? Is that correct?
        Mr. Orszag. $1.3 trillion.
        Mr. Edwards. $1.3 trillion. So that deficit for fiscal year
    2009, put in place by former President Bush, again, with 6 of
    the 8 years of his administration----
        Mr. Orszag. I am sorry, that was for fiscal year 2010. The
    fiscal year 2009 was even higher, $1.6 trillion.
        Mr. Edwards. Okay. But prior to any additional debt being
    added by the Obama administration?
        Mr. Orszag. Correct. Well, actually, we would have to take
    out the Recovery Act. Let's say well in excess of $1 trillion.
        Mr. Edwards. So about four times larger than any numerical
    deficit in the history of the country is what the Obama
    administration faced when he walked into the Oval Office on day
    one, is that correct?
        Mr. Orszag. That is correct. He faced a very significant
    deficit when he walked into office.
        Mr. Edwards. Now, if I could then go on to the question
    that I intended to ask.
        Although I do want to make a comment. I do want to thank
    the administration for its record increase request for veterans
    health care and benefits. It is the largest increase in 30
    years, on a percentage basis, ever asked by a President. Just
    in nominal dollars, it is the largest increase, I believe, ever
    asked by any President for veterans. And, given the sacrifice
    made by America's veterans and the continuing sacrifice of our
    service men and women, I salute the President for his effort in
    backing our veterans once they come home and face the
    consequences of their service and love of country.
        I just want to quickly ask you about a general sense of
    what a current services budget would entail. If we assume the
    same number of FTE, we assume no additional population served,
    whether it is a veterans program or whether it is a Health and
    Human Services program, what kind of an increase for fiscal
    year 2010 do we have to have just to maintain current services?
    If you make whatever broad and fair assumptions that you have
    to make. Is it 1 percent, 2 percent, 3 percent?
        Mr. Orszag. It is several percentage points. And, in
    particular, are you focused on appropriations in particular?
        Mr. Edwards. Yes, on appropriations in general.
        Mr. Orszag. So, in appropriations, it is about $100 billion
    on a $1.3 trillion base. So let's call it 6 percent or so.
        Mr. Edwards. So, 6 percent just to maintain present
    services?
        Mr. Orszag. Yes.
        Mr. Edwards. So if one proposed a freeze in a budget--given
    that there are salary increases, health care cost increases,
    you are actually cutting present services, is that correct?
        Mr. Orszag. That would be one interpretation.
        Mr. Edwards. Okay.
        And, finally, I want to thank you for practicing what you
    preach. You have a difficult job. From most of us, you hear
    that the deficit is too large but the spending programs that we
    support are underfunded, and that is a difficult job to take
    responsibility for.
        But you asked for a 5.4 percent increase, and that,
    according to the number you just gave me, would typically be
    close to or less than current services. And given all the new
    responsibilities you have, I respect you for putting limits on
    your budget request for OMB this year.
        Mr. Orszag. Thank you.
        Mr. Edwards. Thank you, Mr. Chairman.
        Mr. Serrano. I thank the gentleman from Texas.
        And now the gentleman from California, Mr. Schiff.
        Mr. Schiff. Thank you, Mr. Chairman.
        Mr. Orszag, I wanted to ask you about three issues, and I
    will just put them on the table as quickly as I can to give you
    a chance to respond.
        The first is the L.A. Courthouse, which I am deeply
    familiar with. I was an assistant U.S. Attorney in the building
    for 6 years. It has been the Judiciary's highest priority, in
    terms of courthouse construction. It is old, it is insecure, it
    is inadequate in size.
        Congress appropriated the funds to build a new courthouse
    years ago, but many delays have now raised the cost pretty
    dramatically. And we just need to resolve this. And it will
    have to be part of an administration budget, because the
    numbers are just too big to do an add-on. So I would ask you to
    work with me and try to find a way that we can finally agree on
    a plan for the courthouse and meet the Judiciary's number-one
    courthouse construction priority.
        The second issue I wanted to raise is NASA. I was delighted
    to see that we are starting this year with a budget increased
    to double physical science funding over the next decade. But I
    am concerned with the budget for NASA after 2010. In fiscal
    year 2011 and over the 5 years that follow, the NASA budget is
    essentially flat. With inflation, that means a cut.
        As the world leader in science, planetary science, earth
    science, astrophysics, heliophysics, NASA has some of the
    foremost experts on climate change. I am deeply concerned about
    a flat budget for 5 years and how that will affect the agency.
    So if you could talk a little bit about the administration's
    plan for NASA's future and whether that is just a temporary
    placeholder because we have new leadership coming in in NASA or
    whether there is really an intention to hold the budget flat.
        Finally, on SCAAP, this is enormously important for border
    States like California, and it has been zeroed out by the
    administration. OMB, a few years ago, made a finding that
    reimbursements do not reduce the incidence of crime committed
    by criminal aliens, which I think--it says, the program lacks
    goals and cannot measure such an outcome.
        This is an argument that is really, sort of, beside the
    point. First, by incarcerating illegal immigrants who have
    committed crimes, you are reducing crime by incapacitating
    them. So it is effective. Is it more effective because Federal
    money is used as opposed to State and local money? If that is
    the barometer, then there will never be support for the
    program.
        But that wasn't the purpose. The purpose of the program and
    the language authorizing SCAAP basically said, it is the
    Federal Government's responsibility to get immigration, illegal
    immigration, under control. Failing to do that, we need to help
    to defray some of the costs that are being imposed on the State
    through no fault of their own.
        So that is really the purpose of SCAAP. And you can't
    measure it by saying, has it changed outcomes? So I would like
    to get, in your own words, an explanation for why the budget
    doesn't include funding for SCAAP and whether that is an
    appropriate barometer of success for the program.
        Mr. Orszag. So, in reverse order, with regard to SCAAP, two
    or three things.
        First, we do have $27 billion in border enforcement and
    related activities funding--20,000 Border Patrol agents, 33,000
    detention beds. We are trying to take seriously the
    responsibility of enforcing border security. In addition, we
    have support for local law enforcement through the COPS
    program, which was funded in the Recovery Act and in the fiscal
    year 2010 budget.
        With regard to the SCAAP program in particular, the concern
    has involved the degree to which the funds are actually being
    used for the intended purpose as opposed to other purposes--
    purchasing vehicles, other either related or unrelated
    expenses.
        And so the primary concern--or I guess my primary answer
    is, we want to try to mitigate the problem in the first place,
    but then, to the extent that there still are unauthorized
    immigrants who do need to be detained, making sure that
    programs are as targeted as possible and not used for auxiliary
    services. That is the main concern.
        Mr. Schiff. And, Mr. Orszag, we are happy work with you, if
    there is further language necessary, to make sure the funds are
    targeted to the costs of incarceration. I am sure the States
    are happy to do that, because that is where the funds were both
    intended and my understanding is that is where they are used.
    But we will follow up with on you that points.
        Mr. Orszag. With regard to NASA, there is a 5 percent
    increase for fiscal year 2010.
        The out-year numbers will involve an ongoing discussion. As
    you know, we are transitioning from the space shuttle to other
    vehicles. There is a gap that arises in the meanwhile. And we
    have been in active discussions not only with the incoming
    leadership of NASA but John Holdren, who is the President's
    science advisor, about the shape of the future NASA activities.
        It is one reason why we have asked a panel to take a closer
    look at how we can get the most from the dollars that we are
    investing and what the appropriate funding level is. And as
    that panel reports back, we would hope to work with you to
    ensure adequate funding for NASA.
        Mr. Schiff. And on the courthouse?
        Mr. Orszag. Oh, and on the courthouse, again, we can follow
    up, and look forward to working with you on that.
        Mr. Schiff. Great. Because that has been almost two decades
    in the making, and it just has to be resolved.
        And I had wanted to add to my colleagues' acknowledgment
    of--I am really quite amazed at your encyclopedic knowledge of
    all the variety of programs you have to deal with. So, thank
    you for your good work.
        Thank you, Mr. Chairman.
        Mr. Serrano. Thank you.
        Director Orszag, let me ask you a more general question
    about the role and the proper function of OMB, as you see it.
        Most folks, and certainly most people in Congress,
    understand the core role that you play in putting together the
    Federal budget. But you also have other roles that you play in
    reviewing agency policy, regulations, and management.
        The question is, does that then create a problem? You are
    not a very large agency, and if you are going to review a lot,
    if not most, of what happens in government and people have to
    wait for you to give them clearance on a lot of these things,
    aren't you then running the risk of being the bottleneck, the
    problem in the Federal Government, holding things up?
        In addition to that, in the last administration, there was
    a feeling that, more and more, you were ignoring--not you, but
    the OMB--was ignoring the desires, the vision, of people who
    were appointed by the President and cleared in different forms
    by the Senate, who had to wait for OMB to basically allow them
    to do what they wanted to do.
        How do you see the function of OMB? And do you think that
    we have to go back to a time when there was less of this desire
    to concentrate all that power in one office?
        Mr. Orszag. Thank you for the question. And I do appreciate
    that there have been concerns raised about the way in which OMB
    exercised its role in recent history.
        Let's take the regulatory process as an example, though. It
    is clear that the regulatory agencies have responsibility for
    regulation. What OMB's role is is severalfold. One is to make
    sure that what this department is doing is not inconsistent
    with what this department is doing and, sort of, forcing some
    coordination and collaboration and internal consistency across
    the various agencies, to the extent possible.
        The second is to suggest and to try to preserve some
    consistency in the methodology. It would be undesirable to have
    this agency over here conducting a cost-benefit analysis or
    some other analysis in one particular way and then another
    agency doing it in a completely inconsistent way.
        And then, finally, in addition to upholding the law and the
    statutes, there is a role for OMB in preserving the role of the
    President and the President's priorities.
        All of which is to say, OMB plays what I would describe as
    a coordinating and, kind of, internal consistency check role,
    but the ultimate responsibility for the regulatory process
    rests with the relevant agencies.
        With regard to the size of OMB and whether we are a
    bottleneck, I have heard such complaints. I heard such
    complaints about CBO when I was there. What I would urge is
    that, to the extent that there are concerns, that people get in
    touch with me. We try to keep things moving and try to be on
    the ball as much as possible. And if there are particular
    concerns, I have encouraged other Cabinet officers to let me
    know or, if you have concerns, to let me know, and we can try
    to speed things along.
        The basic point, though, is there is always this question
    between the size of an agency and other dimensions. In other
    words, I would be concerned about OMB getting too big and then
    losing some of the--if one of the roles you are trying to do is
    a coordinating and internal consistency check, if you are,
    yourself, so big that it is difficult to coordinate internally,
    that is self-defeating.
        Mr. Serrano. You made an interesting point, though. You say
    that part of the role of OMB is to, sort of--if I heard you
    correctly--check to make sure that everyone else is carrying
    out the President's vision. But, certainly, to me and to most
    Americans, when the President sits around with his Cabinet,
    those are all folks that he believes will carry out his
    mission.
        Mr. Orszag. I agree.
        Mr. Serrano. So, at what point does OMB--and please
    understand that these are questions that have been asked for a
    long time before you were the director.
        Mr. Orszag. I understand. I am not taking it personally.
        Mr. Serrano. Right. At what point does OMB become a problem
    for an administration carrying out?
        It just seems to us that during the last 8 years,
    especially, there was a lot of concentration in there. And it
    is almost like most people were, at times, almost nervous about
    speaking to appropriators because OMB hadn't cleared it.
        Mr. Orszag. Well, again, I hope you can understand the
    underlying rationale, which is--let me speak directly to your
    point. Even in the first Cabinet meeting, the President was
    very clear with the various secretaries assembled there that
    they were appointed not only because they were talented and
    qualified but also because they seemed to share, in their
    particular domain, his vision for how to move forward, which is
    exactly how it should be.
        It is also the case that, when you get to specifics, that
    sometimes questions will arise that the Department of Labor has
    a particular vision for how to proceed and then the Department
    of Transportation has a different vision. And that then again
    raises the question of, how do you make sure that the various
    agencies are being consistent with one another and what the
    President is hoping to do?
        So I want to again say, primary responsibility--and I
    should have been even clearer on this--primary responsibility
    rests with the Cabinet agencies and the other regulatory
    agencies, and OMB's role is simply to coordinate and make sure
    that there is a rigorous and consistent methodology.
        And then, let's hope this never happens, and I don't think
    it should, but if there are divergences between what some
    agency is trying to do that is not required by the law--and let
    me again make it clear, if something is statutorily required,
    that obviously dominates all else--but is not required by the
    law and is inconsistent for whatever reason, through oversight
    mistake, different interpretation, confusion, what have you,
    with where the President is, then it is OMB's role to collate
    comments from other agencies and from White House offices and
    pass that back or share that information with the relevant
    regulatory officials.
        Mr. Serrano. Thank you.
        Ms. Emerson.
        Mrs. Emerson. I want to come back at the Federal debt
    issue.
        Mr. Orszag. Okay.
        Mrs. Emerson. So I am going to start----
        Mr. Orszag. By the way, we are checking with--because I
    think there may be some other factual questions.
        Mrs. Emerson. Well, I am starting from fresh.
        Mr. Orszag. Okay. Although, I do want to again note, I am
    trying to be cognizant if there are different responsibilities
    with regard to making sure that we are all executing well on
    what we have to do. Most of the questions that Mr. Kirk had do
    rest with the Treasury Department. And just like Tim Geithner
    has things that he needs to do, I have things on a daily basis
    that I need to do, and I do rely, I think appropriately, on the
    Treasury Department to do its job well, which I have full
    confidence in.
        Mr. Serrano. And Mr. Kirk will have an opportunity
    tomorrow.
        Mrs. Emerson. Indeed, because we have Secretary Geithner
    tomorrow.
        Mr. Orszag. Excellent. You could ask him about, you know,
    the SCAAP program. I am kidding.
        Mrs. Emerson. I am not getting into all of that.
        All right. So the fiscal 2010 budget estimates a current-
    year deficit of $1.8 trillion and projects deficits to continue
    through 2019, when the deficit would be about $779 billion.
        Your analytical perspectives document states that the
    Federal debt held by the public will be--I will wait and let
    you get that.
        Mr. Orszag. But I am listening.
        Mrs. Emerson. Okay--68.5 percent of GDP in 2014. And,
    according to the document, this is the highest percentage of
    Federal debt to GDP since 1950.
        So, given the size of the Federal debt, is Treasury
    crowding out investment in the private sector? In other words,
    to what extent are investors buying Treasury bonds instead of
    investing in U.S. businesses?
        Mr. Orszag. Not very much now. In fact, one of the things
    that--so the traditional model, if you were in a closed economy
    and there was no access to international capital markets, a
    budget deficit would mean crowding out of private investment.
    But what you instead see is, it has to come from somewhere, and
    what is occurring--you know, what has occurred over the past
    decade now is that additional borrowing doesn't seem to be
    crowding out private domestic investment. Instead, it is
    showing up in additional borrowing from foreigners.
        There still is a cost to doing so. And that is why,
    although it is important to address the economic downturn, we
    don't want to be on a path where we are not addressing our
    medium- and long-term fiscal challenges, because continuing to
    borrow significant amounts from foreigners does impose a cost
    on our future.
        Mrs. Emerson. So when you make the decision that the
    government should borrow more funding for additional spending,
    how do you balance--and I am not an economist, and you are,
    that is why I am asking you this question--how do you balance
    the desire for short-term benefits to the economy versus the
    long-term risks to future generations of increasing debt?
        You know, are we being greedy at the expense of our
    children and grandchildren, who may end up having to pay? I
    mean, I am asking that question. I just really want to know.
        Mr. Orszag. Let me separate that answer into two parts. The
    first is, what do we need to do to fight off the worst
    recession since the Great Depression? So, part of that involved
    the deficits that we were inheriting, but----
        Mrs. Emerson. And believe me, I admit it. You inherited it
    from my party. I agree.
        Mr. Orszag  [continuing]. But then additional efforts were
    necessary. The Recovery Act, for example, was intended to get
    right at the root of that problem by boosting demand again back
    up towards----
        Mr. Serrano. You know, you spoke over a great statement,
    but I am not going to ask you to repeat it.
        Mr. Orszag. I am sorry.
        Mr. Serrano. No, it is okay.
        Mrs. Emerson. I took responsibility.
        Mr. Orszag. You did.
        Mrs. Emerson. I did.
        Mr. Orszag. As the economy recovers, the situation changes,
    and the steps that are necessary to address an economic
    downturn no longer become necessary. And, at that point,
    continuing to borrow substantial amounts of money beyond what
    is sustainable poses risk both to economic performance and to
    the wellbeing of our children, grandchildren, what have you.
        So, from my perspective, the key thing is not what is
    happening this year but, rather, what happens in 2013, 2014,
    2015, 2016, and what have you.
        Now, under our budget and under the budget resolution, the
    deficits come down sharply. And one of the reasons that we are,
    again, focused on health care reform, coming back to the point
    earlier, is, if you look out beyond that, it explodes, and we
    are trying to, you know, I guess I have started to say ``bend
    the curve,'' bend the curve on health care costs to bring that
    down. Because, if not, we are on a path that is not affordable.
        Mrs. Emerson. No doubt about it. And so I applaud you for
    doing that and truly believe that it is imperative that we do
    health care reform.
        When Mr. Kirk asked you about who our largest--who owned, I
    guess--who held, of foreign countries, the most in Treasury
    securities and you said it was China, is there a risk of one
    country owning so much debt? What happens if China stops buying
    our securities?
        Mr. Orszag. What I would say is there is a risk from
    continuing to have to borrow very substantial amounts of money
    after the economy has recovered. There is no indication that
    any of our foreign creditors, you know, have a different
    perspective on that matter than I do, which is to say, right
    now--let me come back again to the point about yields on
    Treasury securities.
        If there were concerns among creditors about the path that
    we were on or about changing their mind with regard to
    purchasing Treasury debt, what you would see is the yield on
    Treasury securities going up. The yield on Treasury securities
    will also go up as economic performance improves, which tends
    to drive up interest rates because the credit markets get
    tighter.
        We have seen some increase in Treasury security yields over
    the past several weeks, 20, 30 basis points, something like
    that. So it is something, but it is not the kind of change that
    you would associate with a dramatic shift in investor
    sentiment. And I, at this point, don't anticipate any such
    shift. I think the key thing, again, is, as we recover, we need
    to bring deficits down.
        Mrs. Emerson. And even though we are going to have a short-
    term spike in health care costs if we bring in all Americans
    into some kind of insurance product--let's just call it that--
    but simultaneously we will reform Medicare, Medicaid, other
    government types of programs, do you feel that there is a way
    to design this program so that we will be able to at least have
    control over the growth, if you will, rather than the
    uncontrollable 11.1 percent increase every single year in
    health care?
        Because, obviously, Social Security is another issue which
    is worrisome down the road. But, I mean, I don't know how to--
    unless you grab hold of everybody in the country and get them
    into--design some health care system that we can then manage
    better, I don't know how we otherwise control the growth of
    health care. Do you?
        Mr. Orszag. Again, four key steps, in my opinion, are the
    most auspicious. If you ask--you know, I am a member of the
    Institute of Medicine. If you go there, that is what folks talk
    about. I spoke to the Business Roundtable maybe a month or so
    ago--similar perspectives.
        So I guess what I would say is, if other folks have ideas
    for what will help reduce the growth rate over time, we would
    welcome them. Because I think we believe we are sort of dialing
    that up as much as possible in a way that will help restrain
    the growth rate of health care costs. And if there are other
    ideas--and I know some of your colleagues are putting forward
    ideas today, and we welcome that. We want more ideas about what
    might help.
        Mrs. Emerson. Yeah. I guess I just worry since we are
    worried about health care costs growing even within the
    Medicare and Medicaid systems. And if we have a new public
    plan, if you will, and it doesn't supplant but it, rather,
    supplements Medicare and Medicaid, I worry that that also might
    fall victim to the same situations facing Medicare, and
    Medicaid to a lesser extent.
        Mr. Orszag. Okay.
        Mrs. Emerson. But, you know, there might be a way to design
    it otherwise.
        Thanks.
        Mr. Serrano. Thank you.
        Mr. Edwards.
        Mr. Edwards. Thank you, Mr. Chairman.
        Dr. Orszag, regarding the operations of OMB, itself, it
    obviously plays a critical check and balance, balancing and
    checking Congress and the various Federal agencies, as you
    mentioned.
        Does OMB have its own inspector general?
        Mr. Orszag. No.
        Mr. Edwards. It does not.
        Mr. Orszag. No.
        Mr. Edwards. Is there a reason for that?
        Mr. Orszag. Well, I mean, inspector generals are usually
    looking, again, at internal operations. And we are, at least on
    the scale of a Cabinet agency, an extraordinarily small, 500-
    person entity.
        Mr. Edwards. All right. Who, then--I think that the
    brilliance of our Founding Fathers was to set up a system of
    checks and balances within our government. There should be. The
    House can check the Senate; the Senate can check the House. We
    can check the White House. The White House can veto a bill. We
    can override a veto.
        Let's just assume--I believe the general perception is that
    OMB runs its business professionally. That is probably
    reflected in the high job approval ratings of those who work
    there. But assuming there were a problem at OMB, if we don't
    have an inspector general at OMB, who is to be the check and
    balance on OMB to see that it is doing its job well?
        Mr. Orszag. Well, there are several--I mean, first, we have
    several statutory, Senate-confirmed officials. So one check is
    obviously the legislative branch, because we can be called to
    testify.
        In addition, we are very integrated into the White House.
    And, to the extent--it depends, I guess, on exactly what the
    nature of the concern would be. Inspector generals are often
    looking for either fraudulent behavior or lack of application
    of guidelines and what have you--much more appropriate to
    agencies that are administrating large programs. We are not
    operational, and inspector generals are typically focused on
    operational issues.
        Mr. Edwards. But yet you are influencing multibillion-
    dollar decisions, what goes into the President's budget. When a
    four-star general or a secretary of a military service
    testifies before the subcommittee I chair, Military
    Construction and Veterans Affairs, I believe OMB has to approve
    their testimony.
        If undue political considerations were influencing
    decisions, if that happens on earmarks, even though ``earmark''
    has become a four-letter word now, the public and press have
    access to that. It is a very transparent process. The OMB
    process, for many of us, including those of us in Congress, is
    a black box, and we are not sure how decisions are made within
    the OMB, and I doubt the public and the press really know.
        I am not suggesting there is anything going on at OMB that
    deserves an inspector general review. But I think, in general,
    the principle our Founding Fathers of checks and balances
    within our system has served our Nation well. And given the
    incredible power of OMB, both on the regulatory side--let's
    just say, for example, OMB--OMB, just for the record, has
    considerable input on regulatory processes, right?
        Mr. Orszag. In a coordinating kind of way, yes, as I
    mentioned before.
        Mr. Edwards. Okay. So, if in----
        Mr. Orszag. But let me even note there, I mean, for
    example, the office responsible for that process, OIRA, has a
    Senate-confirmed official at the head of it. We are actually
    awaiting Senate confirmation for the President's nominee for
    that office. That official can, therefore, be called to testify
    and, you know, frequently would be if there are concerns. I
    also want to----
        Mr. Edwards. But the question is, how would you find out--
    if we had concerns we were aware of, yes, we would call that
    person to testify. But----
        Mr. Orszag. That is a great example where almost everything
    is in the public domain. In fact, last week, there was a
    question--OMB tends to take comments that come in and collate
    them and send them back to the relevant agency. That is in the
    public domain. And there were media reports attributing to OMB
    comments that came from one of the agencies where we just
    simply collect the comments and pass them back. That is in the
    public domain.
        But I think, more broadly, I am very committed to
    transparency, in a variety of dimensions. I mean, I don't want
    to make it too trivial, but I started a blog at OMB, in part
    because I thought we could better explain what we were doing,
    and have gotten a good response to that.
        In the regulatory sphere, there are legal requirements, in
    terms of disclosure. And I am hoping that we can not only meet
    those statutory requirements, obviously, but go beyond that to
    the extent that it is feasible.
        So I think, in most areas, you will see transparency with
    regard to OMB's operations. And, beyond that, again, we can be
    called to testify, which is a helpful discipline. And, beyond
    that, we also have a White House operation that is clearly very
    attentive, which is to say, if there were a concern about OMB's
    operations that an agency had, not only have you heard about
    some of those concerns, which I think is as it should be, but,
    frankly, the President and the White House would hear about
    them also. And that is a--I think we all need to be clear
    about--you know, that provides a discipline to OMB's own
    operations, which I think is healthy.
        Mr. Edwards. Well, my time is up. I will finish by saying I
    think it is a great compliment to the professionalism of the
    OMB staff, the professional staff that work there year-in,
    year-out, decade-in, decade-out, that it hasn't had its own
    inspector general and yet there have not been the kind of
    scandals that we have seen throughout other Federal agencies.
        Thank you, Mr. Chairman.
        Mr. Serrano. Thank you.
        You know, even health care--the health care issue is
    obviously a very serious issue, but even during discussion of
    very serious issues you can have a chuckle. And I remember
    during the campaign, every time candidate Obama would say, ``We
    have to give the American people the same health care plan the
    Members of Congress have,'' I couldn't help but think, ``I
    wonder if Senator Obama knows that we don't have vision or
    dental, that we have to add that on.'' And so, we hope that you
    give the American people the full plan, not the one we have.
        Although I am not complaining about anything that I have as
    a Member of Congress, for the record, especially the
    opportunity to meet folks like you who come and testify and
    instruct us as much. And I read that exactly the way Mr.
    Edwards wrote it for me.
        Let me ask you--I have just one more question to ask you,
    and that is, during the previous administration, OMB pressured
    Federal managers to do more and more contracting out of
    functions being performed by Federal employees. Some of these
    contracts may have made sense and increased efficiency. In many
    cases, though, the main effect seems to have been a lot of
    money and effort wasted on doing studies, demoralization of the
    workforce, and disruption of agency services.
        Our subcommittee included language in 2009 government-wide
    appropriations provisions placing a moratorium on further
    outsourcing studies. And I am pleased to see that you propose
    to continue that moratorium. This is only a temporary step,
    though, pending a comprehensive review of contracting-out
    practices and implementation of new policies that can separate
    sound practices from others.
        Some have suggested that the government really doesn't know
    how many contract employees it has working for it, knowledge
    that would seem an important first step in getting a handle on
    this problem. Therefore, in the 2009 appropriations bill, we
    asked for a report on the size of the workforce as of the end
    of 2008, by agency and by number of civilian, military, and
    contract employees.
        Can you tell us how that study is coming? Can we expect to
    receive it on schedule this September?
        Mr. Orszag. Two things. One, we have been developing
    appropriate methodologies for reporting back by September. I
    think progress is good. In addition to that, we are looking
    into--there is a separate requirement, and we are looking into
    conducting pilot projects with particular agencies to get a
    more nuanced and accurate count of contractors.
        One of the frustrations, as you may know, the Army took 5
    years or so to do a full enumeration of the number of
    contractors. That takes longer than would be useful, and so we
    are looking at ways of piloting with different agencies, a way
    of getting a timely and accurate count.
        For the September report, we are going to have to rely on
    approximations and methodologies that are not a direct
    enumeration but rather a statistical guess at what the number
    of contractors are.
        Mr. Serrano. We also included language in the 2009 bill
    encouraging studies of where it might make sense to do some in-
    sourcing--that is, replacing contractors with Federal
    employees. Can you tell us what OMB is doing to encourage
    agencies to implement that policy?
        Mr. Orszag. Well, I think you have seen a significant
    announcement, for example, by Secretary Gates, suggesting that
    much of the activity, including in the acquisition field, that
    had been contracted out will be brought in-house. And that is
    exactly as I think it should be.
        So across the government, as you know, the President issued
    a memorandum in early March on this topic. We are cognizant of
    the concerns about the line between Federal activity and
    contracting out having gotten blurred, if you will, over the
    past several years and the need for better clarity about what
    is inherently governmental and should be done by Federal
    employees.
        Mr. Serrano. Right.
        And the last part is, I am sure you are aware of this whole
    understanding by some people that you have people that are
    being contracted making policy decisions that really should be
    made by civil servants. What can you tell us about that? What
    concern is there that this is getting a little out of hand?
        Mr. Orszag. Well, again, the concern is that the line has
    become too blurred, and things that are inherently
    governmental, including making policy decisions, belong to be
    made by Federal employees. And we are aware of the concern. We
    are working to implement a set of changes.
        I will, again, point to the Defense Department as being one
    of the key actors in which that line is being redrawn. But
    beyond that, we will be redrawing the line and providing more
    clarity that Federal employees need to be conducting inherently
    governmental activities.
        Mr. Serrano. One last point. Let's say that, of the three
    people that are sitting in that front row, two are Federal
    contractors and one is a civil servant. Are they then--and a
    lot of people are not clear on this--are they then covered by
    the same ethics rules of that agency and everything? Or is one
    person covered by whatever?
        Mr. Orszag. Not always. And one of the reasons in getting--
    --
        Mr. Serrano. The answer was no?
        Mr. Orszag. One of the reasons in even the difficulty of
    counting is, you know, you sign a contract for something, and
    that entity then has a bunch of people working on it. They
    often will not be necessarily reporting the number of employees
    directly. And one of the reasons the Army found such difficulty
    in obtaining the number of contractors is that reaching down to
    getting all the people who are working on a contract is not
    necessarily the easiest thing in the world.
        So there are a variety of concerns involved in the
    contracting out that has occurred, and we need to be much more
    disciplined about it.
        If I could also, by the way, just because I can't help
    attention to detail, just for the record: As of the end of
    March, which is--I don't know why I am obsessed with this, but
    I will nonetheless report back to the committee--as of the end
    of March, which is the latest data that we have, China remained
    the largest holder of Federal debt, with $768 billion in
    Federal securities; Japan was the second largest.
        The flow since Inauguration has flipped slightly, with
    China purchasing roughly $60 billion in debt and China $40
    billion. But nonetheless, China remains the largest foreign
    holder of U.S. securities.
        Mrs. Emerson. Can you repeat that? It flips, so is Japan is
    number one and China number two?
        Mr. Orszag. No, no. So the one question is----
        Mrs. Emerson. Well, you said China and China in the last
    one. I got confused.
        Mr. Orszag. Oh, I am sorry. China remains the largest
    holder of Federal securities. Japan is second. But if you look
    at new purchases, there has been a slight change since
    Inauguration, with Japan purchasing $60 billion and China
    purchasing $40 billion.
        Mrs. Emerson. Yeah, that is what I thought you meant. Okay.
    I just wanted to clarify that.
        I have three questions, and they are little questions.
        One of the things that you all have done tremendously well,
    I think, is to try to call on each of the departments of the
    government to be more efficient. And one example would be the
    Department of Homeland Security, with regard to its office
    supplies, saving $52 million, which is quite shocking. I am
    sure you were as shocked as I was about that.
        Are you working with all of the other departments to do the
    same?
        Mr. Orszag. Yes. And, as you know, the President has asked
    the Cabinet to report back on at least $100 million in savings.
    I am hoping we will exceed that threshold. The Cabinet officers
    are currently conducting--they are, sort of, looking through
    and seeing what they can save. This is not in terms of policy
    proposals, non-legislative, just in terms of internal
    administrative functions where they can save money.
        Mrs. Emerson. Well, let me say, because I know that DHS
    saved $52 million by not going through the GSA, but, just for
    fun, we took three items that are on the GSA schedule. One was
    one pack of pens, and another was a pack of something else, and
    another thing was a stapler, just a regular old stapler, an
    old-fashioned stapler that we have on our desks.
        The stapler at Staples or Office Depot, one of the two
    let's just say, was $6.74. And the same stapler with the exact
    same VIN number on the GSA acquisition was $10 and some cents.
    Now, keep in mind the millions of staplers we buy. All right,
    that just annoyed me. Plus, it took 17 days for the stapler to
    get from the GSA place to your agency, OMB, and it took 3 days
    from Staples.
        The pens, a little bit of--not so bad. Maybe one was 60
    cents more a box and the other was 50 cents more a box.
        But when you consider the magnitude of a number of these
    items that every single department has, I mean, you--I guess my
    point is, I would like to you take a look at the GSA
    acquisition table and really see if they are getting bargains.
    I mean, heaven knows you would need a trillion interns,
    practically, to go through everything and make comparisons, but
    we just did three and it was shocking that there would be a $4
    difference in the same exact stapler.
        So, anyway, I really am pleased that you are doing that.
        Another thing that is kind of a pet peeve of mine, and it
    has to do--and you brought up the child nutrition bill. And the
    child nutrition bill is not at all a pet peeve of mine; it is
    the process. In other words, here we are, we have the Labor and
    Education Committee handling child nutrition, but yet, really,
    child nutrition per se is an agriculture function. And I
    realize that both agencies work together, but are you also
    looking at--you know, you say, well, it is important that we
    are forcing collaboration among the agencies where they have,
    perhaps, a joint jurisdiction.
        Are you looking at anything to try to consolidate some of
    these functions? Like, food safety, I guess, would even be a
    better one.
        Mr. Orszag. Food safety is a classic example.
        Mrs. Emerson. Classic example. I mean, somebody, one or the
    other, ought to have it. But to have two sets of policies, one
    for poultry and meat, one for dairy, I mean, it is just
    craziness. And it ought to be done--and I hope that is part of
    the process, too.
        Mr. Orszag. I believe that both Secretary Vilsack and our
    FDA commissioner, Peggy Hamburg, who were just confirmed last
    night, if I remember correctly, are both interested in finding
    more efficient ways to consolidate the food safety regime in
    the United States. Because it is clear that the current system
    has flaws that the National Academies and others have pointed
    out and inconsistencies that don't make sense.
        Mrs. Emerson. And I dare say--and this probably will ruffle
    some feathers, but I am going to say it anyway--there are
    committee chairpeople who wish not to lose jurisdiction over
    things that I know kind of hurts the process of trying to
    become more efficient. But it seems to me, particularly on the
    food safety issue, that is one place.
        And even on child nutrition--I mean, my Ag Subcommittee on
    Approps ought to be dealing with child nutrition as much, quite
    frankly, as Education and Labor, but we don't deal with it at
    all. To me, it seems crazy. So, anyway, hopefully you will look
    at those kinds of things, too.
        And my last question, Mr. Chairman, has to do with the
    Recovery Act. And you have stated--and I don't remember when,
    maybe it was even today--that the government right now is
    spending about a billion dollars a day in stimulus funding.
        So if you all are able, at OMB, to account for the
    expenditure of the stimulus funds for internal purposes, when
    is it going to be possible for the consumer, our constituents,
    to get that same information all the way down to the contractor
    level? In other words, we know that Missouri got X amount of
    money, and we know X amount of that went to the transportation
    department and perhaps X went to somewhere else. But, beyond
    that, nobody knows anything.
        And I know that Earl Devaney has also said that he is
    worried about--you have the money to let us know all that
    information, but he is worried about, you know, your time
    frame. Is there anything else that we can do to help you so
    that you can speed the process up, or is it just a physical
    impossibility?
        Mr. Orszag. Two comments. One is, as you know,
    responsibility for recovery.gov, which would be the portal or
    the Web site through which that information is provided, does
    rest now with Earl Devaney and the oversight board.
        In addition, one of the challenges is the underlying
    financial plumbing or financial architecture of the Federal
    Government does unfortunately involve some delays in
    aggregating information. It has been a frustration with
    USAspending.gov and with other related activities.
        We are working to accelerate the timelines as much as
    possible, but it is true that there are still lags involved in
    the process that seem surprising to outsiders.
        Mrs. Emerson. But is there anything that we can do to help
    you? I mean, I realize that there is some inherent lag that is
    always just going to happen, but----
        Mr. Orszag. Yeah, I appreciate the concern. I could perhaps
    come back to with you specific suggestions. But my
    understanding and my impression is that we are being as
    aggressive as we can, and I don't know that there are any
    additional things that you can do for us right now that would
    help speed it even further. But I will come back to you even in
    writing.
        Mrs. Emerson. I would appreciate that. Just let us know,
    okay?
        Mr. Orszag. Sure. I appreciate that.
        Mrs. Emerson. Thanks.
        Mr. Serrano. Well, we only have one last question, but just
    an observation, listening to you go back a couple of times to
    the China issue.
        You are not going to find a Chair and a ranking member who
    agree on an issue as much as Jo Ann and I agree on the fact
    that we should have a better relationship with the Government
    of Cuba. And yet we hear all of this talk about China. And it
    begs the question, so how is Cuba a threat to us? But that is
    not for you to answer.
        Mr. Edwards.
        Mr. Edwards. Dr. Orszag, if you could give a quick answer,
    maybe I could stretch this into two quick questions----
        Mr. Orszag. All right.
        Mr. Edwards [continuing]. Maybe the first one being
    quickest.
        Congressional earmarks as a percentage of the total Federal
    budget, including discretionary and mandatory spending, give me
    a ballpark.
        Mr. Orszag. Way under 1 percent.
        Mr. Edwards. Way under 1 percent. Okay.
        And since that was so quick, if I could stretch the
    chairman's goodwill, one last question.
        This discussion--it came up earlier in this hearing today--
    the sense that you can cut taxes by $1 and that will generate
    $1.05, $1.10, or $1.20 in extra Federal revenue. If that were
    the case, this would be an easy problem to solve. Let's cut all
    the marginal tax rates to 1 percent, and we will have almost an
    infinite amount of Federal revenue. So it doesn't even pass the
    commonsense test.
        But as a Budget Committee member, back when you were
    wearing the nonpartisan hat as director of CBO, you did a study
    on the impact of tax cuts and dynamic scoring. As I recall--if
    you could just quickly tell us some of the results of that.
        As I recall, it said that, on average, many economists,
    most economists would say, if you cut taxes by a dollar, maybe
    at most it might raise 20, 22, 23 cents back, so you have a net
    loss of revenue to the Federal Government of 75 to 80 cents.
    But then if you are actually paying for tax cuts by borrowing
    money, which is what we have done over most of the last 8
    years, it actually could reduce economic growth.
        Mr. Orszag. That is correct.
        Mr. Edwards. Could you summarize? Address the issue, does a
    dollar in tax cuts pay for itself?
        Mr. Orszag. No. There is no credible evidence that tax cuts
    pay for themselves.
        You correctly summarized the CBO study, which I think
    reflects the consensus in the economics community, which is
    that deficit-financed tax cuts, not only do they not cause a
    boom in economic activity over the medium or long term, the net
    effect may well be a negative. And that is because any benefit
    you get from lower marginal tax rates or better incentives to
    work and to save can be offset by the drag from a larger
    deficit.
        Mr. Edwards. Okay.
        Thank you, Mr. Chairman.
        Thank you very much.
        Mr. Serrano. Thank you.
        And we thank you, Director Orszag, for your testimony
    today, for being with us. We stand ready to assist you, to be
    your partner.
        If this chairman has a concern, I have already voiced it,
    and that is that there is plenty for OMB to do and OMB will
    always be an important agency, but the last 8 years allowed OMB
    to take on a role that we think does not go with the job
    description, if you will.
        Nevertheless, we are here to be supportive and to help our
    country move forward. And we thank you.
        Mr. Orszag. I appreciate it. Thank you.
        Mr. Serrano. The meeting is adjourned.

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                                                Thursday, May 21, 2009.

                              TREASURY DEPARTMENT

                                    WITNESS

    HON. TIMOTHY GEITHNER, SECRETARY
        Mr. Serrano. Today the subcommittee meets to discuss the
    work of the Treasury Department and its budget request for
    fiscal year 2010. I am pleased that the request includes
    funding for expanded IRS enforcement efforts targeted at
    individuals and businesses seeking to park cash overseas in
    order to escape U.S. taxes. I am also pleased to see the strong
    funding increase for the Community Development Financial
    Institutions Fund to provide capital and financial services for
    underserved low-income communities throughout the country,
    communities that are suffering most from the current state of
    the economy.
        At the same time, however, I am dismayed that the
    Department is refusing to abide by a key provision of the
    fiscal year 2009 Appropriations Act relating to agricultural
    and medical sales to Cuba. This is totally unacceptable, and I
    will have more to say about this today. Of the Treasury
    Department's many responsibilities, none has attracted the
    attention and concern of the American public as much as the
    Department's role in responding to the financial crisis, and in
    particular, the Department's implementation of the Emergency
    Economic Stabilization Act of 2008. Its success or failure is
    just too important to the country and to all our constituents.
        There are several key questions we must ask. First, are the
    Department actions helping to restore confidence in the
    financial markets? Are credit markets opening up again? And is
    lending increasing again? Second, are the Department's actions
    helping to stem the tide of home foreclosures in this country?
    Last month alone, more than 340,000 properties received a
    default or auction notice or were seized. As highlighted by a
    study released last week by the Pew Research Center, 85 percent
    of the neighborhoods worst hit by foreclosures are minority
    neighborhoods. Other research has found that tenants make up a
    large percentage of those who lose their homes in foreclosure
    because their new landlords do not have to respect the leases
    signed by the old landlord.
        While I am encouraged that the Department has unveiled a
    plan to prevent foreclosures, and while it is reasonable to
    expect that the plan will take some time to see results, this
    problem is of utmost urgency to millions of Americans. A third
    question is whether the American taxpayer is getting a good
    deal. Will the taxpayer recoup the massive public investments
    that are being made in financial institutions? I have said in
    the past that when Wall Street was doing great and these guys
    were giving each other $50 million bonuses, I could not see
    anything happen to my district in the Bronx that made me say,
    `wow, there is some good from what is happening on Wall
    Street.'
        Now Wall Street is not doing as well, bonuses have still
    been paid, and many of the problems in my district, especially
    the foreclosure problem, are getting worse. I hope that the
    Department will keep in mind the needs of all Americans and all
    communities, and not just Wall Street, as we attempt to solve
    the crisis.
        I expect that we will have a very healthy and vigorous
    discussion this morning. Secretary Geithner knows more about
    these issues than most anyone else in the country, having
    previously headed up the Federal Reserve Bank of New York.
        Secretary Geithner has also played a lead role in the
    Treasury Department's responses to the global financial crises
    of the late 1990s. We welcome you today, Mr. Secretary, and
    look forward to your testimony today. You were supposed to be
    our first hearing. As it turns out you are our last hearing.
    But somehow you were either going to start it or end it, and
    you are closing the hearing season. So we welcome you today. We
    look forward to your testimony.
        And I would like to recognize our ranking member and my
    colleague, Jo Ann Emerson.
        Mrs. Emerson. Thank you, Chairman. Welcome, Secretary
    Geithner. I am glad you are able to be with us this morning,
    and welcome to the committee. In the Nation's current economic
    condition, you, as we all know, have a very challenging task
    that includes reinvigorating bank lending to consumers and
    small businesses, stabilizing the housing markets, saving the
    American auto industry, and most importantly, protecting the
    American taxpayer, their investments, and preserving the long-
    term financial health of the Federal Government. I know that
    you and your staff have been working extremely hard on these
    issues, and we appreciate the dedication of all of you. Like
    many of my Republican colleagues who voted for the TARP last
    fall, I am disappointed with the former administration's
    allocation of the funds.
        Providing banks with hundreds of billions of dollars,
    borrowed dollars I might add, with little accountability or
    transparency was not what the Congress thought it was
    authorizing when we passed the Emergency Economic Stabilization
    Act. And let me tell you that I come from a very rural district
    in southeast, south central Missouri, and it is quite difficult
    to explain to my constituents why banks have received billions
    of dollars without being required to increase lending, account
    for the funds they received, or take meaningful steps to limit
    executive compensation. In February you released the new
    administration's plan for using the remaining TARP funds. At
    the time, this plan had few details and was not met with great
    confidence by the American people or the markets.
        Many questions and concerns still remain about your plans
    to address issues such as growing home foreclosures, limiting
    executive compensation, the Federal Government's ownership of
    common shares of banks, the future of the American auto
    industry, finding ways to increase small business lending, and
    eliminating toxic assets from balance sheets. In addition to
    administering the TARP programs, you all at Treasury have many
    other responsibilities, including acting as the government's
    bookkeeper, producing the country's coins and paper money,
    administering the government's debt, assisting citizens in
    filing their taxes, and pursuing those who do not pay their
    fair share, as well as performing important work involving
    terrorist financing and money laundering.
        Regarding the administering the government's debt,
    yesterday we discussed with Director Orszag the same issue. And
    I am concerned with the administration's fiscal year 2010
    budget, because it projects a deficit in 2009 of $1.8 trillion,
    and projects continuing deficits for the foreseeable future. My
    concern and the concern of so many of us is where will these
    funds come from? China, Saudi Arabia, sovereign wealth funds.
    Will this public borrowing crowd out investment in the private
    sector, slowing the recovery? Who will ultimately pay for this
    borrowing? Our children, your children, our grandchildren? What
    are we doing to the future of the financial health in the long
    term for this country?
        In conclusion, you do face great challenges in managing the
    Federal Government's finances and in attempting to reinvigorate
    the economy. I look forward to working closely and
    collaboratively with you, Chairman, and the rest of this
    committee to address these difficult matters. So thanks for
    being here.
        Mr. Serrano. Thank you. The committee is honored to have
    with us our chairman and our ranking member, Mr. Obey and Mr.
    Lewis, notwithstanding the fact that they bring about
    butterflies in Emerson's and Serrano's stomach, because we have
    to sound smart and look good, and they take notes and they
    report back to themselves.
        Ms. Wasserman Schultz. You always look good.
        Mr. Serrano. Thank you. So I would like to recognize our
    chairman, Mr. Obey.
        Mr. Obey. Thank you, Mr. Chairman. It is getting a little
    deep in here. Let me simply, Mr. Secretary, let me just put it
    to you this way: Two points. Number one, I watched Senator
    Tester yesterday in an exchange with you about the auto
    industry. And he is a plain-spoken man. And I admire that
    greatly. And essentially, what he said, and it is something I
    totally agree with, I am very interested in seeing a healthy
    auto industry remain in this country, but I am not interested
    in providing one damn dime to any company like General Motors
    who decides that as part of their reorientation operation, they
    are going to be closing plants in this country and moving them
    to Mexico or any other foreign country.
        There is a limit to the toleration of taxpayers and voters
    when it comes to accepting the realities of globalization. And
    one of the realities that the auto industry is going to have to
    accept is that if they expect to receive taxpayer support and
    government solicitude, they need to demonstrate their loyalty,
    if you will, to American workers and to the American job front.
        Secondly, I chaired the Foreign Operations Subcommittee for
    10 years. And I pushed through this Congress a lot of funding
    for the IMF. But I have to tell you I am very, very reluctant
    to support any additional funding for the IMF in the
    supplemental as long as the Europeans continue to be as modest
    as they are in terms of their actions on the stimulus front. I
    understand the traditional fear of the German Central Bank
    about inflation. I understand what they went through before
    Hitler came to power. I understand all of that. But it seems to
    me that if we are being asked to borrow money by the worldwide
    community in order to stimulate our economy that we do not want
    Uncle Sam to be Uncle Sucker. And I, for the life of me, do not
    understand why the Germans are so reluctant to support a more
    aggressive stimulus package. Because if their economies do not
    recover, our economies do not recover, because we cannot sell
    to them what we ought to be selling to them.
        And I would like your honest assessment whether you think
    they are stuck in last century's fears or whether they are
    going to recognize this is a new reality again. Thank you very
    much, Mr. Chairman.
        Mr. Serrano. Thank you. Mr. Lewis.
        Mr. Lewis. Welcome, Mr. Secretary. You have taken on, to
    say the least, major challenges. I do not have any opening
    statement that is of a formal nature. They tell me that
    Alexander Hamilton thought you had the most important job in
    the Federal Government next to the Presidency. And indeed, if
    challenges are a part and parcel of carrying out that
    responsibility, you have them. I look forward to having a
    chance to ask questions. Thank you.
        Mr. Serrano. Thank you. Mr. Secretary, we always ask our
    witnesses to keep their testimony down to 5 minutes. And your
    full statement will go in the record. So please proceed.
        Secretary Geithner. All right. Thank you, Mr. Chairman,
    Ranking Member Emerson, and members of the subcommittee,
    Chairman Obey, it is an honor to be here with you today. I am
    sorry that I was not here first in your list of hearings. That
    would have been an honor too. But I am pleased to be here, and
    I look forward to working with you. We are going to need your
    support, I hope to have that support, and I want to have a
    close, productive working relationship with this committee,
    this subcommittee. It is very important for the Department. And
    I hope you give me a chance to work with you closely on these
    issues.
        My opening statement is about our budget, not about the
    financial system, financial recovery efforts, about the IMF or
    autos, but I would welcome a chance to talk to you about all
    those questions. I am happy to discuss any issue before the
    country. These are challenging times. President Obama and his
    administration are working to meet these challenges by getting
    Americans back to work, trying to get our economy growing
    again, by recognizing the imperative of getting our fiscal
    house in order, bringing our deficits down on time to more
    sustainable levels, by making long neglected investments in
    health care, energy, education that are necessary to improve
    the productive capacity of our economy over the longer term,
    and to enhance our competitiveness in this global economy.
        To achieve this, we must repair and reform our financial
    system so that it works in favor of recovery rather than
    against recovery. We need to support growth and meet our long
    term fiscal goals. We must redesign and bolster enforcement of
    our Tax Code so it is both fairer and more efficient. To
    advance our interests globally, we have to work with other
    nations to promote economic recovery and to ensure more open
    markets for U.S. businesses, a more balanced, sustainable
    global recovery over the longer term. And to protect our
    national security interests, we need to continue to use all the
    tools at our disposal to exclude terrorists, proliferators,
    other illicit actors from using our financial system to advance
    their interests.
        The fiscal year 2010 budget before you today will allow the
    Treasury to pursue these core missions. The $13.4 billion
    request includes a 676 million, or 5.3, percent increase over
    enacted 2009 levels. Of this, and let me just give you a few
    brief highlights: 14 million would go to bolstering and
    increasing the staffs of our domestic finance and tax policy
    offices, which are at the center of, as you know, the
    challenges facing our country in the financial system and on
    the fiscal front.
        We included a $137 million request to more than doubling
    our CDFI fund to ensure that the benefits of financial repair
    reach beyond our major banks and to businesses in economically
    distressed communities. These communities were underserved by
    our financial system even before the current crisis, and they
    have been deeply hurt by the job losses, foreclosure crisis,
    business failures that the crisis has spawned. We propose a
    total of $332 million devoted to the new Internal Revenue
    Service enforcement efforts, including 128 million to add
    nearly 800 new IRS employees to combat offshore tax evasion and
    improve compliance with U.S. international tax laws by business
    and high income individuals.
        Another 130 million would go to bolster the security of IRS
    information technology, to improve the efficiency of its
    business systems, and to upgrade its fraud detection
    capabilities. Although not directly under the jurisdiction of
    this subcommittee, our budget also includes funds to meet our
    international obligations in the international financial
    institutions, again to help us mount an effective global
    response to the crisis, which is so important to our recovery.
    As we seek these additional funds to respond to our Nation's
    troubles, we have cut back on some programs that are either
    ineffective or can be safely delayed. As to just one example,
    even as we seek to increase capital investment for the IRS, our
    budget would reduce the Department-wide capital investment
    account by 65 percent, for a savings of $17 million.
        Now before I conclude, I just want to say a word about the
    Treasury Department staff. I have had the honor now of leading
    a team of smart and dedicated individuals who are working
    exceptionally hard to make our government more effective, our
    society more just, who are following a long tradition of
    debating policies openly and courageously on their merits,
    doing what is right, not what is expedient, and drawing on the
    best ideas and expertise available across the nation. They are
    performing a great service for the country under very
    challenging circumstances, and I am grateful to them. As I
    said, it is an honor to serve with them again.
        Treasury is, of course, responsible for promoting the
    Nation's prosperity and protecting its financial security. We
    advance our interests around the world through the strength not
    only of our economy, but the quality of ideas, by the
    commitments we demonstrate through our actions. At other times
    in our history, when the economy was growing on its own and
    markets seemed capable of regulating themselves, these duties
    might have seemed comparatively routine, but these are not such
    times. The President and the Treasury Department have already
    begun the hard work of recovery and reform. Our budget will
    help us pursue these critical goals, and we hope to earn your
    support and cooperation as we go forward. Thank you, Mr.
    Chairman. I would be happy to answer your questions.
        [The information follows:]

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        Mr. Serrano. Thank you, Mr. Secretary. Mr. Secretary, prior
    to your written statement you mentioned the fact that you
    needed to have a good working relationship with this committee.
    And I certainly understand the need to have a good relationship
    with every Member of Congress, with this committee, and this
    subcommittee in particular. So what I want to do now, before I
    move onto a discussion with you, is just to get out of the way
    the one unpleasant, perhaps unpleasant question I had, and that
    was in the 2009 omnibus bill, there was language that this
    subcommittee included jointly with the Senate, Senator Durbin,
    which spoke to agricultural and medical sales to Cuba. And in a
    desire to get two Senators to vote for that bill, you issued a
    letter, unbeknownst to me, or to this committee, basically
    saying that what we intended to do was not going to take place,
    and that they could rest assured that that was not going to
    take place.
        That was not good. That was not a good way to start a
    relationship, because I take very seriously article one of the
    Constitution that says that Congress dictates what the law will
    be, and it is your role to carry it out. And so I was
    distressed to see that you basically were telling two senators
    if you vote for this, I promise you this is not going to take
    place, when I had intended, and Senator Durbin had intended,
    for it to take place. So my question to you was, was it that
    you did not understand the intent of what Congress was trying
    to do? After all, this was a bill agreed to by the Senate and
    the House, and was on its way to the President's desk. Or was
    this an administration's desperate need to pick up two votes?
        Secretary Geithner. Mr. Chairman, thank you for raising
    this. I understand how strongly you feel about this. And thanks
    for giving me a chance to respond to your concerns on this. I
    know you have worked on these issues for many, many years, and
    I admire your leadership on these issues. And I think you are
    finding we are at a time now where we have a chance to move
    together on many of the things you worked very hard for.
        Now, in this particular context, with respect to the
    concerns you raised about this letter, what I did was explain
    how the Department interpreted the law, clarified our
    interpretation, same interpretation we have had for some time.
    It was a consistent statement of how we interpreted the law,
    and that is my obligation, as you know.
        Now, I understand your concerns with this. And I want to
    say today before you, we would be happy to work with this
    committee and with the authorizers to seek changes in the law
    that would allow us to meet the concerns you have supported and
    pursued for some time. I do not know what is going to be
    possible in that context, but I would be happy to work with
    this committee and the authorizers on ways to figure out a way
    to move forward and to address your concerns in this area.
        But what I did in this letter is just simply explain what
    has been Treasury's interpretation of what the law requires.
    And we came to that judgment very carefully. We were very
    thoughtful in doing it, but it was a consistent interpretation.
        Mr. Serrano. And I understand that. And even on this
    committee not everyone agrees with me or with Ms. Emerson, who
    agrees with me, on how we should go forward. But I think we all
    agree that if any Member here gets the committee to accept
    language or dollars that then you have to carry out that. And
    so my concern at that time, and I will drop the subject because
    I am not interested in pursuing it any further, at that time
    was that the administration was basically saying it does not
    matter what the Congress said, we, in order to pick up two
    votes to pass this bill, will tell these two Senators that that
    issue is dead.
        And that troubles me, because it could happen on any of the
    issues that Mr. Obey brings up, on any issues Ms. Emerson or
    Mr. Lewis brings up, and that is not the practice. So you
    said--you answered the next question I was going to ask you,
    was on any issue when you feel that there is a difference,
    please discuss it with us before you issue letters and
    embarrass the heck out of me in the Spanish press.
        Let me move on to more pleasant things. We understand that
    the financial services authorizing committees and the
    administration are giving serious consideration to creating a
    new agency to address consumer problems with financial
    services. Such a commission might be started in the next fiscal
    year, and it would fall within the jurisdiction of our
    Financial Services Subcommittee. Can you share with us your
    thoughts about what a commission might look like, how much it
    would cost to run, how large a staff would be required, and how
    it should be funded?
        Secretary Geithner. Mr. Chairman, as you know, the
    President is committed to working with the Congress this year
    to enact comprehensive reform of our financial system, to put
    in place a much stronger form of protections for consumers and
    investors, and a range of other reforms to make our system more
    stable in the future, less vulnerable to this crisis. And as
    part of that, we have outlined in the public a series of
    substantive proposals in the areas of reducing systemic risk,
    bringing oversight to derivatives markets, improving credit
    card protections for consumers, now enacted into law pursuant
    to the work of your colleagues in the Congress.
        And we are going to lay out to the public and to the
    Congress in the next several weeks a broad set of comprehensive
    reforms. As part of that, we will make some proposals for how
    we change the oversight structure. This country has lived for
    some time with a very complicated, very segmented, archaic
    framework of oversight over our financial system. And that is
    one reason why this crisis was so severe, one of the reasons
    why consumer protections were evaded so easily. And that is
    something we are going to have to change. As part of that, you
    are correct, we are examining the merits of setting up a new
    independent commission or agency to help provide stronger rules
    to protect consumers and better enforcement of those rules. We
    are not at the point yet, though, where we have made a judgment
    on what precise structure or form this should take, how broad
    its authority should be, how it relates to the existing
    authorities that exist across agencies now. But we look forward
    to a chance to laying out our proposals for you when we are
    ready.
        And I think it will probably take us a little longer to
    address the questions you raised, which is how to fund it, how
    large is it going to have to be. We are starting to think
    through those questions now, but as you know, those very
    complicated, consequential questions. The funding in particular
    is difficult because of the complications created by some of
    the existing funding mechanisms for supervisory authorities.
        So we are beginning to work through this. But the objective
    is, which is the most important thing, is that we have better
    designed rules to protect consumers, that are enforced much
    more effectively and evenly across the entire financial system.
        Mr. Serrano. And what is your timetable to come to us?
        Secretary Geithner. We are, of course, working closely with
    the banking committees, other relevant committees in this
    context. But we expect to lay out in public within the next
    several weeks a broad set of proposals not just for the
    substance of the rules of the game, but for the oversight
    structures to enforce those rules.
        Mr. Serrano. Well, thank you. We have great attendance at
    the committee today, so I will stop now and turn to Ms.
    Emerson.
        Mrs. Emerson. Thank you, Mr. Chairman. Let me just put in
    my one bit of comment on the original issue that Mr. Serrano
    brought up with you, particularly in light of your comment
    about the desire to open up markets. And certainly Cuba has
    been a market that has great potential and has served us well
    so far. But I just want to point out, and this has bothered me
    for some time, and unfortunately you are now the recipient of
    this, having worked over the last several years with the
    Treasury Department on this issue, and having been one of the
    authors of the original bill, some folks at the Treasury
    Department have told me that they were interpreting the intent
    of Congress.
        And when they are telling me that they are interpreting my
    intent, and it is not being interpreted properly, it is really
    rather problematic. So I just say that. And hopefully, we will
    be able to work on this issue and get it done. But now I will
    talk about other Treasury things. The fiscal 2010 budget
    estimates that banks will return about 25 billion in TARP funds
    this fiscal year. And I think you all made a statement about
    that sometime earlier this week. And that the funds would or
    could be used to make investments in community banks.
        When Congress authorized the TARP program, we were led, as
    I said earlier, to believe that the program would purchase
    troubled assets. And I believe that members did not think that
    the proceeds from the sale of assets would then be used to
    purchase additional assets. So my three quick questions are
    these. One, do you believe that the Treasury has the authority
    to use funds returned by the banks to purchase new assets
    rather than perhaps to pay down our debt or pay down our
    deficit?
        Number two, if you believe Treasury does have the authority
    to purchase new assets with returned funds, is the TARP going
    to go on forever? And the last question I have is will this
    administration or future administrations have the ability to
    recirculate the TARP funds over and over again in order to
    nationalize or partially nationalize additional businesses and
    industries beyond banks, insurance companies, or the auto
    industry?
        Secretary Geithner. To go in reverse order, then I will do
    details, no, no, and yes. So let me try and go through them. We
    believe as the law is written, and we spent some time thinking
    through exactly how the law is structured, and I addressed this
    in some detail in public yesterday, that a dollar that comes
    back to the Treasury repaid by a bank goes into the general
    fund, available to reduce our debt. But it also increases the
    head room available under that authority and gives us the
    flexibility, if we think there is a strong case for doing so,
    to use that additional resources to support the programs we put
    in place. That flexibility is designed in the law. And I think
    it is a prudent, important thing to retain, because we are
    still in a, you know, a very challenging economic and financial
    situation.
        It is very hard to know what is going to be necessary and
    possible going forward. We would like nothing better than to
    have all those resources go into general fund, reduce the debt.
    But I think prudence requires that we use the flexibility the
    law provides to reinforce these programs, which are designed to
    get credit available to businesses and families across the
    country. Now, the law does sunset. I believe the Secretary of
    the Treasury has the ability under the law to extend it beyond
    its initial expiration for an additional 9 months. But I do not
    have the authority to extend it beyond that. So it is not a
    permanent program. So we cannot permanently recycle these
    programs. And it is not our objective, and I would never
    support a program designed to, as you questioned, a program
    designed to allow us to nationalize banks or other businesses
    as a matter of policy. I would never support that.
        It never should be the objective of the United States
    Treasury to do that kind of thing. What our obligation, though,
    is, is to try to make sure we get this economy back on track as
    quickly as possible and we get this financial system repaired
    and working again so it is not damaging the fortunes of
    American businesses and people who want to borrow to put their
    kids through college. And these programs are designed carefully
    to try to get credit flowing again where it is necessary, so
    again, we have recovery come as quickly as possible. That is
    our reading of the statute, though. And I know there is some
    questions about the way it was designed, but we have looked at
    it very carefully.
        We checked that interpretation with independent people. And
    we think that is the way the law is written.
        Mrs. Emerson. Thank you.
        Mr. Serrano. Before I recognize Mr. Obey, let me just say
    that I agree with his comments about bailing out corporations
    that are then going to use some of that money, if not all of
    that money, to go elsewhere. You know, no one bails out little
    grocery stores. In my district, we have something, as you know,
    called bodegas. And bodegas were opening up on every block. Now
    for the first time in all my years in New York they are closing
    down. If you were to bail them out, they would open up in the
    same place, down the block, rehire the same people. But to bail
    out major corporations who then go to Mexico or elsewhere is a
    major problem. And I join Mr. Obey in that concern. Mr. Obey.
        Mr. Obey. Mr. Secretary, I would just like to talk to you
    for a bit about the general role of Treasury in the government
    and in the economy. And I raise this because I am very
    concerned that over the long haul, our long-term debt situation
    is simply not sustainable. I fully supported, and in fact, I
    think we need an even more aggressive effort at stimulating the
    economy short-term than we have engaged in. But I am very
    concerned that in the long-term we are simply not going to be
    able to get our debt into manageable levels as long as we do
    not have a healthy increase in the earning power of average
    American workers. And so that is what leads me to ask. I do not
    know if it is a question or simply making a point.
        We do not normally think of capitalism as being a system
    under which the government shovels money into the banks and
    shovels money into corporations. It is an emergency situation.
    And we have to do it, but we do not like it. But I would urge
    you to look at the Treasury Department and its responsibilities
    in a far more expansive way than has been the case in the past.
    Workers are being asked to swallow the idea that the government
    is going to shove billions of dollars into the high rollers in
    this economy. And they are being told that that is necessary to
    save the system. But unfortunately, some of the same
    beneficiaries of that in our society, when people talk about
    trying to shield workers from some of the more nasty
    consequences of globalization, their response is, `no, no, no,
    we have got to let the free markets work.'
        Well, with all due respect, right now we are not
    experiencing the free markets on Wall Street or other high
    places, but we certainly are on Main Street. And so I would
    simply ask that you, during your tenure, use the Treasury
    Department as an agency that serves as a spokesman for
    everybody in this society, not just the top dogs. And that
    means we have to be just as aggressive in looking for ways to
    stabilize the wage situation, the family security situation,
    the pension situation for private average families as we are
    for the biggest guys on the block. I know that is heresy to
    some of the establishment in this economy, but I think Treasury
    has--it is not just the Labor Department that is supposed to
    give a damn about average workers in this place. And I would
    simply say that unless we get a better balance, the idea that
    workers simply have to take what is going to come in the
    globalized market, while big guys are too big to fail and so
    they can get help, that is not a sustainable economic model
    because it is not a sustainable political model.
        And so I just urge you, for whatever it is worth, to take
    that kind of view of your agency's responsibility. Other than
    that, I would simply like to have a comment from you on my
    comments on the German Central Bank and the IMF and the
    Europeans' reluctance to go as far as I think they should do
    with respect to their own economic stimulus.
        Secretary Geithner. Mr. Chairman, let me just say at the
    beginning that I completely agree with what you described as
    the appropriate role of the Treasury in thinking about laying
    the foundation for a more sustainable, more balanced, more
    productive economy where the gains are broadly shared across
    the spectrum. When I last served in the Treasury, which was in
    the 90s, we had a period where we had very responsible fiscal
    policies help induce a large sustained increase in private
    investment, strong productivity growth, and much more broadly
    shared gains of that growth across the American economy.
        And I think that shows how important it is to look more
    broadly at how you design economic policy, because you are
    going to get more sustained, more productive growth, more
    evenly shared if you bring that mix of long term fiscal
    responsibility, investments in things that will make our
    economy more productive over time. Now, just to underscore our
    commitment to this, the Senate confirmed 2 weeks ago Alan
    Krueger, Princeton economist to be Assistant Secretary of
    Economic Policy at the Treasury. And Alan's life's work is in
    the areas you referred to, in labor market policies, a range of
    things in that area. And so we are very much in support.
        I know the President, as you know, the President is very
    committed to trying to make sure that we create the conditions
    for a more balanced, more sustainable economy over time as we
    address this crisis. And you are right that we have this huge
    obligation to work with the Congress to bring our fiscal
    deficits down over time to a more sustainable level. Now, right
    now the most important thing we could do towards that objective
    is to fix the crisis we inherited. That requires in the short
    term more stimulus, more support to prepare our financial
    system. But that is the only way to get growth back, the only
    way to make sure deficits are lower, not larger in the future.
    But that has to come with a very clear commitment to bring
    those deficits down over time. Now, on the important thing
    about the international imperative, absolutely our efforts to
    promote recovery here will be less effective if we do not get
    other countries moving with us to support demand and growth in
    their economies. And the President went to London about 6 weeks
    ago and got broad agreement among the major economies,
    including the Europeans, to provide the largest, most
    coordinated support in terms of fiscal policy that we have ever
    seen. And as part of that, the major European economies are
    doing very substantial stimulus in 2009. What distinguishes
    their approach today from ours is the stimulus package that the
    Congress designed with the President provides for more support
    sustained over a 2-year period of time. The Europeans have a
    somewhat different system. And they have been reluctant to
    commit at this stage to lock in now additional stimulus for
    2010 partly because their systems are different.
        But my sense is the whole context has changed. A year ago,
    6 months ago people were debating whether this is a crisis or
    not. They thought it would be contained to the United States.
    The world would be insulated from it. No one takes that view
    now. Their economies are going through as challenging periods,
    in many ways more challenging in some things than ours, and I
    think that has led to greater recognition about the imperative
    in Europe for more aggressive action. You are seeing it. We
    want to make sure it is sustained and strong enough so that it
    is reinforcing our efforts. And you are right to underscore
    that point.
        So I think it is slightly better than you think. But what
    is important is that it be sustained and that all governments
    are watching carefully about the impact of their policies and
    see if they will need to reinforce them.
        Mr. Obey. Thank you, Mr. Chairman.
        Mr. Serrano. Thank you. Mr. Lewis.
        Mr. Lewis. Thank you very much, Mr. Chairman. Mr.
    Secretary, I read with some interest Treasury's response
    initially to what around this place was our mutual bipartisan
    desire to have the average American family have access to the
    American dream, that is the opportunity to own a home.
    Everybody knows that is a part of a family's solid future, et
    cetera. We allowed that over the years to get so out of control
    that we may very well have undermined that dream being
    available for the average family. Indeed, over the years I
    supported that idea, I am sure my colleagues supported that
    idea. In turn, we found ourselves in a circumstance in one
    neighborhood close to my own a fellow who wanted to live in
    Oregon, got the bank to provide him with a $600,000 loan.
        He and his wife took that to Oregon and walked away from
    the house, in the neighborhood of which I speak. Next door to
    that same house another fellow saw an opportunity, because
    obviously house prices are going to continue going up forever,
    and he had a home on the marketplace shortly for $2.1 million
    in a neighborhood where next door it was going to be $600,000.
    I do not know, have any idea what that bank sold the latter
    house to two physicians from Loma Linda for, but I am clear, I
    am absolutely certain they took a heavy loss in connection with
    that. The fellow who went to Oregon simply walked away.
        It seems to me that somewhere we have missed it as we try
    to make sure the American dream is available to that average
    family. Now, I read with some interest Treasury's response to
    all this. And it sounds to me like you may be proposing
    policies that would take us right back to the track that got us
    here in the first place. It really seems to me that we ought to
    be examining whether the family that wants a piece of the
    American dream should not also have some skin in the game. If
    people do not put 10 percent down or 20 percent down--it was
    not that long ago it was 20 percent expected--then they will
    not have skin in the game. I would like to hear what your
    thinking is about that as we go forward.
        On another level, I would like to ask a question, if I have
    time, about our governor's suggestion that perhaps Treasury
    should be involved in helping the California economy with its
    American dream.
        Secretary Geithner. Thank you, Congressman. On the housing
    thing, I think you are actually right that basic failures in
    underwriting standards, in consumer protection, in lending
    behavior helped exacerbate the unsustainable boom in housing
    prices, which has put at peril or put at risk the dreams of
    many other Americans who are much more responsible in their
    lives from being able to participate in owning their home,
    staying in their home. And I think that one of the tragic
    things about financial crises is when they end, the pain is
    indiscriminate. It affects people who were careful and
    responsible, it affects people in neighborhoods who did not
    borrow too much, did not live beyond their means, had a lot of
    equity in their house.
        And that is what is basically unfair about crises. And that
    is one of the reasons why it is important that we put in place
    reforms that will make sure there is going to be more
    conservative underwriting standards in the future. And that is
    going to require change to the rules of the game and better
    enforcement among other things. Now, the proposals in the
    President's housing initiative I do not believe carry the risk
    you described. But let me just describe what those are. They
    have three key parts. The first is working with the Fed to help
    bring mortgage interest rates down to levels that will help
    stabilize, reduce the risk of further declines in house prices.
    And they have come down now to historic lows. Second is to make
    it possible for millions of Americans, who under previous
    programs could not refinance their mortgages, to take advantage
    of them, to have the opportunity to do that. And that you have
    seen refinancing rates surge. And that program again will be
    very helpful to a lot of people who would not have had the
    opportunity to take advantage of lower interest rates. And that
    will bring meaningful reductions in their monthly payments that
    will help the economy as a whole as well.
        Third piece of the President's program is to allow eligible
    homeowners to modify their loans to bring down their monthly
    payments to a more affordable level for a period of time. But
    those programs will not benefit Americans who really just went
    too far. They will not benefit speculators or people who bought
    second homes. So they are carefully designed to have maximum
    benefit for the people who are most affected by this crisis for
    reasons beyond their control. And I think they are an
    important, very important part of recovery. Housing is not the
    only cause of this crisis, but it is the center of the crisis.
        And I think these programs are necessary, and I think will
    be helpful in those parts of the country that were most
    affected by the crisis. And very briefly on the question you
    raised about the ability of state governments and municipal
    authorities to borrow to finance the programs, meet the basic
    needs of their communities. Mr. Chairman, can I go on on this?
        Mr. Serrano. Sure.
        Secretary Geithner. Okay. The municipal market was
    dramatically affected by the broad pressures this crisis
    unleashed. And it caused a very, very sharp increase in
    borrowing costs for governments, for government authorities.
    And things are getting better, though, on that front. The cost
    of borrowing has come down a lot. Those markets are starting to
    find some new balance and equilibrium, and they are
    significantly better. But there are many States, including your
    State, where States are facing much higher deficits than they
    thought, and they are going to face a challenging period ahead
    still. They are working very hard, as they are in your state,
    to try to bring those deficits down, take actions that are
    going to help make it possible for them to meet their borrowing
    needs.
        And we are open to working with the Congress on ways to
    help address those constraints. A lot of proposals are on the
    Hill for helping in that context, and we are working with some
    of the authors of that legislation to see if we can help. But
    the primary burden is going to rely on governors and mayors to
    try and make sure that they are taking the steps necessary to
    bring their deficits down and they can earn back the confidence
    of the people they need to invest in their securities. We may
    be able to help in some ways, but they are going to carry the
    primary burden of trying to manage through this very
    challenging period.
        Mr. Lewis. Mr. Secretary, you know very well that
    California, as the Golden State, could go to the marketplace,
    and indeed----
        Secretary Geithner. It is actively going now.
        Mr. Lewis. Correct. They can issue bonds, the marketplace
    will respond.
        Secretary Geithner. They will.
        Mr. Lewis. They will respond in one way if there is a
    Federal Government guarantee, Uncle Sam backing those
    guarantees. And it is hard for me to quite imagine my
    colleagues from Wisconsin or one of my friends from Kansas want
    to--it is hard for me to imagine their encouraging Treasury to
    say, sure, we will back your bonds, and we will pay part of the
    price, indeed because we know, we are absolutely certain you
    are going to reduce your spending patterns, and thereby get
    your economy in order. But it sure leaves a lot of questions in
    my mind as to whether that is real world.
        Secretary Geithner. Well, I mean, again, we are prepared to
    work with Members of Congress who have ideas for how we can
    help address this. But I just want to point out that a lot of
    the burden, as all those officials recognize I think, is going
    to be on them to lay out a path that gets their deficits down
    to the point where they are going to be able to fund themselves
    comfortably.
        Mr. Lewis. I will be very interested in your decisions
    about marketplace versus what might be a new government-backed
    beginning for a State like California. Thank you.
        Secretary Geithner. You know, I should say, Congressman,
    that the Build America bond program that Congress legislated as
    part of the recovery is a very effective, successful program.
    It does have the government provide, share some of the burden
    of borrowing costs of states and municipal authorities, but it
    is, I think, a well-designed program at a time like this where
    the country is going through the deepest recession in decades.
    It is important that States are able to meet their basic needs,
    that they are able to, you know, keep policemen and firemen,
    teachers on the job, and they not have to do things that are
    going to deepen the recession. So I that is good example of
    things the government has done that can be very effective in
    this area without raising some of the risks that you alluded
    to.
        Mr. Lewis. Thank you.
        Mr. Serrano. Thank you, Mr. Lewis. We will now begin to
    recognize members of the committee under our beloved, but
    strict 5-minute rule. And we start with the gentleman from
    California, Mr. Schiff.
        Mr. Schiff. Mr. Chairman, thank you. I wanted to follow up
    where my colleague left off. Mr. Secretary, as you know,
    California has one of the highest unemployment rates in the
    country. Unemployment in California rose to 11.2 percent in
    March, the highest level since the State began keeping records
    in 1976. What is more, the number of people out of work for
    almost a year rose by 9.4 percent, double the amount in 2008.
        A recent budget review by the nonpartisan Legislative
    Analyst's Office estimated that the California budget--if the
    budget propositions failed, as they did yesterday, the State
    will face over a $100 billion deficit over the next five years.
    A hundred billion dollar deficit. Due to these cash problems,
    Standard & Poor's lowered its rating on general obligation
    bonds in February, making California, its bond rating lower
    than any other State in the country. The short-term municipal
    bond market conditions are freezing liquidity, sapping investor
    confidence, shrinking the market for investor municipal issuer
    bonds, which burden taxpayers with substantial costs and worsen
    the State's budget woes. These dire financial circumstances
    have left the State with few options. And the governor is now
    contemplating just radical cuts in education, health care, and
    other essential services.
        The State estimates it will need to borrow 13 to $15
    billion in short-term bonds this year, compared to 3 to 5
    billion in a normal year. They will need money in January or
    face even more severe cuts. It is unlikely the financial
    markets in the current State could even bear such a large
    short-term need. And if the State cannot find the money
    somewhere, it will likely be forced to stop all public work
    projects, which will have completely counterstimulative impact,
    cutting critical infrastructure jobs, stop paying its
    contracts, cut off cash flow to localities that perform State
    services, could force municipal bankruptcies around the State.
        Given the centrality of California in the national economy,
    and the impact this could have economically for all of us, I am
    very interested in what you can do. And my sense is, given the
    enormous flexibility and authority you have already
    demonstrated, that you probably already have the power even
    without legislation to help the State of California. The
    simplest, quickest way to support cash flow borrowings would be
    a Federal guarantee under TARP or TALF to provide stand-by
    purchase guarantee to banks, providing credit enhancement for
    their cash flow borrowings. In the unlikely event that a State
    or locality could not repay its obligation at maturity, it
    would draw on the bank line of credit supporting the cash flow,
    borrowing to repay investors. The Federal Government could then
    purchase nonperforming assets from the bank under TARP or TALF,
    and would ultimately be repaid by the State or locality. It
    presents I think very little risk in the long run to the
    Federal Government.
        On the other hand, allowing California to go belly up
    presents a great risk to our hoped for continued economic
    recovery and turnaround. Another solution might be for the
    Federal Reserve to establish a program to provide liquidity to
    the short-term municipal bond market by either purchasing
    variable rate bonds that are sold to banks or loaning banks the
    money so they can buy municipal variable rate bonds. No
    solution is perfect. I think the guarantees are the quickest
    short-term solution, and I think you may have the authority to
    do that already. And assuming, Mr. Secretary, that you do have
    the authority to do it, and I understand you may not be
    prepared to accept my assumption, but assuming that you do, are
    you willing to exercise it? Because I think the downward drag
    on the economy that will result if California founders, and we
    are going to make massive cuts, so it is not like we are asking
    for a pain free solution, but are you willing to use the
    authority, if indeed it can be shown that you have it?
        Secretary Geithner. Congressman, let me just start by
    saying I think you described the challenges well, and those
    challenges are not unique to California. They are acute in
    California, but many States across the country are facing very
    similar challenges both in terms of level of unemployment,
    substantial increase in borrowing needs, incredibly difficult
    choices ahead. And I think you are absolutely right that if
    States and cities are forced to cut back too much in this
    context that could deepen the recession and lengthen the point
    at which--deter and weaken recovery. And that is why the
    Congress has moved so quickly to put in place very, very
    substantial support for States. That is why the Build America
    bond program is so important. And that is why it is so
    important we get this economy back on track and the financial
    system working better. And the improvements we have seen in the
    muni market are partly a reflection of the strength of those
    broader efforts. But they are not yet back to normal, still a
    challenging environment.
        Now, on your specific question about the authority, let me
    do this very carefully. We do not believe that TARP, as
    currently designed and legislated, provides a viable solution
    to this specific challenge. And let me cite three reasons why
    that is the case: We are not allowed under TARP to guarantee
    issues, securities issued after March 2008. We are restricted
    to giving assistance to financial institutions. The way TARP is
    designed, every dollar we guarantee is charged against the
    limited funds Congress authorized. And for those reasons and
    others, it does not appear to us to provide a viable way of
    responding to that challenge. And I think that is one reason
    why your colleagues in the House are considering legislation to
    address that problem.
        And as I said, we are, you know, of course we are prepared
    to work with Congress on ways to think through how to address
    this problem, ways that would not make some other problems
    worse in the future. It is a difficult, complicated balance. We
    are in very close touch with officials in your State and many
    other States as they navigate through this. And we are going to
    keep on watching very carefully. And of course we will work
    with Members of Congress if they have ways that they think they
    can mitigate this through legislation.
        Mr. Schiff. If I could make one last comment, it will be
    very brief.
        Mr. Chairman, I just want to respond to my colleague from
    California, and your point, which is correct, that there are
    many other States that are in the same boat, maybe not sinking
    as fast as California. So there may be broader interests in
    this idea because of that.
        But my concern is, we don't have the time. And we already
    saw--California already demonstrated--we had to put a halt to
    all the construction projects in the State. We don't want to do
    that again. It would run completely counter to what you are
    trying to do and what we are trying to do with the stimulus.
        We will continue to explore with you whether you have the
    authority already, and if you don't, we will certainly work to
    give you that ability. But I appreciate any help that you can
    provide the State.
        Thank you, Mr. Chairman.
        Mr. Serrano. Thank you.
        Before I recognize Mr. Kirk, I want to apologize to Ms. Lee
    for a little mix-up there. However, just the apology. You don't
    get any extra time when I recognize you.
        Ms. Lee. I know you, Mr. Chairman. You are trying to calm
    me down and give me time----
        Mr. Serrano. You are going to be angrier now because Mr.
    Kirk goes first. Mr. Kirk.
        Mr. Kirk. I very much appreciate your service to President
    Bush and to President Obama. And I think that you reappointed
    Stuart Levy on Iran.
        I am concerned that when we have talked to the World Bank,
    they have refused to tell this committee who the financial
    intermediaries are between the World Bank and Iran. Over the
    last calendar year, the World Bank has provided checks from
    18th Street in Washington, D.C., to the Central Bank of the
    Islamic Republic of Iran of $125 million.
        I suspect--or previously, the intermediary was Bank Melli
    then cited by the Treasury Department as a proliferator. I
    suspect that the intermediary is now the Central Bank of
    Austria, then paying the Bank of Markaz; and I am wondering if
    you could commit to us that you would let us know who these
    intermediaries are that the World Bank is using to pay the
    Iranians.
        Secretary Geithner. Congressman, I would be happy to commit
    to you to come back to you and see if we can be responsive. I
    can't respond now in that context. I would be happy to have
    Stuart or his colleagues come up and speak to you.
        And thank you for what you said about Mr. Levy. He is an
    exceptionally capable official, and he has led the design of a
    remarkably successful program.
        Mr. Kirk. Exceptionally capable. And he really has strong
    bipartisan support up here.
        My main concern is about our official borrowing. And I
    would hope that you would commit to visit Commissioner Van
    Zandt and the Bureau of Public Debt and the trading floor
    yourself, because there is a reality check that you will go
    through once you talk to your team there, since they are
    responsible for over 40 percent of the funds raised by the
    United States.
        If I look at the charts from the Bureau, you are
    borrowing--given that so much of your debt is just 4-week debt
    and rolling over, you are borrowing at a rate of $160 billion a
    week. So far, since the administration took off, we have
    borrowed $3.2 billion and we have a new authority that is being
    used by the Fed in which they are basically printing money and
    then buying U.S. debt which is now about $126 billion has been
    used in printed money to purchase U.S. debt.
        Now, we have received official concerns from the European
    Central Bank, from the premier of China and the Chinese central
    bank on this policy and the growing perception of weakness of
    the dollar. We have also seen two major industrialized
    borrowers collapse in their ability to sell debt to the public.
    The German Government collapsed in an effort in January and the
    United Kingdom has now failed in two major efforts. Today--and
    I hope you will take the time to read it--the Wall Street
    Journal reports that S&P and Fitch have announced that next
    July, they will strip Britain of its AAA credit rating.
        Now, Britain invented what I would call the ``guilt
    standard.'' When we have some people pressuring European
    countries to increase their deficit spending, we have a reality
    check that the markets are already saying to Prime Minister
    Brown, You are collapsing your ability to raise money.
        My question is this: Is the European Central Bank, central
    bank of China, premier of China, Fitch and S&P all wrong about
    the concerns about the dollar and the creditworthiness; and you
    are right, that this is not a completely irresponsible
    borrowing policy on behalf of United States? Or should we begin
    to be concerned about a new Treasury debt bubble that is being
    created under the Obama administration?
        Secretary Geithner. Congressman, we don't know each other,
    but I want to say that I welcome your interest and concern
    about these proposals. And we are going to need your support
    and the support of the Congress because we are going to face
    the most challenging fiscal environment in a long period of
    time. And it will be as critical for this economy, for
    confidence in our financial markets, for the basic health of
    recovery, that we work with the Congress to put in place
    credible commitments to bring our deficits down to a
    sustainable level over the medium term.
        Mr. Kirk. As a Republican moderate, let me say, the message
    that I am picking up right now from the American people is two
    messages, one difficult for Republicans to hear and one
    difficult for Democrats.
        The message from the American people that I am getting is,
    Get out of Iraq and don't raise my taxes. President Bush really
    didn't want to listen to the first message and President Obama
    doesn't want to listen to the second. But the message is clear:
    Leave Iraq and don't raise taxes.
        Now, in that environment, which we just heard from the
    voters in California overwhelmingly, it leads to a downward
    pressure on spending because the borrowing that you are doing
    is--the markets are rapidly telling other sovereign borrowers
    that their plans are not sustainable.
        Secretary Geithner. Congressman, what I am saying is, you
    are absolutely right. And as the Secretary of the Treasury, I
    want you to know that my basic obligation is to make sure that
    we put in place policies that sustain confidence in this
    economy, in our currency, that we sustain a strong dollar, we
    retain what is a great strength and asset of this country,
    which is the most deep and most liquid markets for Treasury
    securities in the world.
        And we will work very hard to make sure that we bring these
    deficits down once we put in place a recovery and we fix this
    crisis that we inherited. Remember, we start with an--we
    started with an exceptionally high deficit. The cost of the
    crisis required additional costs up front. There is no way we
    could solve this crisis without the temporary necessity of
    higher short-term deficits; and if we did not do this, again we
    would face higher deficits in the future.
        Now, I spent the last 5 years being President of the New
    York Fed. One of the Fed's responsibilities, as you know, is to
    help the government fund itself. I am deeply aware of the
    complexity and importance of that basic task of making sure we
    are preserving that great asset, which is the most--the deepest
    liquid markets in the world. And we will work very hard at
    that.
        Now, you are right to say that the Fed has embarked on a
    very unconventional, exceptional program for buying treasuries.
        Mr. Kirk. Which is--basically they are printing money and
    buying treasuries.
        Secretary Geithner. I wouldn't think about it that way.
        But I think you are right; it deserves an amount of care
    and reflection and evaluation. But we have a very strong Fed,
    independent Fed, whose basic obligation to the Congress and the
    American people is to keep inflation low and stable over time.
    And they have been exceptionally good at doing that, and they
    will be good in the future.
        And as the chairman has said in public, they are very
    committed to make sure they have the ability to unwind and
    reverse the exceptional measures they have taken, once we have
    achieved the necessary stability in our financial markets and
    economic priorities are back on track.
        Mr. Kirk. I want to close with one technical point, which
    is this. You were sent a message by the market when the 30-
    year-note auctions nearly collapsed and you had a large Fed
    purchase of that and you had to raise the interest rate by 50
    basis points to get it sold.
        When I was on the trading floor----
        Secretary Geithner. Congressman, I am sorry. You are right
    that we are going through a----
        Mr. Serrano. We are running out of time here, folks.
        Secretary Geithner. That is not an accurate
    characterization of the events of that day.
        Mr. Kirk. But let me just ask this. When I was on the
    trading floor----
        Mr. Serrano. Your time is up. Can you save that for your
    second round?
        Mr. Kirk. I would have finished in 30 seconds, but----
        Secretary Geithner. I would be happy, by the way, when we
    come back in the second round to keep--this is a very important
    issue, and I would be happy to keep talking about it.
        Mr. Serrano. The Chair is now going to recognize the
    charming, debonair, charismatic Member from California, Ms.
    Lee.
        Ms. Lee. Thank you, Mr. Chairman. And I accept your apology
    for jumping over me today. You gave me time to calm down.
        Because I am telling you, Mr. Secretary--first of all, I am
    delighted to see you, glad that you are here; but I am fuming
    at your response to the chairman with regard to what happened
    on the medical supply and ag provisions that occurred on Cuba.
        First of all, let me just say this: This administration is
    an administration of change. The President campaigned based on
    a campaign of change in direction. And we have seen the
    President mount a major effort, and I fully support what he is
    doing.
        What you said to the chairman in response--with regard to
    interpreting this provision that was in the law that we passed,
    consistent with prior interpretations, to me flies in the face
    of, first of all, what congressional intent was until two
    Members of the Senate decided it was not congressional intent.
    And secondly, when you said you want to work with the
    authorizing committee to try to move forward, how in the world
    can I accept that? Because the same two Senators may weigh
    again as we pass whatever changes we may want to pass.
        So that is unacceptable to me, because if that is the only
    reason that you all moved against--violated congressional
    intent based on what we wanted to do, then I don't know how you
    are going to do it in the future. That has not changed any
    interpretation of any laws based on the past 8 years; when we
    are trying to change those laws, to go back and say you are
    interpreting it consistent with the last administration, to me,
    is just downright outrageous.
        Secondly, Chairman Rangel and myself, we asked GAO to
    conduct a report on OFAC and its expenditure of tax dollars as
    it relates to enforcing the embargo against Cuba. You all were
    instructed--again, under the last administration, which we
    never received--to conduct a risk-based assessment, which GAO
    recommended. Cuba-sanctioned enforcement for many years was
    unbelievable in terms of the dollars that it took, tax dollars,
    to enforce. And we believe in GAO in that they have recommended
    that those resources could be used for efforts to such as
    protection and homeland security, rather than enforcing and
    finding individuals who are bringing in Cuban cigars.
        Thirdly, Mr. Chairman, let me just ask you about the TARP
    funding as it relates to minority and women-owned businesses--
    also minority media outlets. We have written to you and to Vice
    President Biden. I chair the Congressional Black Caucus, and we
    have not seen the banks respond at all in terms of advertising
    dollars. They are not being fair with our tax dollars. And we
    want to see how the Treasury Department--yourself, Mr.
    Secretary--can make sure that the banks provide for a level
    playing field and use some of these TARP dollars, when they are
    advertising in major media outlets, that they also play fair
    and provide advertising in black and Latino and Asia Pacific
    American media.
        And we have written to you. We have written to the Vice
    President. We are going to stay on this until there is some
    justice in this whole effort. Thank you.
        Secretary Geithner. Would you like me to respond?
        Ms. Lee. Yes, I would.
        Secretary Geithner. On your first point, I understand your
    concerns. We are applying the law as we believe it reads. But
    as I said, we are willing to work with the appropriations and
    authorizing committees to find a way to move forward in this
    issue and meet your concerns and the chairman's. I don't know
    if that is going to be possible, but we would be happy to try.
        Ms. Lee. We tried to do that in the legislation.
        Secretary Geithner. I understand. And I know that I am not
    addressing your concern today.
        Ms. Lee. No. But I mean, we tried to do that is what I am
    saying.
        Secretary Geithner. We are going to have to try again,
    because I think that we don't believe it is--again, we are
    interpreting the law as we believe it is written.
        Ms. Lee. But we were trying to change that as it is
    written, Mr. Secretary.
        Secretary Geithner. I understand.
        Ms. Lee. So what I am saying to you is that is
    disingenuous.
        Secretary Geithner. No. It is not--I will never be
    disingenuous before you. I am stating exactly why I wrote the
    letter as I did, what its rationale is for. And I am committing
    to work with the authorizing appropriators on how to move
    forward on this question.
        We would like to find a way to try to address this, and we
    have a chance to try and do that.
        Ms. Lee. I look forward to working with you on that. I want
    to see exactly how we are going to do that.
        Secretary Geithner. That is reasonable. You should judge us
    by our actions and give me a chance to try and meet your
    concerns on this issue. I don't know if we can do it, but we
    will try.
        On enforcement resources for OFAC sanctions, for Cuba
    related sanctions, if I understand the numbers correctly, we
    have roughly 10 full-time equivalent slots in Treasury now
    devoted to this enforcement challenge. That is 10 against 155.
        I am not completely sure we have got the balance right, but
    we will keep looking at that and trying to make sure we are not
    overdoing it and we are not misallocating resources. But we
    have got a whole set of obligations we have to meet. We have to
    meet those as carefully as we can and as responsibly as we can.
        Your question about minority----
        Ms. Lee. The GAO study and the recommendation, the risk-
    based assessment, are you in the process of conducting it?
        Secretary Geithner. Of course, as in any case, we look
    carefully at what the GAO does. And my general view on these
    things is, of course, how you allocate resources should be
    guided by a risk-based approach, and we should be looking at
    where we get the highest return on the marginal resources. That
    approach is something I believe in deeply.
        Ms. Lee. We are looking forward to the report.
        Secretary Geithner. Now, on the TARP question, I will give
    you--I hear you. I understand your concern. I understand your
    interest in this issue. Let me just give you one example where
    we are trying to be responsive.
        We outlined as part of our effort to try to fix the
    financial system, clean up the financial system, a set of new
    funds that provide a market for real estate-related loans and
    securities that were at the heart of the crisis, still gumming
    up the financial system. And as part of soliciting interest
    applications for participation by asset managers in these
    funds, we encouraged firms to partner with small veteran-owned,
    minority women-owned businesses; and the application--a lot of
    interest in this program.
        I am pleased to say that most applications and certainly
    the strongest applications have come with very substantial
    partnerships, and we expect to announce in the next couple of
    weeks our decisions on the selected asset management companies;
    I hope you will see in that context evidence that we are trying
    to be responsive to your concerns in this area.
        Ms. Lee. How about minority media?
        Secretary Geithner. I can't respond to you today on the
    media question you raised. But I heard you, and I will be happy
    to get back to you on that question.
        Ms. Lee. Thank you, Mr. Chairman. And if we have a second
    go-round, I have some more.
        Mr. Serrano. Yes. Thank you.
        And for the gentlewoman's information, we want to just
    clarify--and I don't want to drive this subject to death, but
    the Senate--the House bill had passed full committee. As you
    know, it was an omnibus bill, so things did not pass the floor.
        It passed committee, and spoke to cash-in-advance sales to
    Cuba. The Senate bill had the same language.
        The Senate had an addition to allow businessmen to travel
    to Cuba. We accepted that. That is part of the negotiating
    between the two houses, whether you pass a bill on the floor or
    you do it in an omnibus situation.
        It was then that the issue came up of just trying to go
    around those agreements between Mr. Durbin, myself and Mr.
    Regula, and the ranking member on the other side. And that is
    what created the difficulty and the tension.
        Mr. Culberson.
        Mr. Culberson. Thank you, Mr. Chairman.
        Secretary Geithner, the question that my colleague, Mr.
    Kirk, asked is so important, I would like to--if I could, Mr.
    Chairman--yield a minute to Mr. Kirk to follow up.
        Mr. Kirk. I just wanted to follow up on situational
    awareness of the auctions that you have.
        You are selling debt about four times, five times a week
    now. In general, an auction is between 12:30 and 1:00, with all
    of the action happening about 6 minutes out from 1:00; and the
    Bureau of the Public Debt is very proud that they report the
    results of these auctions within 90 seconds.
        Coming out of my reserve duty in the war room of the
    Pentagon, I said, if you have a collapse of an auction, as now
    has happened in Germany and the United Kingdom, can you get the
    President of the United States on the phone right away? Because
    MSNBC will know before the White House.
        And they said, No, we actually don't have that procedure.
    We would call our assistant secretary who would call the under
    secretary who might get it.
        So I am wondering technically, when you visit the office,
    can you set up a procedure where Commissioner Van Zandt has
    your cell phone?
        Secretary Geithner. Sure.
        Mr. Kirk. Because I am very worried as we have now seen
    other sovereign borrowers begin to collapse, Van Zandt is going
    to have to get you on the phone as he is telling the media
    because he has a 90-second reporting requirement.
        Secretary Geithner. I would expect him to call me and, of
    course, would ensure that he could
        Mr. Kirk. Thank you. Thank you.
        Mr. Culberson. Thank you, Mr. Chairman. Secretary Geithner,
    one of the biggest concerns that my constituents have, the
    people of Texas--I know taxpayers do nationally--is, they
    consider actually the debt deficit burden faced by the United
    States is the greatest threat to the Nation. In fact, Peter
    Heart--the Peter Heart Survey organization just did a survey
    that the Peterson Foundation released showing that 85 percent
    of the American public rank as the greatest threat to our
    national security--ahead of terrorism and everything else, they
    rank growing budget deficits and the national debt as the
    greatest threat to the Nation's long-term security. And I
    absolutely have to agree, when you look at the level of
    borrowing, the level of spending.
        I voted against $2.3 trillion worth of spending under
    President Bush. I am a dedicated fiscal conservative. I have
    always described myself as a Jeffersonian, first and foremost,
    and have so far voted against 1.6 trillion here. So I don't
    play favorites.
        And my concern is--I don't know if you have ever seen one
    of these. This is a $50 billion bank note from Zimbabwe. It is
    the real McCoy. Do you have one of these? Do you have one that
    you carry around? Yeah? Good for you.
        Mr. Serrano. Mr. Secretary, is there a rule about having
    foreign currency at an appropriation hearing?
        Mr. Culberson. Thank you. I am glad to see it. Thank you.
    You obviously are thinking about it a lot, too. I am really
    thrilled to hear it because that is very important.
        And I have, in the brief time that I have got--and I hope
    there will be a follow-up. I wanted to ask on behalf of my
    constituents--and I asked them to send me some questions on
    Facebook and Twitter.
        I got a couple of terrific questions, and I want to ask on
    behalf of several of my constituents--Mark Langford asked this
    question on Facebook and Robert Gremillion asked the same
    thing. Mark Langford asked, Mr. Secretary, will you
    categorically rule out bailing out California or any other
    States with our tax dollars?
        Secretary Geithner. I don't know if this is going to be
    responsive, Congressman. Let me tell you how I always answer
    that question.
        I have a set of important obligations to the American
    people. The most important of those is to help this President
    get this economy back on track, repair this mess, put us on a
    path where we are going to be growing again, and get our fiscal
    house in order. And everything we do we view through that
    prism.
        And we will have to do exceptional things, as we have done
    already, to fix this mess, because the only way we are going to
    get the economy back on track, a more sustainable, balanced
    recovery to get our fiscal position back to a sustainable level
    is to fix this crisis.
        Now, that is not saying that--that is not putting on the
    table or taking off the table any specific thing like that. But
    I just want you to know there are things that we have had to do
    I never would have contemplated doing and that we are doing it
    only because we inherited and started with such a traumatically
    damaging recession.
        Mr. Culberson. Right. And added to that debt and deficit at
    a pace that is unprecedented--I know you inherited a lot of
    debt and deficit, but you have added to it at an unprecedented
    clip. No Congress has ever spent this much money in this little
    time in the history of the United States.
        Secretary Geithner. We haven't had--again, this Congress
    and this administration started in January with a $1.2 trillion
    deficit and a deeply damaged financial system and a recovery--a
    recession that was still deepening and intensifying. And the
    only responsible way and the only fiscally conservative way to
    address that challenge was to put in place programs that would
    help get growth back on track.
        And if we did not act, Congressman--and I am a fiscal
    conservative too. And I think, again, the only responsible
    fiscal policy this country can adopt is to make sure we are
    taking actions to fix this crisis. If we did not do that, you
    would have had much more damage done to the productive capacity
    of the American economy, to our future revenue base--deficits
    would be higher in the long term, much greater risk of loss of
    confidence in this economy.
        That doesn't mean we are going to agree exactly on----
        Mr. Culberson. We obviously have a deep philosophical
    disagreement.
        Secretary Geithner. I suspect that we don't, actually.
        Mr. Culberson. The debt level is just unsustainable, and I
    think that is where Mr. Kirk was going.
        The concern is, we will reach a point--Moody's has already
    warned us we may lose our AAA bond rating.
        Secretary Geithner. But, Congressman, understand--I think
    we disagree less than you think.
        You are absolutely right that the fiscal position of the
    United States is now on a path where, if we do not bring those
    deficits down, it will be unsustainable. A really important
    obligation we share--and we can't do it alone; we need the
    Congress with us on this--is to make sure we have the will to
    put in place policies that will bring those deficits down
    credibly to the point where our debt stabilizes at an
    acceptable level as a share of our economy.
        If we don't do that, then recovery will be delayed, it will
    be weaker and we are going to face much deeper challenges.
        Mr. Culberson. Without raising taxes and cutting spending?
        Secretary Geithner. It is going to require bringing our
    resource expenditures back into balance.
        Mr. Culberson. Tax increases?
        Secretary Geithner. It will require us doing what it takes.
        Mr. Culberson. Is that what you are saying?
        Mr. Geithner. No. I am going to say it takes what it takes.
        Mr. Serrano. The gentleman's time has expired.
        I am not a doctor, but if anybody can help me out, later,
    Google it, or something, and find out what is the mental
    condition that only begins a memory recollection from January
    20th to now and ignores everything that happened before.
        Mr. Culberson. I voted against all that spending under
    Bush. I really did.
        Mr. Serrano. Nobody supported Bush now, it seems.
        Ms. Wasserman Schultz.
        Ms. Wasserman Schultz. Thank you, Mr. Chairman.
        Mr. Secretary, it is great to be with you again. I think
    you are probably pretty clear on what I am about to say, and
    that is, not everybody on the subcommittee agrees that that
    letter was inappropriate. I, in fact, agreed with your
    interpretation of the law and thought that your issuing that
    letter was the correct decision.
        I think it is important to note that the fiscal year 2009
    appropriations process was done outside of regular order to the
    dismay of all of us. But the fact that you needed to even issue
    a letter like that and that we had to go through the process of
    wrangling with two Senators and going back and forth in a very
    internal, instead of regular order, way was demonstrative of
    why your letter became necessary.
        So before you go too far out on a limb committing to move
    in a dramatically new direction on the Cuban policy, with great
    respect to my colleague on the right and the two on the left--
    who, I know, do not agree with my views on the matter--please
    understand that it is very likely, if we tested it, that a
    majority of the Congress supports leaving the sanctions in
    place--particularly because have a regime in Cuba that has not
    reformed, that in spite of President Obama's overtures and the
    administration's overtures has not made any concessions on
    human rights, on democracy, on abusing its people, on
    recognizing political parties.
        So let us not go too far out on a limb before we commit to
    working with the authorizing committees and the appropriators
    on dramatic change. And in that vein, I want to ask you,
    because when President Obama made an announcement about the
    change in policy and relaxed the travel policy for family
    members traveling to Cuba, as well as rolling back the
    remittance, the limits on remittances, he also issued a very
    important statement in sending a message to the Cuban regime
    that the 30 percent in taxation that comes right off the top of
    any remittances that are sent to Cuba should end.
        Initially, Cuba has--takes--Cuban law takes 20 percent of
    every dollar that is sent to a relative on the island; that is
    confiscated by the Castro government. And then they are
    required to convert U.S. dollars to a convertible--to a CUP, a
    convertible U.S. peso; and that is an additional 10 percent
    exchange fee.
        What I would like to know is, what steps are you taking to
    pursue President Obama's urging of the Castro regime to roll
    back those remittance fees?
        Secretary Geithner. By the way, just to emphasize how
    complicated this is, how complicated a question it is, we are
    working very hard to put in place regulations to apply these
    new changes in Cuban policy. And as part of that, we would be
    happy to come talk to you about how to address the separate
    concern you raised. I don't know really--I can't do it justice
    now, but it is important.
        Ms. Wasserman Schultz. It is. Because if the idea is to get
    the remittances to family members on the island----
        Secretary Geithner. Of course.
        Ms. Wasserman Schultz [continuing].--30 percent off the
    top--which is, by the way, the second largest source of income
    for the Castro government, second largest source of income--
    that is absolutely wrong.
        And I might add, before any more steps are taken by the
    administration to ease sanctions, we should at least be
    insisting on the Castro regime's responding in kind, as Raul
    Castro strongly indicated everything is on the table. So far,
    not one thing has been on the table. In fact, reiterated and
    underscored by the former President, Fidel Castro, that his
    brother was misguided and incorrect, and nothing has occurred.
        So I just wanted to be very, very clear that if we tested
    it, which one day soon we will, the majority of this Congress
    does not support rolling back sanctions against Cuba,
    particularly unless there is a response in kind in easing human
    rights abuses and making sure that the Cuban people have an
    opportunity truly to be free.
        In my remaining time, I want to ask you a completely
    separate question related to the visually--the blind and the
    visually impaired. The American Council of the Blind won a
    Federal lawsuit against the Treasury, prior to the Obama
    administration's taking over, about making currency more
    accessible to the blind and visually impaired. The injunctive
    relief that was ordered by the court requires Treasury to make
    changes to paper money; as the currency is redesigned, they
    will make it accessible to the blind. And I actually had a
    fourth grader who, when I went and spoke to a class in my
    district, didn't know about the lawsuit, but raised the issue
    and said why don't we have Braille on paper money because how
    are blind people supposed to know what denomination the money
    is. And I just thought that was the neatest idea and looked
    into it and found out that this lawsuit occurred.
        So can you let us know what progress there is towards
    making sure that the blind and visually impaired have access to
    paper money?
        Secretary Geithner. I can't do justice to that today. I
    would be happy to come back and give you a more thoughtful
    response, either in writing or have our staff----
        Ms. Wasserman Schultz. I would really appreciate that very
    much, and I will see you on the next round.
        Mr. Serrano. Time has expired.
        Just a quick comment. That omnibus bill was not regular
    order; I agree with you. But it also had a lot of things that
    members liked and members of this committee asked for that were
    included. So there are some things we liked, some things we
    don't like. That is the process.
        Secondly, Mr. Secretary, I don't disagree with the
    gentlewoman that you should ask for things in return. I hope
    you just do it also with China, Vietnam, Pakistan, Saudi
    Arabia, on and on, all these countries we deal with that behave
    in certain ways, not just Cuba for another 50 years.
        Mr. Crenshaw.
        Mr. Crenshaw. Thank you, Mr. Chairman. And for the record,
    I would like to associate myself with the remarks of the
    gentlewoman from Florida.
        Mr. Serrano. Are you from Florida by any chance?
        Mr. Crenshaw. I am from north Florida.
        Mr. Secretary, thank you for being here today. I think you
    have given new meaning to the term ``baptism by fire''--
    certainly the work that you have done early on here. And I
    wanted to give you a chance to comment on some good things and
    some not-so-good things.
        You have used just about every tool in your bag to deal
    with the economy. Rates are as low as they can be for a while.
    You have spent a lot of money with financial institutions,
    automobiles; people are asking for money now for the States.
        But there are signs, I think--you hear a lot of bright,
    smart people talking about a potential recovery. You hear words
    like ``rays of hope.'' I think you said the economy may be
    ``starting to heal.'' And I would like you to comment, number
    one, on what you see as some of those encouraging signs that
    lead people to begin to say we are seeing the stock market, we
    are seeing unemployment, we are seeing some positive signs.
        But as you comment on that, I would like you to include the
    area of the average American because you can say, yeah, the big
    banks are going to the capital markets and raising money, but
    if the little guy is 70 percent of our economy, is he seeing
    some of this positive, and how does he fit into this potential
    recovery?
        And on the other side, as you comment on the encouraging, I
    would like you--on the not-so-good, what are your concerns?
        You have been criticized over time, maybe for having an ad
    hoc approach or piecemeal; but I imagine you have learned a lot
    of things in a very quick period of time. And so I would like
    you, after you say some of the--what are the things that you
    think you have learned? What are the concerns you have?
        For instance, if, God forbid, we take a turn for the worse,
    what are you prepared to do then?
        So those two things, if you could just give us your
    thoughts.
        Secretary Geithner. Let me do the encouraging signs first.
        The economy is showing signs of stabilizing, the rate of
    decline in growth has slowed, financial markets are starting to
    heal, it is easier for businesses to borrow in the capital
    markets, interest rates have come down quite a bit. Costs of
    credit has come down, the asset-backed securities market is
    starting to open up again, cost of borrowing by banks has come
    down a bit. Those are signs of somewhat greater confidence and
    stability.
        But I agree with you that it is very early still; this is
    really just the beginning. And businesses and families across
    the country are still going through, again, the most
    challenging period that this country has seen in decades. The
    companies are still laying off people. The labor market has not
    yet stabilized; unemployment is still rising. And even as
    growth starts to recover--and it will--unemployment is likely
    to continue to rise for some period of time.
        So this is just the beginning. But I--you know, we need to
    be candid about the encouraging stuff, just as we are candid
    about the challenges. These are necessary conditions for
    recovery, and you are not going to get recovery without the
    financial market functioning better.
        And it is important to point out, the positive effect of
    what the executive branch and the Congress and the Fed have
    done is to help bring a bit more confidence, lay a bit better
    foundation for repair of this financial system. And I think
    that is an important beginning.
        But I think you are absolutely right that it is still a
    very challenging period across the economy, and it is going to
    stay that for some time because this took a long time to get us
    into this mess, and it is going to take a while to get us out
    of it, progress is not going to be even and steady. And I--it
    is going to feel fragile and uncertain, I think, for a
    significant period of time.
        Now, on the latter question you raised, which is a very
    complicated question, let me just step back for one second.
    What I did when we came was to lay out a very broad, general
    framework of reforms to our financial programs and laid out the
    specific areas where we thought additional action was going to
    be necessary--in housing, in getting small business and
    consumer lending going again, in recapitalizing and cleaning up
    the banking system. And we have moved at an incredibly rapid
    pace to put in place very complicated programs within that
    broad framework. And we are--we made a lot of progress.
        We have some programs that are still not operational, but
    they will be operational in the next couple of months. And I
    think that basic framework, that basic strategy, is the most
    effective mix of policies that we believe are available for us
    to fix this at least cost the taxpayer over time, maximum
    benefit, to get credit flowing again to small businesses.
        Now, people will disagree about whether we got the design
    exactly right. And we may have to adapt these policies, but it
    will not be an ad hoc approach. That basic framework, which is
    to make our banks strong enough that they can lend and fix
    these broken securities markets is a necessary condition for
    any recovery in the financial system.
        That suite of programs that we put in place are showing
    important initial signs of positive effect. And what our
    commitment is, though, is to make sure we are going to do what
    it takes, and we are going to keep at it until we fix it.
    Because the cost of us doing too little, being kind of
    tentative or slow or holding back would, I think, be a deeper
    recession and more damage to viable businesses, more risk of
    failure that could have been avoided.
        We talked to a very broad range of experts in the financial
    community and the academic community to make sure we are taking
    consideration for any good pragmatic idea in this area. But at
    its core, any effective strategy will be to make sure banks are
    strong enough to get through a bad recession, they can get
    lending going again; and we fix these broken securities markets
    and housing markets.
        Mr. Crenshaw. Thank you.
        Thank you, Mr. Chairman.
        Mr. Serrano. Thank you.
        We have three votes going on. We have about 5 minutes on
    this first vote, but a lot of Members are now voting. So we
    have time to take Mr. Boyd.
        And then, after that, we are going to have to take a break,
    Mr. Secretary. But everybody is eager to speak to you, and you
    are welcome to stay in an office nearby that will provide for
    you to look at pictures of my children and things. Undisclosed
    location.
        Mr. Boyd.
        Mr. Boyd. Thank you, Mr. Chairman and Mr. Secretary, Mr.
    Chairman, I want to follow up on an issue that some others have
    raised, including Chairman Obey and Mr. Culberson, relative to
    short-term recovery versus long-term fiscal stability.
        And I want you, if you would, try to put a little meat on
    the bone, Mr. Secretary, for us.
        Before I do, I want to, for the sake of Mr. Culberson,
    before he leaves, put us back into historical perspective and
    go back to 2001 after we had come out of the 1990s, cutting
    spending and trying to get everything in order. And we had
    revenues and expenditures as a percentage of GDP both in the
    19.5 percent range, with revenues actually being a little bit
    higher, thereby creating a surplus.
        Many of us encouraged the then-new administration to use
    that money for entitlement reform, tax cuts and debt payment.
    You know the rest of that story; it was all crammed into tax
    cuts and even that, you didn't deal with the problems of AMT
    and estate tax, which even now create a problem where it--it is
    going to make it very much more difficult for us to come out of
    this recession because we have to deal with those issues.
        Can you talk to me and the committee a little bit about
    short-term recovery versus long-term fiscal sustainability, and
    try to put a little meat on the bones about what we have to do
    to get those numbers back even.
        Secretary Geithner. You are right about the history. I
    think it is important to remember that when I left the Treasury
    in 2001, we had significant budget surpluses in existence and
    projected. And it is then that we started--this Congress
    started this year with the largest deficit in decades, $1.2
    trillion, a very expensive problem to fix.
        I don't believe there is any conflict in the near term
    between those basic objectives. The only way to get the long-
    term fiscal position in better shape is to make sure we get
    growth back on track. That requires--and there is no other way,
    it requires significant support for demand and it requires
    again fixing a damaged financial system. And the Recovery Act
    would not work unless we got the credit flowing again and banks
    and the capital markets healed.
        And--but the opposite was true too. You couldn't fix the
    economy just by fixing the financial system.
        What the President laid out in his first budget was a
    commitment to bring those deficits down so that 5 years from
    now, they were at 3 percentage points of GDP. And if sustained
    at that level, that would leave our debt as a share of GDP at
    stable and acceptable rates.
        If we are unable to do that or convince people, make them
    feel confident that we are going to do that, then we have the
    risk that interest rates will be higher, recovery will be
    choked off, investment will be squeezed out by public
    borrowing. To achieve that, it is going to require, first,
    fundamental reform of the health care system so the costs are
    growing at a much slower pace. That is the most powerful weapon
    we have to bring this fiscal vision back in order. As you know,
    it is the President's highest priority; and we believe we are
    making a lot of progress towards that basic objective.
        That is going to be necessary, but not sufficient. We are
    also going to have to look at a full range of other entitlement
    programs, including Social Security. And we are going to have
    to bring about much slower growth in a range of other
    commitments this government makes.
        Mr. Boyd. Mr. Secretary, if I might just follow up briefly,
    all of the projections under the previous administration after
    2001 showed a systemic deficit under the current law relative
    to revenue and to spending.
        You obviously have to change both of those to do what you
    have just talked about. That is where I would hope you would
    put a little meat on the bones for us.
        Secretary Geithner. Again, we have to bring our revenues
    and our expenditures back into balance, closer to balance; and
    it is going to require movements in both. And you saw in the
    President's budget a range of proposals, both on the revenue
    and expenditure side to help achieve that objective. We laid
    out paths consistent with that imperative.
        And there may be other ways to do it, but I think our
    obligation is to make sure that the people understand that we
    have to commit to do that. We have to make sure we do enough to
    get there and build whatever consensus we can.
        And I think what is encouraging, just to find hope in this,
    is that I think there is broader support now, broader
    recognition on both sides of the aisle of the magnitude of
    these challenges. I think that will help provide a basis for a
    consensus that has alluded us for the last many years.
        Mr. Boyd. Thank you, Mr. Chairman. And I just want you to
    know I am not a Johnny-come-lately fiscal conservative.
        Mr. Culberson. We are all on the same page.
        Will the gentleman yield?
        Mr. Serrano. His time is up.
        I am a big spending liberal and proudly so now.
        Mr. Secretary, we will break now and we will come back as
    soon as these votes are over. We appreciate your understanding.
        Sorry for the delay, but we had a drawn-out voting process.
    Democracy gets in the way at times.
        The Secretary must leave the hearing at 1:15, so we will
    try to get in as many of the Members as possible, but certainly
    the two members who have not participated yet.
        And we will start off with Mr. Fattah.
        Mr. Fattah. Thank you, Mr. Chairman.
        Mr. Secretary, welcome.
        At the beginning of the last President's term, we had
    hearings like this. We had Alan Greenspan testifying, and the
    subject matter, if you go back to the transcript, the
    discussion was the projection that the Bush administration
    could pay off the entire national debt by the conclusion of
    that administration, given the surplus and the projected
    surpluses over time.
        And we were literally having a discussion, an academic
    discussion about whether it would be good for the country to be
    completely out of debt or whether or not, as the chairman was
    asked at the time, Chairman Greenspan, whether or not--and he
    was jousting about maybe leaving some small amount of debt on
    the books, that it may have some economic utility.
        So now we are 8 years later, and it is a very different
    reality. This administration comes in at a time in which the
    revenues generated don't meet the country's needs, and we have
    an economic challenge that you are, in an extraordinary way,
    trying to address.
        And there is good news today from the Philly Fed--I
    represent Philadelphia, so--in terms of the leading economic
    indicators report, up 1 percent.
        But my question is more about something that is in your
    testimony, which is this question about tax reform and tax
    policy. You recommend an increase in the Office for Tax Policy,
    one that I am very enthusiastic to support. Because I think, at
    the end of the day, we really have to have a system that
    generates the needed revenue to protect our national security,
    to deal with the challenges that our citizens face. And this
    income tax system we have had for over 100 years I am not sure
    is what is going to take us over the next 100 years.
        The Treasury Department, under Reagan, did some studies of
    fundamental tax reform, found the notion of a flat tax
    fundamentally flawed, I think in the words of the report, and
    that a national sales tax wouldn't work.
        The Bush administration, without a lot of publicity, did--
    the Treasury Department for Bush did two studies on the same
    two ideas and found them not to be workable.
        I am interested in whether or not this Office of Tax Policy
    is going to look at fundamental reform. Because I am supportive
    of the notion that we need to have a system that is reliable so
    that we don't have, as much as the President and you talk about
    this bust-to-boom economy, that we don't have in our national
    budgeting and governmental responsibilities a system that can't
    generate the revenues the country needs at any particular time,
    whether it is in face of war or in face of a need for economic
    stimulus, and that we don't have to have a circumstance in
    which we are using a system of generating revenues that may
    have outlived its usefulness.
        So I would be interested in your comments about fundamental
    reform and this Office of Tax Policy and where your thinking
    may be on the subject.
        Secretary Geithner. Thank you, Congressman.
        I think I would define the hierarchy of priorities this
    way: We need to do a much better job of enforcing the existing
    tax laws we all live with. And you see in the budget
    substantial additional resources for the IRS into enforcement
    activities, which we think will generate substantial revenue.
    That is fair, it is important to do, and that is where we
    start.
        The second thing I would say is that, across the entire
    economic policies of the President that we are working towards,
    there are very important tax provisions that we will have to
    confront. Health care is a good example. And, in that context,
    we are going to have to look for ways to make sure that, as we
    work to bring down costs and reform this health care system,
    that we are finding revenues to pay for the commitments we all
    think we need to make.
        We also believe that there is going to be a substantial
    opportunity to simplify the Tax Code. The President made some
    very important proposals in his campaign to begin that process.
    And we will begin to examine ways we can simplify this very
    complicated Tax Code we have.
        Looking beyond that, we hope and expect we will have the
    opportunity to look at a broad range of other aspects of the
    Tax Code. In the corporate tax area, there is a lot of
    opportunity for reform that would help make U.S. business more
    competitive and close some gaps and loopholes, make that whole
    system more fair too.
        So that would be an initial list of priorities.
        The Office of Tax Policy is one of the great resources of
    the Treasury and the country. And we are proposing some
    significant additional resources so that they can discharge
    what is a much, much more demanding burden than I think their
    predecessors had. And we would welcome the support of this
    committee and the Congress for that objective.
        Mr. Fattah. Well, let me just say, you are going to have my
    support and, I believe, the committee's support. You now have
    44 economists and some 30 lawyers there that you will take on
    and making a significant investment there.
        I am interested in something you didn't list in that
    outline you listed, which is looking at fundamental reform, new
    ideas that may have utility, you know, in terms of improving
    the economic capacity, job-creating capacity, and not just
    making what we have now work a little bit better, which is in
    everyone's interests, but looking at whether or not what we
    have meets the needs of the country going forward and whether
    there are some other ideas that should be reviewed by your Tax
    Policy Office.
        Secretary Geithner. Yeah, I just wanted to start with the
    initial list of priorities, but, as you know, in the Recovery
    Act in the President's budget there is a very long list of
    important provisions that are designed not just to make the Tax
    Code more fair and more balanced, but to make sure we are
    putting in place incentives to encourage savings and investment
    over the longer term.
        And, absolutely, as any Secretary of the Treasury would, we
    are always looking at broader opportunities for reform in the
    Tax Code. And we may have the opportunity in this Congress,
    this administration, to go beyond that initial list of
    priorities I laid out.
        Mr. Fattah. Well, thank you very much, Mr. Secretary.
        Mr. Serrano. Mr. Edwards.
        Mr. Edwards. Thank you, Mr. Chairman.
        Mr. Secretary, there is still a lot of frustration and
    anger among everyday citizens and families regarding TARP 1 and
    TARP 2. The sense persists that, why should my hardworking tax
    dollars go to bail out people and corporations that made
    terribly irresponsible decisions? Why should that happen?
        So I would like to ask you two questions. In your opinion,
    what would have been the possible negative consequences to our
    economy if TARP 1 and TARP 2 had not been approved? And,
    secondly, what could have been the specific impacts upon
    average working families if AIG had not been given Federal
    funding?
        Secretary Geithner. Congressman, let me try to respond to
    that very important question.
        I believe that what the Congress authorized at that time,
    in September, was absolutely necessary to prevent the
    catastrophic failure of the U.S. financial system. And without
    that authority and without those actions to put capital in
    banks, we would have risked seeing much greater failure and
    much more damage to pension values, to cost of credit, much
    larger business failures, higher rates of growth in
    unemployment even than we saw.
        This recession was going to be a challenging recession no
    matter what, because it followed a long period of over-
    borrowing, over-leveraging. We were living beyond our means as
    a country; many Americans were as well. So it was going to be a
    difficult recession. But it was made dramatically worse because
    this country came into the crisis without the tools to limit
    the damage to Main Street from some of those excesses.
        So I would just say, the starkest way to say it is, people
    saw a version of this in the last few months of last year,
    where you saw the economy decline at a remarkably rapid rate,
    here and around the world. You saw pension values decline
    dramatically; Americans are going to have to work longer
    because of this. You saw interest rates rise dramatically,
    businesses fail who didn't need to fail, because of damage to
    the financial system. And that was even with dramatic action.
    If that authority had not been provided by the Congress, those
    actions not taken, it would have been dramatically worse.
        Now, important difference between TARP 1 and TARP 2. So,
    when I came into office, the President came into office, we
    made some very, very important changes in priorities and
    direction in response to the legitimate frustration and concern
    people had about how that program had been administered.
        So we put in place much higher standards for transparency.
    So all the detailed conditions, terms that were provided to
    banks across the country were put on the Web site. People could
    see who was getting assistance across the country.
        We put in place much more stringent reporting requirements
    so people could see where lending was rising, how people were
    using that money. We put in place stronger conditions on
    compensation, on dividends, so that the money was going to
    benefit lending.
        But, as important as that, we redirected the whole program,
    so we were directly focusing on fixing the housing crisis,
    getting small banks capital, getting small business and
    consumer credit going again. And those are the things we have
    done.
        Now, we had to take some additional action to help
    stabilize AIG, help stabilize Fannie and Freddie. Those are
    complicated problems we inherited. And, without action to do
    that, then, again, you would have faced the risk that you would
    have another wave of collapse in confidence that people see in
    their monthly savings when they open up those pension accounts,
    and you would have seen much greater damage to capacity of
    businesses to borrow, higher rates of growth and unemployment.
    And that is the starkest way to present it.
        But I am not sure people are aware of this. The only
    assistance that we have provided since this President and this
    Secretary came into office to banks is for banks--under the
    program my predecessors put in place, the only additional
    assistance was to small community banks across the country and,
    of course, to help stabilize AIG. What we have tried to do is
    to try to make sure that the major banks are going into the
    markets to raise capital and are restructuring so they need to
    do that.
        So these are big changes in the direction of the program,
    and I think they are helping, as we have discussed earlier,
    helping to bring some measure of healing and stability to the
    financial system. And you see that reflected in somewhat
    greater confidence numbers.
        Mr. Edwards. Could you just very briefly address the AIG
    issue? To talk to an individual family, what could this have
    meant to them? Would they have lost their life insurance value?
    Would they have lost their pension? Why should the Jones and
    Serrano families care about AIG going under?
        Secretary Geithner. Well, there is a direct risk to people
    across the country who bought insurance products from AIG----
        Mr. Edwards. By ``direct risk''--and I want to put this in
    everyday terms. A ``direct risk'' doesn't mean something to the
    everyday person. Does that mean they paid in for 20 years into
    life insurance or a pension and they were going to lose that
    pension or a big part of it?
        Secretary Geithner. Well, there is some risk of that, but,
    you know, people bought a whole range of products from AIG.
    They bought protection that guaranteed savings values. Those
    could have been at risk.
        But it is bigger than that. It is not just that direct
    risk, which could have been significant. Again, the greater
    risk is that you would have had broader loss of confidence,
    greater failures to other businesses, other financial
    institutions, that would have produced, again, this dynamic we
    saw in the fall of higher unemployment, more businesses
    failing, pension values hurt by the fallen equity prices,
    credit not available.
        So it is not just the direct, immediate consequences people
    can see; it is the more indirect consequences that people sort
    of lived with in the last half of last year.
        Mr. Edwards. Okay. I will finish by saying I think we need
    to make a better effort, all of us, Members of Congress
    included, that supported TARP 1 and 2, to explain in everyday
    terms in a way that the average person who is not into Wall
    Street finance can understand the consequences had we not had
    TARP 1, TARP 2, had AIG gone under and Citibank gone under.
        Thank you, Mr. Secretary.
        And thank you, Mr. Chairman.
        Secretary Geithner. I agree with you, Congressman. You said
    it well.
        Mr. Serrano. Thank you.
        As we stated before, the Secretary has to leave at 1:15, so
    we are going to try to get as many more questions as possible.
        Mr. Secretary, this week it was reported that Goldman Sachs
    and Morgan Stanley have asked to repay $20 billion in TARP
    payments. Press reports have indicated that they are eager to
    remove themselves from the Federal restrictions that were
    attached to the use of these funds.
        What criteria will you be using to determine whether these
    large financial institutions will be allowed to repay this
    money or get out? Does your criteria go beyond the ability to
    repay? Does repayment by large institutions create a
    disincentive to invest in or work for institutions that have
    not yet repaid the funds?
        In addition, when the TARP was created, all the financial
    firms were at risk. Congress insisted that, when TARP funds
    were provided, the taxpayer gets some upside benefit in
    required stock warrants. If some financial institutions repay
    their TARP money, what will you do to make sure the taxpayer
    gets full benefit from those warrants?
        Secretary Geithner. Mr. Chairman, under the law, as
    modified in the Recovery Act, the judgment about whether firms
    can repay is a judgment left with the Federal banking agency
    that is responsible. I would be happy to describe what I
    believe the policy will be, but I want to emphasize that it is
    their responsibility to approve these repayments.
        The two basic conditions are, to say them simply, that you
    need to have more capital than the Fed's recent capital
    assessment said you needed, you need to have that additional
    capital. And you need to demonstrate that you can issue debt in
    the markets without an FDIC guarantee. That is sort of an
    additional protection to make sure these banks are not taking
    advantage of other programs the government has laid out to help
    stabilize the system as a whole.
        If they meet those two conditions, then my expectation is
    that they will get approval to repay. And that is a positive
    sign about how far the system has come to a greater foundation
    of stability.
        Now, on the warrants, the way it works now is firms have
    the ability to come and repurchase. And if they do that, we
    have an elaborate process in place to try to make sure we use
    outside, market-based pricing to judge the appropriate value to
    the taxpayer in that context.
        If they don't want to repurchase, we still have the right
    to sell those warrants into the market. And we would use an
    auction procedure, if we do that, to make sure, again, we are
    getting the best price for the taxpayer. We have to make a
    careful judgment about what the right time frame in which to
    dispose of those warrants, and that is something we are
    thinking through carefully now.
        Mr. Serrano. Well, I hope that that becomes something that
    we pay a lot of attention to. As Mr. Edwards stated, there is
    still--and you can't get a single Member of the House or the
    Senate, 535, that have not heard from a group of people saying,
    ``Who is bailing me out?''
        So, we did this. Now we have to make sure that we get back
    what is ours. And we have to make sure that people don't squirm
    out of it and get away with what they shouldn't be getting away
    with.
        Secretary Geithner. Oh, absolutely.
        And remember, you know, these initial indications that a
    number of major institutions will be able to repay will allow
    the American taxpayer to see that there is money coming back
    that the government earned a return on.
        And I am not sure this is exactly the right number, so give
    me a chance to adjust this, correct it for the record. But the
    number of payments already that have come into the Treasury
    from those capital investments made in the fall, I think, now
    exceed $2.5 billion already. So that is resources back into the
    government, back in the taxpayers' hands, reflecting a return
    on that initial investment.
        Mr. Serrano. Okay, I just have one--I am going to put the
    rest of my questions in for the record. Your testimony
    discusses scrapping the early EITC program because of problems
    with fraud. But that program is of value to low-income, working
    families.
        The last administration made a big deal out of fraud in the
    EITC. And when I say ``big deal,'' they made it sound like the
    program was horrible and it was the only program in the country
    that had a problem. But it was not committed to making the EITC
    program work well.
        No one can defend fraud. But before you scrap the program,
    are you sure that you cannot eliminate the fraud so that the
    program can continue? And can't the program be promoted for
    wider usage?
        Secretary Geithner. Mr. Chairman, this is a very important
    program, a remarkably successful program. And this President
    and I certainly am committed to making sure that a broader EITC
    program is sustained and working and doing what it is supposed
    to do.
        This particular part of that program, though, has been
    troubled in implementation. And our judgment is that we need to
    modify this program the way we have proposed to eliminate that
    risk, and we think its impact will be modest.
        The vast bulk of this existing EITC program will remain in
    place and will continue to do what it needs to do. But, of
    course, we will reflect on your suggestion and concern, and, of
    course, share your commitment to making sure we are eliminating
    any opportunities for fraud in this program. And we will do it
    without causing too much damage to the other broader objectives
    of the program.
        Mr. Serrano. Right. And I think the key word here is
    modify, not eliminate.
        Like I said, I will submit the rest of my questions, in a
    desire to give everybody at least one crack before you leave at
    1:15.
        Mrs. Emerson.
        Mrs. Emerson. I would like to submit questions for the
    record, as well.
        Mr. Serrano. Without objection.
        Mrs. Emerson. One very, very quick, quick AIG question, and
    then I have another one to ask you.
        As Chet was saying, and Joe, too, to a certain extent, I
    mean, our constituents were up in arms about the whole AIG
    thing. And one of the other problems--and I am not quite sure
    how to explain this; perhaps it was a process thing--would
    there have been any way for you all at Treasury to have said to
    AIG, ``Okay, we are going to give you X amount of dollars;
    however, you can't use some of that money to then pay your
    counterparties like Societe Generale and any of those''? That
    would not have been possible?
        Secretary Geithner. No. Again, we came into this crisis
    without the tools and authority to manage, prevent the
    potential failure of a large institution like this that could
    cause a lot of damage to the financial system. And, without
    that authority, we had limited options.
        And when you choose to act to prevent failure and defaults,
    you are making a choice to help make it possible for that firm
    to meet all its commitments to people who brought an insurance
    product from it, of any sort. And you can't selectively allow
    the institution to default on particular types of creditors
    without risk that the whole thing comes unwound, comes crashing
    down at risk of great damage.
        And, again, the American people lived with, the last few
    months of last year, the consequences of failure of large
    institutions. A big part of what made the recession so deep and
    so damaging in this country was the damage caused by the
    default and failure of other significant institutions. That
    would have been much worse if AIG also had gone.
        But the short answer to your question is, no, not possible
    without greater authority. And that is why we are working with
    the Congress to put in place resolution authority to give us a
    little bit more flexibility in handling these things more
    early, more quickly, and more effectively.
        Mrs. Emerson. I appreciate that. Thanks.
        The special inspector general for the TARP has stated in
    written testimony, basically he says, quote, ``We stand on the
    precipice of the largest infusion of government funds over the
    shortest period of time.'' And then, just to save time, ``We
    are looking at the potential exposure of hundreds of billions
    of dollars in taxpayer money lost to fraud.''
        So, my question is, number one, how closely are you all
    working with the special IG for the TARP, GAO and others, in
    the formulation of your TARP programs to prevent this
    vulnerability to fraud?
        And I am assuming that you are doing everything possible to
    ensure that the IG has full cooperation from you all, but are
    you also detailing staff? Because I know that they were very
    short-staffed when I met with him earlier.
        Secretary Geithner. We are working very closely with him.
    And I want you to understand, it is exceptionally important to
    me that we do everything we can to reduce the risk of fraud in
    any of these programs.
        I think, as you said, the confidence of the American people
    that we are using the taxpayers' money as wisely and as
    carefully as possible is deeply important to the overall
    effectiveness of our programs. Part of that is about making
    sure we are reducing risk of fraud.
        We are working very closely with the SIG-TARP, with the
    GAO, with the congressional oversight panel. I think my second
    day in office, I met with them as a group. We look at all of
    their recommendations, and we will make sure they resources and
    access necessary to do their jobs. And where they have
    suggestions and ideas that we think work, we will take them on
    board. And I found their recommendations, in general, very
    valuable.
        Mrs. Emerson. Do you have any way of trying to determine
    how much of the TARP funding could be lost to waste or fraud,
    or is that something that kind of has to come back after the
    fact?
        Secretary Geithner. Well, we are going to reduce the risk
    to the extent we can. My own sense is--but, again, this is
    something we have to keep looking at--that the programs that we
    inherited were actually quite carefully designed to limit that
    risk. And I am sure that the programs we put in place since I
    came into office will be very well-designed to help limit that
    risk.
        It won't be perfect. You know, these are substantially
    complex programs with substantial resources in place. But we
    have put a lot of protections in place at the front end, and we
    have the great virtue of having SIG-TARP and GAO and the
    congressional oversight panel looking at everything we do.
        And one of the greatest protections we have is to make sure
    that there is transparency across all of these programs. That
    allows everyone to see what the terms are, where the resources
    are going to, and that is a good protection too.
        Mrs. Emerson. All right. Thank you.
        Mr. Serrano. Thank you.
        Ms. Lee.
        Ms. Lee. Thank you, Mr. Chairman.
        Good afternoon again, Mr. Secretary.
        Let me go back again to my colleague from Florida, who is a
    good friend of mine, who I respect tremendously, and who knows
    I am discussing this with you, because we discussed this as we
    walked down.
        First of all, with regard to any possible movement on
    legislation as it relates to Cuba moving through the House, I
    just have to remind you that over 70 percent of the American
    public wants the embargo ended. Over 60 percent of the Cuban-
    American community wants the embargo ended. Okay? So that
    should tell you something about public opinion and about the
    possibilities of any actions that we may take here on the House
    side and on the Senate side.
        Secondly, let me just say, she mentioned the issue of
    remittance. I wanted to clarify this, because the percentage of
    remittances is 20 percent, and then there is a 10 percent
    surcharge, FYI and for the record. And my colleague from
    Florida understands that also.
        And I would suggest to you to look, as you have these
    talks, if you are, with the Cuban Government, understand that
    some of us believe that taxes on income is appropriate. The
    more income we make, the more we are taxed. Now, the structure
    and the tax fairness of the issue has to be addressed. Now,
    whether that is consistent with Cuban policies as it relates to
    taxes, who knows. But, for the record, most countries charge a
    tax on additional income.
        Secretary Geithner. Including this country.
        Ms. Lee. Including our own country. And so I think we have
    to be fair as we approach any types of discussion on
    remittances and have to know what we are dealing with.
        Secondly, let me just go back to the issue of the
    involvement of the banks. And I asked you this earlier, and I
    want to pursue it with you a little bit, because we want the
    CEOs of the banks that receive TARP money to tell us how much
    money they are investing in minority-owned newspapers and media
    outlets. I want to see those numbers, I want to see what they
    are doing.
        And then we need to talk about a strategy to commend them
    for their approach and the dollar amount and the percentages,
    or tell them they are going to have to do better. So we need
    the numbers, though, first, Mr. Secretary. And that is what we
    have communicated to yourself via letter and also to Vice
    President Biden.
        Secretary Geithner. I will take a careful look at that.
        Ms. Lee. Okay. I would appreciate that. And members, I
    know, of the Congressional Black Caucus would appreciate that.
        And thirdly and finally, Congressman Waters, in our
    economic recovery efforts, has been really looking at minority
    hiring at the Treasury. And we have passed--and this was
    Congressman Waters's effort, and she actually worked to create
    an office of minority affairs within the GSEs. The Federal
    Reserve, Chairman Bernanke, is looking at that model also. We
    are not sure if he needs legislation or not.
        But we wanted to know if you would consider, or are you
    considering, any efforts within Treasury to establish an office
    of minority affairs or something similar to what the GSEs are
    doing? And we would like some information on your minority
    hiring, in terms of the diversity of your staff and also the
    contracting out of your office.
        Secretary Geithner. I would be happy to give you any
    information on hiring and on contracting. And I have not
    considered it before, but I will consider, as the GSEs and the
    Fed are considering, your suggestion on an office. As any
    suggestion, I will consider carefully that suggestion.
        Ms. Lee. Thank you very much.
        And thank you, Mr. Chairman, for giving us the time for a
    second go-around, because we are going to consider to pursue
    these issues.
        Mr. Serrano. And we are getting down to that time.
        Mr. Fattah.
        Mr. Fattah. Mr. Secretary, you have said that the revised
    RFP, in terms of the packaging, was getting ready--I know the
    deadline was originally April 10th. It was then moved back,
    right? So it is getting ready to happen soon.
        Secretary Geithner. You are talking about for our
    investment funds? Our public-private investment program?
        Mr. Fattah. Yes, correct.
        Secretary Geithner. Actually, I think the initial deadline
    was--well, we put out the request for applications, and I think
    our initial expectation is we would announce appointees in mid-
    May. We have pushed back for a couple weeks that announcement.
    But we are now in the process of going through the strongest
    applicants, the more detailed due diligence on their
    applications. But we are close to announcing.
        Mr. Fattah. And one last point, which is not a point of
    controversy with me, but I do want to raise it nonetheless
    since it has some currency.
        TARP, as you receive either earnings on those investments
    or repayment, your intention is to have those dollars available
    in case there are other needed interventions as we go through
    this process of trying to get the economy back on track, is
    that correct?
        Secretary Geithner. Well, just to clarify, the way the law
    is written, a dollar of repayment comes back, goes into the
    general fund to reduce the debt, but it creates a dollar of
    authority we can use to make new investments if we think there
    is a strong case for doing that, under the terms of the act.
        For income, the dividend coupons on the preferred stock, I
    believe those go directly into the general fund. I don't think
    we can use those. But that is something I have to clarify.
        Mr. Fattah. Thank you very much.
        Mr. Serrano. Mr. Secretary, before we end, I just want to
    let you in on something. If you were to attend the Democratic
    caucus meetings, you would see that every time our leadership
    comes up with a program that they are presenting to us, a new
    law, possible new law, I get up and I ask, ``will the
    territories be included equally? '' And it is happening more
    and more every day.
        Your predecessor participated in doing something that had
    never been done before, and it had the support of Leader
    Boehner, at the insistence of our Speaker, as I presented it to
    her, and that was that, regarding the stimulus checks that were
    sent to 50 States, the territories were included. And the issue
    of whether or not they pay certain taxes or not--which, you
    know, that is all a fallacy; they do pay taxes--was not an
    issue, because it is the same economy. You send a check to
    Puerto Rico, where do they spend it? At Sears, at K-Mart,
    Circuit City when they were in existence. It is the same
    places--McDonald's, whatever.
        So it is important for many of us that, as you look at your
    policies in the future, that we remember that it is not just 50
    States, it is also people who live under the American flag and
    American citizens and American nationals. And we include them
    in everything else. As we speak, you know, there are hundreds,
    if not thousands of them, thousands of them in Iraq and
    Afghanistan. We should include them at other times, too.
        Secretary Geithner. Mr. Chairman, I just wanted--I agree
    with you. And when I was president of the New York Fed, which I
    was for 5 years, I had the privilege of having as part of my
    district Puerto Rico, and agree very much with what you said.
        Mr. Serrano. Yes. And, you know, that is a little inside
    joke in the Puerto Rican community, which is, some years ago,
    when the Puerto Ricans were the lead group, Latino group, in
    New York, someone decided at the Federal level, whatever the
    New York region was, it included the Virgin Islands and Puerto
    Rico. And so the director of the New York region for HUD, for
    FDA, whatever, got to travel to Puerto Rico and the Virgin
    Islands as well as Manhattan.
        Secretary Geithner. Just for the record, I did travel to
    Puerto Rico but not to the Virgin Islands, even though the
    Virgin Islands was also part of the New York Fed's district.
        Mr. Serrano. Well, we are going to take care of that now.
        So we thank you. And we want you to keep these things in
    mind. As you can see from the questioning, this committee is
    very much interested in the work you are doing. We are all on
    the same side in bringing back our economy and taking care of
    the American people and making sure that the taxpayers don't
    get ripped off as we take care of other people. So we stand
    ready to work with you.
        Our opening comments on Cuba--and you heard many other
    comments on Cuba--only mean that we have to keep in touch. And
    isn't it interesting or ironic that, 52 years later, Fidel
    Castro is still an issue in the U.S. Congress? It is amazing.
    You are gone from this place a month and they don't remember
    you, and he is still an issue 52 years later.
        We thank you, sir.
        Secretary Geithner. Thanks for having me. I appreciate your
    support, and we will work very closely together.
        Mr. Serrano. Thank you.
        The meeting is adjourned.

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    Geithner, Hon. Timothy...........................................   115
    Orszag, P. R.....................................................    71
    Shulman, Douglas.................................................     1