[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.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
                                            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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Orszag, P. R.....................................................    71
Shulman, Douglas.................................................     1
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